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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

For the quarter ended December 31, 2007

OR



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

Commission File Number 000-51383





ACCENTIA BIOPHARMACEUTICALS,
INC.

(Exact name of registrant as specified in its charter)







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





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

None

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

Common Stock, par value $0.001
per share

(Title of class)





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

Indicate by check mark 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 January 31, 2008, there were
43,180,576 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, 2007 and those set forth in our other filings with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.



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IN
DEX

ACCENTIA BIOPHARMACEUTICALS, INC.



|         |  |                                                                                                                    |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                                    |  | Page
|PART I   |  | FINANCIAL INFORMATION                                                                                              |  |     
|ITEM 1.  |  | Financial Statements                                                                                               |  |     
|         |  | Condensed Consolidated Balance Sheets as of December 31, 2007 (unaudited) and September 30, 2007                   |  | 2   
|         |  | Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2007 and 2006 (unaudited)  |  | 4   
|         |  | Condensed Consolidated Statement of Stockholders Deficit for the Three Months Ended December 31, 2007 (unaudited) |  | 5   
|         |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2007 and 2006 (unaudited)  |  | 6   
|         |  | Notes to Condensed Consolidated Financial Statements                                                               |  | 8   
|ITEM 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                              |  | 44  
|ITEM 3.  |  | Quantitative and Qualitative Disclosure About Market Risk                                                          |  | 64  
|ITEM 4.  |  | Controls and Procedures                                                                                            |  | 65  
|         |  |                                                                                                                   
|PART II. |  | OTHER INFORMATION                                                                                                  |  |     
|ITEM 1.  |  | Legal Proceedings                                                                                                  |  | 65  
|ITEM 1A. |  | Risk Factors                                                                                                       |  | 66  
|ITEM 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                        |  | 67  
|ITEM 3.  |  | Defaults Upon Senior Securities                                                                                    |  | 67  
|ITEM 4   |  | Submission of Matters to a Vote of Security Holders                                                                |  | 67  
|ITEM 5   |  | Other Information                                                                                                  |  | 67  
|ITEM 6   |  | Exhibits                                                                                                           |  | 67  



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                  |  |                              |            |                    |   |           
|----------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | ------------------ | - | ----------
|                                                                                                                  |  | December 31, 2007(Unaudited) |            | September 30, 2007
|ASSETS                                                                                                            |  |                              |            |                    |   |           
|Current assets:                                                                                                   |  |                              |            |                    |   |           
|Cash and cash equivalents                                                                                         |  | $                            | 629,518    |                    | $ | 1,623,140 
|Cash, restricted                                                                                                  |  |                              | 4,975,996  |                    |   | 2,503,330 
|Accounts receivable:                                                                                              |  |                              |            |                    |   |           
|Trade, net of allowance for doubtful accounts of $278,591 at December 31, 2007 and $542,864 at September 30, 2007 |  |                              | 2,755,785  |                    |   | 3,637,633 
|Inventories                                                                                                       |  |                              | 971,384    |                    |   | 1,497,584 
|Unbilled receivables                                                                                              |  |                              | 1,898,148  |                    |   | 1,806,584 
|Deferred finance costs                                                                                            |  |                              | 5,908,693  |                    |   | 1,196,000 
|Prepaid expenses and other current assets                                                                         |  |                              | 1,546,540  |                    |   | 892,026   
|                                                                                                                  |  |                              |            |                    |   |           
|Total current assets                                                                                              |  |                              | 18,686,064 |                    |   | 13,156,297
|                                                                                                                  |  |                              |            |                    |   |           
|Goodwill                                                                                                          |  |                              | 1,193,437  |                    |   | 1,193,437 
|Intangible assets                                                                                                 |  |                              | 14,422,096 |                    |   | 14,716,072
|Furniture, equipment and leasehold improvements, net                                                              |  |                              | 1,592,035  |                    |   | 1,761,289 
|Deferred finance costs, less current portion                                                                      |  |                              | 1,471,191  |                    |   | 1,763,815 
|Other assets                                                                                                      |  |                              | 458,342    |                    |   | 455,597   
|                                                                                                                  |  |                              |            |                    |   |           
|                                                                                                                  |  | $                            | 37,823,165 |                    | $ | 33,046,507
|                                                                                                                  |  |                              |            |                    |   |           

(Continued)



2



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(CONTINUED)



|                                                                                                                                                                                 |  |                              |              |   |                    |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------------ | - | ------------------ | - | ------------ | -
|                                                                                                                                                                                 |  | December 31, 2007(Unaudited) |              |   | September 30, 2007 |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                                            |  |                              |              |   |                    |   |              |  
|Current liabilities:                                                                                                                                                             |  |                              |              |   |                    |   |              |  
|Current maturities of long-term debt (Note 9):                                                                                                                                   |  |                              |              |   |                    |   |              |  
|Hybrid financial instrument at fair value                                                                                                                                        |  | $                            | 10,357,576   |   |                    | $ | 7,662,925    |  
|Other long-term debt                                                                                                                                                             |  |                              | 7,971,790    |   |                    |   | 8,195,132    |  
|Lines of credit (Note 7):                                                                                                                                                        |  |                              |              |   |                    |   |              |  
|Related party                                                                                                                                                                    |  |                              | 1,005,000    |   |                    |   | 1,705,000    |  
|Other                                                                                                                                                                            |  |                              | 10,985,555   |   |                    |   | 12,030,768   |  
|Accounts payable (including related party balances of $4,734,519 and $1,553,460 at December 31, 2007 and September 30, 2007,
respectively)                                       |  |                              | 11,327,093   |   |                    |   | 13,202,241   |  
|Accrued expenses (including related party balances of $2,010,816 and $169,658 at December 31,2007 and September 30, 2007
respectively)                                           |  |                              | 7,574,720    |   |                    |   | 6,750,086    |  
|Unearned revenues                                                                                                                                                                |  |                              | 1,998,470    |   |                    |   | 1,456,700    |  
|Dividends payable                                                                                                                                                                |  |                              | 479,452      |   |                    |   | 479,452      |  
|Notes payable (Note 8)                                                                                                                                                           |  |                              | 10,989,520   |   |                    |   | 2,399,851    |  
|Notes payable, related parties                                                                                                                                                   |  |                              | 320,099      |   |                    |   | 168,412      |  
|Royalty liability (Note 10)                                                                                                                                                      |  |                              | 10,645       |   |                    |   | 491,987      |  
|Customer deposits                                                                                                                                                                |  |                              | 558,846      |   |                    |   | 878,781      |  
|Derivative liabilities (Note 11)                                                                                                                                                 |  |                              | 13,116,970   |   |                    |   | 10,814,252   |  
|                                                                                                                                                                                 |  |                              |              |   |                    |   |              |  
|Total current liabilities                                                                                                                                                        |  |                              | 76,695,736   |   |                    |   | 66,235,587   |  
|Long-term debt, net of current maturities (Note 9):                                                                                                                              |  |                              |              |   |                    |   |              |  
|Hybrid financial instrument at fair value                                                                                                                                        |  |                              | 8,444,803    |   |                    |   | 6,152,492    |  
|Other long-term debt                                                                                                                                                             |  |                              | 15,364,126   |   |                    |   | 13,877,455   |  
|Royalty liability, less current portion (Note 10)                                                                                                                                |  |                              | 4,727,290    |   |                    |   | 4,604,509    |  
|Other liabilities, related party                                                                                                                                                 |  |                              | 2,281,391    |   |                    |   | 2,299,546    |  
|                                                                                                                                                                                 |  |                              |              |   |                    |   |              |  
|Total liabilities                                                                                                                                                                |  |                              | 107,513,346  |   |                    |   | 93,169,589   |  
|                                                                                                                                                                                 |  |                              |              |   |                    |   |              |  
|Non-controlling interest in variable interest entities (Note 11)                                                                                                                 |  |                              | 4,879,704    |   |                    |   | 4,973,632    |  
|                                                                                                                                                                                 |  |                              |              |   |                    |   |              |  
|Commitments and contingencies (Note 17)                                                                                                                                          |  |                              |             |   |                    |   |             |  
|Stockholders deficit:                                                                                                                                                           |  |                              |              |   |                    |   |              |  
|Common Stock, $0.001 par value; 300,000,000 shares authorized; 42,334,355 and 39,588,900 shares issued and outstanding at December 31,
2007 and September 30, 2007, respectively |  |                              | 42,335       |   |                    |   | 39,589       |  
|Additional paid-in capital                                                                                                                                                       |  |                              | 187,815,106  |   |                    |   | 172,449,173  |  
|Accumulated deficit                                                                                                                                                              |  |                              | (262,427,326 | ) |                    |   | (237,585,476 | )
|                                                                                                                                                                                 |  |                              |              |   |                    |   |              |  
|Total stockholders deficit                                                                                                                                                      |  |                              | (74,569,885  | ) |                    |   | (65,096,714  | )
|                                                                                                                                                                                 |  |                              |              |   |                    |   |              |  
|                                                                                                                                                                                 |  | $                            | 37,823,165   |   |                    | $ | 33,046,507   |  
|                                                                                                                                                                                 |  |                              |              |   |                    |   |              |  

See notes to condensed consolidated financial statements



3



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                                                                |  |                                        |             |   |      |   |             |  
|----------------------------------------------------------------------------------------------- |  | -------------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                |  | For the Three Months EndedDecember 31, |            
|                                                                                                |  | 2007                                   |             |   | 2006 |  
|Net Sales:                                                                                      |  |                                        |             |   |      |   |             |  
|Products                                                                                        |  | $                                      | 1,532,413   |   |      | $ | 2,936,017   |  
|Services                                                                                        |  |                                        | 2,803,652   |   |      |   | 2,772,425   |  
|Related party, products                                                                         |  |                                        |            |   |      |   | 173,301     |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Total net sales                                                                                 |  |                                        | 4,336,065   |   |      |   | 5,881,743   |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Cost of sales:                                                                                  |  |                                        |             |   |      |   |             |  
|Products                                                                                        |  |                                        | 922,877     |   |      |   | 834,740     |  
|Services                                                                                        |  |                                        | 785,745     |   |      |   | 790,552     |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Total cost of sales (exclusive of amortization of acquired product rights)                      |  |                                        | 1,708,622   |   |      |   | 1,625,292   |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Gross margin                                                                                    |  |                                        | 2,627,443   |   |      |   | 4,256,451   |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Operating expenses:                                                                             |  |                                        |             |   |      |   |             |  
|Research and development                                                                        |  |                                        | 481,422     |   |      |   | 3,798,672   |  
|Research and development, related party                                                         |  |                                        | 3,334,178   |   |      |   | 592,086     |  
|Sales and marketing                                                                             |  |                                        | 1,726,553   |   |      |   | 2,177,455   |  
|General and administrative                                                                      |  |                                        | 5,579,303   |   |      |   | 6,792,458   |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Total operating expenses                                                                        |  |                                        | 11,121,456  |   |      |   | 13,360,671  |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Operating loss                                                                                  |  |                                        | (8,494,013  | ) |      |   | (9,104,220  | )
|Other income (expense):                                                                         |  |                                        |             |   |      |   |             |  
|Interest expense                                                                                |  |                                        | (12,950,576 | ) |      |   | (11,228,953 | )
|Interest expense, net, related party                                                            |  |                                        | (3,177      | ) |      |   | (11,518     | )
|Loss on sale of assets                                                                          |  |                                        | (1,147      | ) |      |   | (1,181,325  | )
|Derivative loss (Note 11)                                                                       |  |                                        | (2,302,719  | ) |      |   | (649,931    | )
|Loss on financing transaction (Note 12)                                                         |  |                                        |            |   |      |   | (8,780,712  | )
|Loss on extinguishment of debt (Note 13)                                                        |  |                                        | (1,445,255  | ) |      |   |            |  
|Absorption of prior gains against minority interest                                             |  |                                        |            |   |      |   | 269,401     |  
|Other income                                                                                    |  |                                        | 247,357     |   |      |   | 46,245      |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Loss before non-controlling interest in losses from variable interest entities and income taxes |  |                                        | (24,949,530 | ) |      |   | (30,641,013 | )
|Non-controlling interest in losses from variable interest entities (Note 18)                    |  |                                        | 107,680     |   |      |   |            |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Loss before income taxes                                                                        |  |                                        | (24,841,850 | ) |      |   | (30,641,013 | )
|Income taxes                                                                                    |  |                                        |            |   |      |   |            |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Net Loss                                                                                        |  | $                                      | (24,841,850 | ) |      | $ | (30,641,013 | )
|                                                                                                |  |                                        |             |   |      |   |             |  
|Weighted average shares outstanding, basic and diluted                                          |  |                                        | 41,651,901  |   |      |   | 31,720,472  |  
|                                                                                                |  |                                        |             |   |      |   |             |  
|Per share amounts, basic and diluted:                                                           |  |                                        |             |   |      |   |             |  
|Loss attributable to common stockholders per common share                                       |  | $                                      | (0.60       | ) |      | $ | (0.97       | )
|                                                                                                |  |                                        |             |   |      |   |             |  

See notes to condensed consolidated financial statements.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS
DEFICIT

FOR THE THREE MONTHS ENDED DECEMBER 31, 2007

(Unaudited)



|                                                                                              |  |              |  |                          |        |  |                     |             |   |       |   |              |   |  |   |             |  
|--------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ------ |  | ------------------- | ----------- | - | ----- | - | ------------ | - |  | - | ----------- | -
|                                                                                              |  | Common
Stock |  | AdditionalPaid-InCapital |        |  | Accumulated Deficit |             |   | Total |  
|                                                                                              |  | Shares       |  | Amount                   |        |  |                    
|Balances, October 1, 2007                                                                     |  | 39,588,900   |  | $                        | 39,589 |  | $                   | 172,449,173 |   |       | $ | (237,585,476 | ) |  | $ | (65,096,714 | )
|Exercise of warrants for cash                                                                 |  | 1,738,328    |  |                          | 1,738  |  |                     | 4,639,598   |   |       |   |             |   |  |   | 4,641,336   |  
|Share-based compensation                                                                      |  |             |  |                          |       |  |                     | 1,043,597   |   |       |   |             |   |  |   | 1,043,597   |  
|Reclassification of capitalized finance cost to equity upon conversion of debentures (Note 9) |  |             |  |                          |       |  |                     | (140,576    | ) |       |   |             |   |  |   | (140,576    | )
|Common stock issued for services                                                              |  | 52,435       |  |                          | 53     |  |                     | 224,746     |   |       |   |             |   |  |   | 224,799     |  
|Common stock warrants issued for financing cost                                               |  |             |  |                          |       |  |                     | 7,636,792   |   |       |   |             |   |  |   | 7,636,792   |  
|Conversion of debentures to common stock                                                      |  | 853,201      |  |                          | 853    |  |                     | 1,723,202   |   |       |   |             |   |  |   | 1,724,055   |  
|Common stock issued for accrued interest                                                      |  | 101,491      |  |                          | 102    |  |                     | 238,574     |   |       |   |             |   |  |   | 238,676     |  
|Net loss for the period                                                                       |  |             |  |                          |       |  |                     |            |   |       |   | (24,841,850  | ) |  |   | (24,841,850 | )
|                                                                                              |  |              |  |                          |        |  |                     |             |   |       |   |              |   |  |   |             |  
|Balances, December 31, 2007                                                                   |  | 42,334,355   |  | $                        | 42,335 |  | $                   | 187,815,106 |   |       | $ | (262,427,326 | ) |  | $ | (74,569,885 | )
|                                                                                              |  |              |  |                          |        |  |                     |             |   |       |   |              |   |  |   |             |  

See notes to condensed consolidated financial statements.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                               |  |                                         |             |   |      |   |             |  
|------------------------------------------------------------------------------ |  | --------------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                               |  | For the Three Months EndingDecember 31, |            
|                                                                               |  | 2007                                    |             |   | 2006 |  
|Cash flows from operating activities:                                          |  |                                         |             |   |      |   |             |  
|Net loss                                                                       |  | $                                       | (24,841,850 | ) |      | $ | (30,641,013 | )
|Adjustments to reconcile net loss to net cash flows from operating activities: |  |                                         |             |   |      |   |             |  
|Loss on sale of assets                                                         |  |                                         | 1,147       |   |      |   | 1,181,325   |  
|Loss on extinguishment of debt                                                 |  |                                         | 1,445,255   |   |      |   |            |  
|Loss on financing transaction                                                  |  |                                         |            |   |      |   | 8,780,712   |  
|Change in fair market value adjustment of convertible debentures               |  |                                         | 6,343,620   |   |      |   | 8,017,767   |  
|Depreciation                                                                   |  |                                         | 172,811     |   |      |   | 148,918     |  
|Amortization                                                                   |  |                                         | 293,976     |   |      |   | 231,111     |  
|Share-based compensation                                                       |  |                                         | 1,043,597   |   |      |   | 1,060,077   |  
|Accretion of capitalized finance costs                                         |  |                                         | 3,302,358   |   |      |   |            |  
|Accretion of debt discounts                                                    |  |                                         | 2,458,502   |   |      |   | 436,647     |  
|Accretion of royalty liability                                                 |  |                                         | 141,439     |   |      |   |            |  
|Derivative loss                                                                |  |                                         | 2,302,719   |   |      |   | 649,931     |  
|Issuance of common stock warrants for finance costs                            |  |                                         |            |   |      |   | 1,389,448   |  
|Issuance of common stock for services                                          |  |                                         | 224,799     |   |      |   | 22,259      |  
|Non-controlling interest in non-cash earnings from variable interest entities  |  |                                         | (93,928     | ) |      |   | (267,400    | )
|Other non-cash charges                                                         |  |                                         |            |   |      |   | (6,997      | )
|Increase (decrease) in cash resulting from changes in:                         |  |                                         |             |   |      |   |             |  
|Accounts receivable                                                            |  |                                         | 881,848     |   |      |   | (805,676    | )
|Inventories                                                                    |  |                                         | 526,200     |   |      |   | (683,329    | )
|Inventory deposits                                                             |  |                                         |            |   |      |   | 66,781      |  
|Unbilled receivables                                                           |  |                                         | (91,564     | ) |      |   | (460,152    | )
|Prepaid expenses and other current assets                                      |  |                                         | (554,288    | ) |      |   | (806,964    | )
|Other assets                                                                   |  |                                         | (2,740      | ) |      |   | (305,894    | )
|Accounts payable                                                               |  |                                         | (1,875,147  | ) |      |   | (1,846,352  | )
|Accrued expenses                                                               |  |                                         | 853,288     |   |      |   | (802,061    | )
|Unearned revenues                                                              |  |                                         | 541,770     |   |      |   | 295,999     |  
|Royalty liability                                                              |  |                                         | (500,000    | ) |      |   |            |  
|Customer deposits                                                              |  |                                         | (319,935    | ) |      |   | 866,466     |  
|                                                                               |  |                                         |             |   |      |   |             |  
|Net cash flows from operating activities                                       |  |                                         | (7,746,123  | ) |      |   | (13,478,397 | )
|                                                                               |  |                                         |             |   |      |   |             |  
|Cash flows from investing activities:                                          |  |                                         |             |   |      |   |             |  
|Proceeds from sale of assets                                                   |  |                                         | 17,713      |   |      |   | 4,811,143   |  
|Release (Deposit) of restricted cash, net                                      |  |                                         | (2,472,667  | ) |      |   | 2,391,329   |  
|Acquisition of furniture, equipment, and leasehold improvements                |  |                                         | (22,417     | ) |      |   | (97,158     | )
|Cash paid for acquisition of product rights and other intangibles              |  |                                         |            |   |      |   | (3,500,000  | )
|                                                                               |  |                                         |             |   |      |   |             |  
|Net cash flows from investing activities                                       |  |                                         | (2,477,371  | ) |      |   | 3,605,314   |  
|                                                                               |  |                                         |             |   |      |   |             |  

(Continued)



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)



|                                                                                       |  |                                         |            |   |      |   |             |  
|-------------------------------------------------------------------------------------- |  | --------------------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                                       |  | For the Three Months EndingDecember 31, |           
|                                                                                       |  | 2007                                    |            |   | 2006 |  
|Cash flows from financing activities:                                                  |  |                                         |            |   |      |   |             |  
|Payments on notes payable and long-term debt                                           |  |                                         | (2,539,337 | ) |      |   | (3,460,195  | )
|Proceeds from the exercise of stock options                                            |  |                                         |           |   |      |   | 17,465      |  
|Proceeds from the exercise of stock warrants                                           |  |                                         | 4,641,336  |   |      |   |            |  
|Payment of deferred financing costs                                                    |  |                                         | (426,236   | ) |      |   |            |  
|Proceeds from non-controlling investment in variable interest equity                   |  |                                         |           |   |      |   | 2,400,000   |  
|Proceeds from notes payable                                                            |  |                                         | 8,606,851  |   |      |   |            |  
|Proceeds from notes payable, related party                                             |  |                                         | 300,000    |   |      |   |            |  
|Payments on line of credit, related party                                              |  |                                         | (700,000   | ) |      |   |            |  
|Payments made to related party, net                                                    |  |                                         | (104,649   | ) |      |   | (13,483     | )
|Proceeds from long-term debt                                                           |  |                                         | 500,000    |   |      |   | 28,990      |  
|Proceeds from line of credit, net                                                      |  |                                         | (1,048,093 | ) |      |   | (1,247,663  | )
|                                                                                       |  |                                         |            |   |      |   |             |  
|Net cash flows from financing activities                                               |  |                                         | 9,229,872  |   |      |   | (2,274,886  | )
|                                                                                       |  |                                         |            |   |      |   |             |  
|Net change in cash and cash equivalents                                                |  |                                         | (993,622   | ) |      |   | (12,147,969 | )
|                                                                                       |  |                                         |            |   |      |   |             |  
|Cash and cash equivalents at beginning of period                                       |  |                                         | 1,623,140  |   |      |   | 15,391,799  |  
|                                                                                       |  |                                         |            |   |      |   |             |  
|Cash and cash equivalents at end of period                                             |  | $                                       | 629,518    |   |      | $ | 3,243,830   |  
|                                                                                       |  |                                         |            |   |      |   |             |  
|Supplemental cash flow information:                                                    |  |                                         |            |   |      |   |             |  
|Cash paid for:                                                                         |  |                                         |            |   |      |   |             |  
|Interest                                                                               |  | $                                       | 2,249,380  |   |      | $ | 690,630     |  
|Income taxes                                                                           |  | $                                       |           |   |      | $ |            |  
|                                                                                       |  |                                        
|Supplemental disclosure of non-cash financing activity:                                |  |                                         |            |   |      |   |             |  
|Conversions of convertible debentures to equity                                        |  | $                                       | 1,724,055  |   |      | $ |            |  
|Conversions of accrued interest to equity                                              |  | $                                       | 238,676    |   |      | $ |            |  
|Reclassification of capitalized finance costs to equity upon conversions of debentures |  | $                                       | 140,576    |   |      | $ |            |  
|Common stock warrants issued for capitalized finance costs                             |  | $                                       | 7,736,793  |   |      | $ |            |  



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)

1. Description of business and summary of significant accounting policies:

Accentia Biopharmaceuticals, Inc. and its subsidiaries (collectively referred to as the Company or Accentia) is a vertically integrated
biopharmaceutical company focused on the development and commercialization of late-stage, targeted therapeutic clinical products. We have three products in or entering Phase 3 clinical trials, two of which have fast-track status. All three products
modify the immune system to treat disease. Our first such product candidate, SinuNase, is being developed as a treatment for chronic sinusitis (CS) which the medical establishment also refers to as chronic rhinosinusitis (CRS), which is a
chronic inflammatory condition of the paranasal sinuses that among others, results in nasal congestion, facial pain and pressure, nasal discharge, and headaches. SinuNase is an amphotericin B suspension that is self-administered into a
patients nasal cavity for the treatment of CS. If approved by the FDA, we expect that SinuNase would be the first and only foreseeable pharmaceutical product indicated for the treatment of chronic sinusitis. In April 2005, we submitted an
Investigational New Drug Application, or IND, with the FDA for SinuNase. In December 2006, we commenced the first of two Phase 3 clinical trials for SinuNase for patients who have recurrent CS whose disease severity has warranted surgical
intervention for CS sometime in the past, and in November 2007 we completed randomization of all patients required under the SinuNase Phase 3 clinical trial protocol. We expect unblinding of the Phase 3 data relating to the primary endpoint before
the end of March 2008.

Our second product candidate, BiovaxID, under development by our subsidiary, Biovest International Inc., a publicly held
company in which we currently hold approximately 76% of the outstanding capital stock (Biovest) is a patient-specific anti-cancer vaccine to treat follicular non-Hodgkins lymphoma, or follicular NHL. Follicular NHL is a cancer of the
lymphatic system that results when the bodys follicle center cells, which are a type of white blood cell, become abnormal and eventually spread throughout the body growing and dividing in an uncontrolled fashion. BiovaxID is a customized,
patient specific therapeutic anti-cancer vaccine that is derived from a patients own cancer cells and is designed to utilize the power of the patients immune system to recognize and destroy cancerous lymphoma cells while sparing normal
cells. We produce this vaccine by extracting a portion of the patients tumor cells and then replicating and purifying the unique antigen that is present only on the surface of the patients own tumor cells. Biovest is currently conducting
a pivotal Phase 3 clinical trial for BiovaxID in patients with the indolent, or low-grade, form of B-cell follicular NHL. Based on its analysis of available unblinded clinical trial data from the BiovaxID Phase 3 trial, in June 2007 the independent
Data Monitoring Committee (DMC) for BiovaxID recommended that Biovest conduct an interim analysis of the studys efficacy endpoints and overall safety profile. We implemented a data lock in December 2007 to define the clinical trial data to be
analyzed and the focus of the clinical trial shifted to the planned interim analysis.

Our third product candidate, Revimmune, is being developed as
a treatment for multiple sclerosis (MS). MS is an autoimmune disease that affects the central nervous system (CNS). Revimmune therapy consists of approximately four consecutive days of in-patient or out-patient treatment with an ultra-high
intensity, short-course of an intravenous formulation of an approved drug (cyclophosphamide). This treatment seeks to reboot a patients immune system, thereby eliminating the autoimmunity which is characteristic of MS.
The rebooting process is achieved by temporarily eliminating peripheral immune cells, including the immune cells causing the autoimmunity, while selectively sparing the stem cells in the bone marrow. The surviving stem cells are able,
typically within two-three weeks, to repopulate the body with a nascent immune system which lacks misdirected immunity to self-antigens. In July 2007, the Company filed a pre-IND submission with the FDA for the commencement of a Phase 3 clinical
trial and conducted pre-IND meetings. We are preparing to file our IND with the FDA in the first half of calendar 2008. The Company believes that Revimmune may additionally have applications for the treatment of a variety of autoimmune diseases
other than MS, including Systemic Lupus, Myasthenia Gravis and Aplastic Anemia.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



2. Significant accounting policies and consolidation policy:

Basis of presentation

The accompanying condensed consolidated
financial statements have been derived from unaudited interim financial information prepared in accordance with the rules and regulations of the Securities and Exchange Commission for quarterly financial statements. Certain information and footnote
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 so that the information presented is not misleading. The condensed consolidated 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 condensed consolidated financial statements.

Operating results for
the three months ended December 31, 2007 are not necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in
the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

Consolidation policy

The Company consolidates all entities controlled by ownership of a majority voting interest and, effective February 27, 2007, has consolidated a variable interest
entity of which the Company is the primary beneficiary. The consolidated financial statements include Accentia Biopharmaceuticals, Inc. and its wholly-owned subsidiaries, Analytica International, Inc. (Analytica), TEAMM Pharmaceuticals,
Inc. d/b/a Accentia Pharmaceuticals (Accentia Pharmaceuticals), Accent RX, Inc. (AccentRx), and Accentia Specialty Pharmacy (ASP); its majority-owned subsidiary, Biovest International, Inc. and Subsidiaries, and
Revimmune LLC (Revimmune), an entity in which the Company has a controlling financial interest and has been determined to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in
consolidation.

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, or other convertible financial 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
potential common shares outstanding is anti-dilutive.

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



|                                                                    |  |                              |             |   |                              |   |             |  
|------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ---------------------------- | - | ----------- | -
|                                                                    |  | For the Three Months Ended   |            
|                                                                    |  | December 31, 2007(Unaudited) |             |   | December 31, 2006(Unaudited) |  
|Numerator:                                                          |  |                              |             |   |                              |   |             |  
|Loss applicable to common stockholders                              |  | $                            | (24,841,850 | ) |                              | $ | (30,641,013 | )
|                                                                    |  |                              |             |   |                              |   |             |  
|Denominator:                                                        |  |                              |             |   |                              |   |             |  
|Weighted average sharesbasic loss per share                        |  |                              | 41,651,901  |   |                              |   | 31,720,472  |  
|Effect of dilutive securities                                       |  |                              |            |   |                              |   |            |  
|                                                                    |  |                              |             |   |                              |   |             |  
|Weighted average shares for dilutive loss per share                 |  |                              | 41,651,901  |   |                              |   | 31,720,472  |  
|                                                                    |  |                              |             |   |                              |   |             |  
|Loss per share applicable to common stockholders, basic and diluted |  | $                            | (0.60       | ) |                              | $ | (0.97       | )
|                                                                    |  |                              |             |   |                              |   |             |  



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



2. Significant accounting policies and consolidation policy (continued):



Loss per common share (continued)



The effect of common stock equivalents and common shares indexed to convertible debt securities are not considered in
the calculation of diluted loss per share because the effect would be anti-dilutive. They are as follows as of:



|                                              |  |                              |  |                             
|--------------------------------------------- |  | ---------------------------- |  | ----------------------------
|                                              |  | December 31, 2007(Unaudited) |  | December 31, 2006(Unaudited)
|Options and warrants to purchase common stock |  | 20,699,641                   |  | 9,666,697                   
|Convertible debt instruments                  |  | 14,317,385                   |  | 11,121,551                  
|                                              |  |                              |  |                             
|                                              |  | 35,017,026                   |  | 20,788,248                  
|                                              |  |                              |  |                             



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



2. Significant accounting policies and consolidation policy (continued):



Reclassification:

Certain amounts in the December 31, 2006 condensed consolidated financial statements have been reclassified to conform with the fiscal 2008 presentation.

Recent accounting pronouncements:

In December 2007, the FASB issued Statement No. 141 (revised), Business
Combinations (SFAS No. 141(R)). The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction
costs and the recognition of changes in the acquirers income tax valuation allowance. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Management is currently evaluating the
effect, if any the adoption will have on the Companys financial position and results of operations.

In December 2007, the FASB issued Statement No.
160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS No. 160). The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the
requirements to classify noncontrolling interests as a component of consolidated stockholders equity, and the elimination of minority interest accounting in results of operations with earnings attributable to noncontrolling
interests reported as part of consolidated earnings. Additionally, SFAS No. 160 revises the accounting for both increases and decreases in a parents controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. Management is currently evaluating the effect, if any the adoption will have on the Companys financial position and results of operations.

In September 2005, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157 (FAS 157). This Statement defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair
value measurements, the Board having previously concluded in those accounting pronouncements that fair value is a relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some
entities, the application of this Statement will change current valuation and accounting practices. For fiscal years beginning after November 15, 2007, the Company will be required to implement FAS 157 for financial assets and liabilities, as
well as for any other assets and liabilities that are carried at fair value on a recurring basis in the financial statements. FAS 157 implementation for other non-financial assets and liabilities, has been deferred to fiscal years beginning after
November 15, 2008. Earlier application is permitted provided that the reporting entity has not yet issued financial statements for that fiscal year. Management is currently assessing the effect, if any, adoption of FAS157 will have on the
Companys financial position and results of operations.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



3. Liquidity and managements plans:

The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes the Company 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 $24.8 million, used cash from operations of $7.7 million during the three months ended December 31, 2007, and has a working capital deficit of
$58.0 million at December 31, 2007. Net losses for Biovest, whose results are consolidated with the Company, were $3.7 million, during the same three month period.

Following the end of the fiscal quarter, in January 2008, the Company entered into definitive agreements and closed a private placement of approximately $8.7 million of Convertible Preferred stock (see Note 20).
As a part of the Private Placement, the Company issued short-term warrants to the purchasers of the Preferred Stock giving them the right to purchase up to 3,269,283 shares of the Companys common stock at an exercise price of $2.67 per share.
Each such Short-Term Warrant will be exercisable for cash only and will terminate 30 days after the initial press release by the Company announcing unblinded results of the current Phase 3 clinical trial for SinuNase. If no such press release is
made by the Company prior to December 1, 2008, the exercise period shall be the 30-day period commencing December 2, 2008. The Company projects that it has sufficient cash from the above Preferred Stock transaction and from availability
under its lines of credit to finance its expected cash outflows into the third quarter of fiscal 2008.

SinuNase results are anticipated to be available in
or around March 2008. BiovaxID interim results are anticipated to be available in or around April 2008. The Company believes that its current cash resources available under its lines of credit and proceeds from the private placement above will be
sufficient to fund its operations through the anticipated release of unblinded clinical trial data for SinuNase and BiovaxID. The Company believes that the publication of the aforementioned clinical trial results, if positive, will significantly
enhance its ability to access additional sources of funding.

The Company is in active negotiations to restructure or refinance its debt instruments which
mature in fiscal year 2008. These debt instruments, excluding Biovest debt instruments, include approximately $13.1 million (net of escrowed funds of approximately $1.8 million) due to Laurus and Southwest. Further the Company anticipates that
unless otherwise refinanced its principal payment obligations under the convertible debentures issued in September 2006 and February 2007 will be largely satisfied without cash payments through redemptions of principal paid with its common stock as
permitted by these debt instruments.

The Company expects to finance its foreseeable cash requirements following the unblinding of the clinical trial data
through public or private equity offerings, debt financings, or corporate collaboration and licensing arrangements. If adequate funds are not available from the foregoing sources, the Company may consider additional strategic financing options,
including sales of assets or business units (such as specialty pharmaceuticals, market services or cell culture equipment) that are non-essential to the ongoing development or future commercialization of SinuNase, BiovaxID or Revimmune, or it may be
required to delay, reduce the scope of, or eliminate one or more of its research or development programs or curtail some of its commercialization efforts. The Company may seek to access the public or private equity markets whenever conditions are
favorable, even if it does not have an immediate need for additional capital at this time. The Company cannot be certain that additional funding will be available on acceptable terms, or at all.

4. Restricted Cash:

Pursuant to certain long-term debt and
lines of credit agreements, the following cash balances were held in escrow as of December 31, 2007 and September 30, 2006:



|                                                                       |  |                              |           |                   |   |          
|---------------------------------------------------------------------- |  | ---------------------------- | --------- | ----------------- | - | ---------
|                                                                       |  | December 31, 2007(Unaudited) |           | September 30,2007
|Funds from convertible debentures held to pay down certain Laurus debt |  | $                            | 1,750,454 |                   | $ | 2,503,330
|Funds from notes payable held for use in future operations, Biovest    |  |                              | 3,225,542 |                   |   |         
|                                                                       |  |                              |           |                   |   |          
|                                                                       |  | $                            | 4,975,996 |                   | $ | 2,503,330
|                                                                       |  |                              |           |                   |   |          



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



5. Inventories:

Inventories consist of the following:



|                                                                                                                         |  |                              |         |                   |   |          
|------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------- | ----------------- | - | ---------
|                                                                                                                         |  | December 31, 2007(Unaudited) |         | September 30,2007
|Pharmaceutical products held for sale, net of allowances for obsolescence of $0.9 million and $0.6 million, respectively |  | $                            | 360,764 |                   | $ | 765,443  
|Finished goods, other                                                                                                    |  |                              | 143,397 |                   |   | 205,637  
|Work-in-process                                                                                                          |  |                              | 149,688 |                   |   | 311,302  
|Raw materials                                                                                                            |  |                              | 317,535 |                   |   | 215,202  
|                                                                                                                         |  |                              |         |                   |   |          
|                                                                                                                         |  | $                            | 971,384 |                   | $ | 1,497,584
|                                                                                                                         |  |                              |         |                   |   |          

6. Intangible assets:

Intangible assets consist of the following:



|                                   |  |                              |            |   |                   |   |            |                                   |  |           
|---------------------------------- |  | ---------------------------- | ---------- | - | ----------------- | - | ---------- | --------------------------------- |  | ----------
|                                   |  | December 31, 2007(Unaudited) |            |   | September 30,2007 |   |            | WeightedAverageAmortizationPeriod
|Indefinite-life intangible assets: |  |                              |            |   |                   |   |            |                                   |  |           
|Trademarks                         |  | $                            | 1,176,433  |   |                   | $ | 1,176,433  |                                   |  |           
|Purchased customer relationships   |  |                              | 225,137    |   |                   |   | 225,137    |                                   |  |           
|                                   |  |                              |            |   |                   |   |            |                                   |  |           
|                                   |  |                              | 1,401,570  |   |                   |   | 1,401,570  |                                   |  |           
|                                   |  |                              |            |   |                   |   |            |                                   |  |           
|Amortizable intangible assets:     |  |                              |            |   |                   |   |            |                                   |  |           
|Noncompete agreements              |  |                              | 2,104,000  |   |                   |   | 2,104,000  |                                   |  | 3.5 years 
|Patents                            |  |                              | 149,872    |   |                   |   | 149,872    |                                   |  | 3.5 years 
|Purchased customer relationships   |  |                              | 1,043,813  |   |                   |   | 1,043,813  |                                   |  | 9.5 years 
|Product rights                     |  |                              | 14,964,018 |   |                   |   | 14,964,018 |                                   |  | 18.4 years
|Software                           |  |                              | 498,416    |   |                   |   | 498,416    |                                   |  | 3.5 years 
|Trademarks                         |  |                              | 109,527    |   |                   |   | 109,527    |                                   |  | 7.5 years 
|                                   |  |                              |            |   |                   |   |            |                                   |  |           
|                                   |  |                              | 18,869,646 |   |                   |   | 18,869,646 |                                   |  |           
|Less accumulated amortization      |  |                              | (5,849,120 | ) |                   |   | (5,555,144 | )                                 |  |           
|                                   |  |                              |            |   |                   |   |            |                                   |  |           
|                                   |  |                              | 13,020,526 |   |                   |   | 13,314,502 |                                   |  |           
|                                   |  |                              |            |   |                   |   |            |                                   |  |           
|Total intangible assets            |  | $                            | 14,422,096 |   |                   | $ | 14,716,072 |                                   |  |           
|                                   |  |                              |            |   |                   |   |            |                                   |  |           



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



7. Lines of credit:

Lines of credit consist of the following:



|                                                                                                                                                                                                                                                                                         |  |                              |            |                   |   |           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | ----------------- | - | ----------
|                                                                                                                                                                                                                                                                                         |  | December 31, 2007(Unaudited) |            | September 30,2007
|Related Party:                                                                                                                                                                                                                                                                           |  |                              |            |                   |   |           
|Line of credit bridge note (Line of Credit) from an entity owned by an officer and major stockholder of the Company, interest at
4.25%, matures December 31, 2008 unsecured, maturing under certain conditions, as defined(a)(b)                                                       |  | $                            | 1,005,000  |                   | $ | 1,705,000 
|Other:                                                                                                                                                                                                                                                                                   |  |                              |            |                   |   |           
|Secured revolving note, $2.5 million is convertible, due to Laurus, interest at prime plus 2% (9.25% at December 31, 2007); matures April
2008; principal and accrued interest convertible at fixed conversion price of $6.80 per share (See Note 11 for additional conversion terms)(c) |  |                              | 6,985,555  |                   |   | 8,030,768 
|Revolving credit agreement, interest at prime rate (7.25% at December 31, 2007); matures March 31, 2008; secured by Companys
accounts receivable and guarantee of major stockholder                                                                                                     |  |                              | 4,000,000  |                   |   | 4,000,000 
|                                                                                                                                                                                                                                                                                         |  |                              |            |                   |   |           
|                                                                                                                                                                                                                                                                                         |  | $                            | 11,990,555 |                   | $ | 13,735,768
|                                                                                                                                                                                                                                                                                         |  |                              |            |                   |   |           



|(a) | The Company may prepay the Line of Credit at any time without penalty or premium. However, on the date on which the line of credit 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, 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
line of credit will not become due and cannot be paid until the first day on which both of these conditions are satisfied. The line of credit provided the Company with borrowing capacity of up to $7.5 million. $1.0 million is outstanding under this
line of credit leaving potential available borrowing capacity of $6.5 million. On December 27, 2007, the Company issued 175,000 warrants with a fair value of $0.3 million to Hopkins Capital Group II in consideration for previous extensions and
continued availability. The $0.3 million will be recognized as interest expense over the extension period.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Dr. Francis E. ODonnell, the Companys Chief Executive Officer and Chairman, is the sole manager of Hopkins Capital Group II, LLC and several irrevocable trusts
established by Dr. ODonnell collectively constitute the largest equity owners of Hopkins Capital Group II, LLC.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | On October 31, 2007, the Company entered into an amendment to its revolving credit facility with Laurus to extend the Companys access to its expanded borrowing
availability of $4.4 million under this revolving credit facility through March 31, 2008. In consideration of the extension, the Company issued to Laurus a redeemable warrant to purchase up to 4,024,398 shares with an exercise price of $2.67
per share until October 31, 2014 with piggy back registration rights. The Company has the right to terminate and cancel the warrant by making a cash payment in an amount equal to $0.99 for each share underlying the warrant. The Companys
right to terminate and cancel the Warrant expires on the earlier of April 30, 2008 or the date of public release of unblinded clinical trial data from the current Phase 3 clinical trial of SinuNase. The fair value of the warrants of $7.2
million will be recognized as interest expense over the extension period.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Weighted average interest rate on all short-term borrowings
aggregated 8.2%, and 8.5% at December 31, 2007 and September 30, 2007, respectively.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



8. Notes payable:

Pulaski Bank and Trust

On January 15, 2007, Biovest closed an amended and
restated loan transaction (Note 1) with Pulaski Bank and Trust Company of St. Louis, MO (Pulaski), which amended the Loan Agreement dated September 5, 2006 pursuant to which Pulaski agreed to loan $1 million to Biovest
pursuant to an unsecured Promissory Note. Biovest also closed on a second loan transaction with Pulaski on March 22, 2007 (Note 2), pursuant to which Pulaski agreed to loan an additional $0.75 million to Biovest pursuant to an
unsecured Promissory Note. The combined balance of these notes as of December 31, 2007 is $1.89 million including principal of $1.75 million and accrued interest and fees of $135,000. The notes had original maturity dates from April to July,
which have subsequently been extended to December 31, 2007(1). The note can be prepaid by Biovest at any time without penalty. The notes bear interest
at the prime rate minus 0.5%, requiring monthly payments of interest only. The notes are an unsecured obligation of Biovest and is subordinated to Biovests outstanding loan to Laurus. The notes are guaranteed by entities, officers and other
individuals affiliated with Biovest or Accentia, the majority stockholder of Biovest. Biovest has entered into Indemnification Agreements with each of the guarantors. Biovest issued warrants to purchase 1,770,453 shares of Biovests common
stock at an exercise price of $1.10 to certain officers and directors in conjunction with their guarantee of these notes payable.

Biovest agreed to
indemnify and hold harmless each guarantor should their guarantees be called by the Lender by agreeing to compensate each affected guarantor by an issuance of restricted common stock equal to 700% of the amount of their guarantee if the guarantee is
called upon.





|(1) | Biovest and Pulaski have extended the maturity date of these two loans to June 30,
2008. On February 14, 2008, Biovest paid $750,000 to Pulaski resulting in the current aggregate principal balance of $1,050,000. This transaction is described in more detail in Note 20 (Subsequent Events) herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



8. Notes payable (continued):



Southwest Bank Creve Coeur Financial Center:

On June 26, 2007, Biovest closed a loan transaction with Southwest Bank Creve Coeur Financial Center of St. Louis, MO (Southwest). Southwest loaned $0.2 million to Biovest pursuant to an unsecured
Promissory Note which matures on December 26, 2008, and can be prepaid by Biovest at any time without penalty. The note bears interest at the prime rate plus 1.0% (8.75% per annum at December 31, 2007) requiring monthly payments of interest
only. The note is an unsecured obligation of Biovest and is subordinated to Biovests outstanding loan to Laurus. The note is guaranteed by an officer of Accentia. The Company has entered into an Indemnification Agreement with the guarantor
whereby the Company has agreed to indemnify and hold harmless the guarantor should the guarantee be called by the Lender.

In conjunction with the issuance
of this note payable Biovest issued to the guarantor warrants to purchase 109,090 shares of Biovest common stock, at an exercise price of $1.10 per share (the Warrants). The Warrants will expire on June 25, 2012. Under the terms of
the Warrants, the guarantors shall have piggy-back registration rights for the shares underlying the Warrants.

The balance of this note as of
December 31, 2007 is $0.2 million.

Other notes payable:

On September 10, 2007, Biovest issued a promissory note to a private third-party in the amount of $0.3 million. The note bears no interest, except in the case of default, at which point interest would begin to accrue at 18.0% per
annum. Under the terms of this note all principal is due on September 9, 2008. The note is an unsecured obligation of Biovest and is subordinated to Biovests outstanding loan to Laurus. Biovest is also obligated to issue $0.3 million in
shares of Biovests common stock to this individual on September 9, 2008. For purposes of calculating the number of shares to be issued, the stock will be valued at the lower of $1.10 per share or a discount of fifteen percent to the
volume-weighted average trading price of Biovests common shares for the 60 days prior to maturity. Biovest used the effective interest method to accrete the fair value of these shares as interest expense throughout the term of the note.

On October 12, 2007, Biovest issued an unsecured promissory note to a director of Biovest in the amount of $300,000. This loan bears interest at
prime plus 2.0% and is payable October 11, 2008. Biovest issued warrants to purchase 2,727,270 shares of Biovests common stock at $1.10 per share in conjunction with this loan.

On December 6, 2007, Biovest entered into an agreement with Venture Funding Ltd. (Venture) whereby the Company issued to Venture an unsecured,
subordinated note in the amount of $45,000 in satisfaction of past payment obligations of the Company to Venture. On December 10, 2007 an amortizing payment of $10,000 was made on this note with future payments due in eight equal quarterly
installments plus accrued interest of prime plus 2% beginning March 31, 2008.

On December 10, 2007, Biovest completed a financing transaction
with Valens Offshore SPV II, Corp. and Valens U.S. SPV I, LLC., (collectively the Valens Funds), both of which are subsidiary companies of Laurus, pursuant to which the Valens Funds purchased from Biovest two secured promissory notes in
the aggregate principal amount of $8,500,000 and entered



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



8. Notes payable (continued):



Other notes payable (continued)



into two royalty agreements whereby the Valens Funds have been granted royalty interests in the worldwide net commercial sales of the Biovests biologic
products. The notes are non-amortizing, bear interest at prime plus 2.0%, with a minimum interest rate of 11% and are payable in a single payment of principal and accrued interest on June 5, 2008. The obligations pursuant to the Notes are
secured by a lien against all assets of Biovest and its subsidiaries and are guaranteed by Biovest and its subsidiaries. Proceeds of the notes, after designated payments to the Valens Funds and Laurus in payment of outstanding obligations and
prepayment of certain scheduled principal and interest payments, were disbursed into a restricted account and will be released to Biovest based upon an agreed schedule. These notes also contain a default put option whereby upon an event of default
Biovest would be required to pay to the Valens Funds a default payment of 130% of the outstanding principal, interest and fees due. Biovest has concluded that this feature constitutes a derivative liability that requires accounting recognition at
fair value. Biovest has utilized a probability-based, discounted cash flow approach to value the put. (See Note 11).

9. Long-term debt:

Long-term debt consists of the following:



|                                                                                                                                                                                                                                                                                                                                                                |  |                              |             |   |                    |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ------------------ | - | ----------- | -
|                                                                                                                                                                                                                                                                                                                                                                |  | December 31, 2007(unaudited) |             |   | September 30, 2007 |  
|Convertible debentures  September 2006 (hybrid financial instrument), at fair value, face value of $12,013,467 (December 31, 2007), and
$12,940,359 (September 30, 2007), interest at 8% payable quarterly, principal payable in 37 monthly installments beginning October 2007 through September 29, 2010. Convertible to common stock at $2.60 per share (b) |  | $                            | 18,802,379  |   |                    | $ | 13,815,417  |  
|Convertible debentures  February 2007, face value of $23,390,000 (December 31, 2007) and $24,640,000 (September 30, 2007), interest
at 8% payable quarterly, matures February 2011(c)                                                                                                                                                                          |  |                              | 12,122,096  |   |                    |   | 10,759,654  |  
|Convertible amortizing term note, due to Laurus, interest payable monthly at prime rate plus 4%, (11.25% at December 31, 2007), due April
2008, convertible into shares of common stock at $6.80 per share, exercisable through April 2008 (d)                                                                                                                  |  |                              | 3,302,191   |   |                    |   | 3,556,173   |  
|Convertible notes payable, Biovest 2000 bridge financing, interest at 10%, due in May 2008, 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 $1.00 per share                                                                                   |  |                              | 46,817      |   |                    |   | 46,817      |  
|Convertible amortizing term note (owed by Biovest), due to Laurus, interest payable monthly at prime rate plus 2%, (9.25% at December 31,
2007), payable monthly through March 31, 2009 (a)                                                                                                                                                                     |  |                              | 7,222,361   |   |                    |   | 7,121,871   |  
|Valens Offshore SPV II, Corp, $255,000 face value, prime rate plus 2%, (9.25% at December 31, 2007) note payable, due March 31, 2009
(e)                                                                                                                                                                                                                        |  |                              | 255,000     |   |                    |   |            |  
|Valens U.S. SPV I, LLC, $245,000 face value, prime rate plus 2%, (9.25% at December 31, 2007) note payable, due March 31, 2009 (e)                                                                                                                                                                                                                              |  |                              | 245,000     |   |                    |   |            |  
|Other                                                                                                                                                                                                                                                                                                                                                           |  |                              | 101,074     |   |                    |   | 107,728     |  
|Long term accrued interest                                                                                                                                                                                                                                                                                                                                      |  |                              | 41,377      |   |                    |   | 480,344     |  
|                                                                                                                                                                                                                                                                                                                                                                |  |                              |             |   |                    |   |             |  
|                                                                                                                                                                                                                                                                                                                                                                |  |                              | 42,138,295  |   |                    |   | 35,888,004  |  
|Less current maturities                                                                                                                                                                                                                                                                                                                                         |  |                              | (18,329,366 | ) |                    |   | (15,858,057 | )
|                                                                                                                                                                                                                                                                                                                                                                |  |                              |             |   |                    |   |             |  
|                                                                                                                                                                                                                                                                                                                                                                |  | $                            | 23,808,929  |   |                    | $ | 20,029,947  |  
|                                                                                                                                                                                                                                                                                                                                                                |  |                              |             |   |                    |   |             |  



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##### Table of Contents

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



9. Long-term debt (continued):



Convertible amortizing term note (a)

This note is collateralized by all cash, restricted cash, accounts receivable, inventory, fixed assets and other assets of Biovest. The note also contains
certain restrictive covenants. Pursuant to the original terms of this secured promissory note, Biovest was required to make certain principal and interest payments commencing in August 2007. A Letter Agreement rescheduling future payments due from
Biovest to Laurus under the Note became effective on April 17, 2007. Under the Letter Agreement past due and ongoing principal payments on the Note were deferred until August 1, 2007, when adjusted monthly principal payments of $0.3
million were to commence. As consideration for the forbearance Biovest granted to Laurus a non-cancelable royalty equal to three percent of world-wide net sales of AutovaxID instruments for a period of five years commencing on May 31, 2007.
Under the terms of the royalty agreement the Companys royalty payments to Laurus are required to aggregate to a minimum of $8 million with $0.5 million of the minimum royalty being payable on December 31, 2007 and the balance (if any),
less actual royalties paid, being due at the end of the five year royalty term (Note 10). In addition, upon satisfaction of certain conditions of the Letter Agreement, Laurus consented to Biovest seeking and, if available, entering into bridge loans
in an aggregate amount of up to $7.0 million, (see Note 13).

October 2007 Amendment to Laurus Loan:

On October 31, 2007, Biovest executed amendment agreements (the Amendments with its senior lender, Laurus, to defer payments of principal
and interest on its $7.8 million loan until January, 2008 at which point adjusted principal payments of $0.3 million per month plus interest will commence. Interest on this loan will continue to accrue at prime plus 2.0% (9.25% at December 31,
2007).

Convertible debentures  September 2006 (b)

The September 2006 private placement of $25.0 million in principal amount of 8% Secured Convertible Debentures due September 29, 2010 (the Debentures) resulted in gross proceeds of $23.5 million
after placement agent fees of $1.5 million but before other expenses associated with the transaction. 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. Interest is payable quarterly in arrears in cash, or, at the Companys option, in shares of Company common stock 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, the Company was required 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 Biovest common stock held by the Company, or a combination thereof. On October 31, 2007, the Company and holders of 84% of the 8% Convertible Debenture
Financing dated September 29, 2006 (the September Debentures) agreed to defer required monthly redemption payments under the September Debentures from November 1, 2007 through May 1, 2008 and to allow any unconverted
balance of those amounts to be redeemed on the Maturity Date of the September Debentures.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



9. Long-term debt (continued):



Convertible debentures  September 2006 (b) continued



As a part of this debenture offering, 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 Biovest common stock held
by the Company 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. These will expire on September 29, 2011.

As of December 31, 2007, approximately $13.0 million of principal has been converted to common stock and therefore, $12.0 million (face value) of the
debentures are included on the December 31, 2007 consolidated balance sheet at a fair value of $18.8 million.

Convertible debentures 
February 2007 (c)

The February 2007 Private Placement of $24.7 million in principal amount of 8% Secured Convertible Debentures
issued on February 28, 2007, and maturing February 28, 2011 (the February 2007 Debentures) resulted in gross proceeds of $18,800,000 after placement fees of approximately $2.0 million not including other expenses associated
with the transaction. The February 2007 Debentures are convertible at the option of the holder at $2.67 per share, subject to an adjustment, as defined.

Beginning on March 1, 2008, and on the 1st of each month thereafter, the Company is required to redeem 1/37th of the face value of the February 2007 Debentures in cash or, at its election, with shares of our
common stock.

In conjunction with the issuance of the February 2007 Debentures, in order to induce certain investors from the September
2006 Private Placement to increase their investment by purchasing additional debentures in the February 2007 Private Placement, the Company offered a discount on the February 2007 Debentures and additional warrants to purchase shares of common stock
with the issuance of the February 2007 Debentures. The Company issued $17,940,000 face value convertible debentures to certain investors for proceeds of $13,000,001, and 1,049,750 additional warrants with an estimated fair value of approximately
$1,740,000 to these investors. The Company recognized a loss of $4,547,503 pursuant to this inducement during the year ended September 30, 2007. On September 5, 2007. The Company extended the forced conversion until March 31, 2008.

As a part of the February 2007 Private Placement, the Company issued warrants to the purchasers of the February 2007 Debentures giving them
the right to purchase up to an aggregate of 2.2 million shares of the Companys common stock at an exercise price of $2.94 per share (the Long Term Warrants) and an aggregate of 3.1 million shares of the Companys
common stock at an exercise price of $2.67 per share (the Short Term Warrants and, together with the Long Term Warrants, the Warrants). The Warrants are immediately exercisable, and the exercise prices for the Warrants are
subject to adjustment for stock splits, stock dividends, and the like. In connection with the February 2007 Private Placement, the Company also issued to the placement agents for the transaction Long Term Warrants to purchase an aggregate of
approximately 0.4 million shares of our common stock. All of the Long Term Warrants will expire on the fifth (5th) anniversary of the issue date of such warrants, and all of the Short Term Warrants were to expire September 17, 2007;
however, the Short Term Warrants were extended until September 28, 2007 and further extended until October 19, 2007.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



9. Long-term debt (continued):



Convertible debentures  February 2007 (c) (continued)



On October 19, 2007, the Company engaged in an effort to have the holders exercise the
short-term warrants in connection with the February 28, 2007 Convertible Debenture Financing. The Short-term Warrants, as amended, were scheduled to expire on October 19, 2007. As a consequence of this effort, the Company
received an aggregate of $4.6 million in cash from the exercise of the Short-term Warrants at $2.67 per share, 2,568,564 Short-term Warrants expired unexercised and the Company also issued additional warrants to certain of the holders of the
February 2007 debentures to purchase an additional 1,895,133 shares of the Companys Common Stock. These additional warrants have an exercise price of the $2.67 per share and a term expiring on the first to occur of January 19, 2009 or
three days following notice of the Companys common stock trading at $6 per share based on a 10-day volume weighted average.

Laurus Master
Fund, Ltd. secured revolving term note and convertible term note (d)

On April 29, 2005, the Company obtained an
aggregate total of $10.0 million in debt financing from Laurus. The term loan portion of the Laurus credit facility is evidenced by a secured convertible term note in the principal amount of $5.0 million. The revolving loan portion of the credit
facility is evidenced by a secured convertible minimum borrowing note in the amount of $2.5 million and a secured revolving note of up to $5.0 million, provided that the aggregate principal amount under both notes combined may not exceed $5.0
million.

In August 2005, the term loan portion of the Laurus credit facility was amended and restated secured convertible term note, dated
August 16, 2005, in the principal amount of $10.0 million (an increase of $5.0 million). 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 secured
convertible minimum borrowing note and secured revolving note accrue interest at a rate equal to the greater of 7.25% per year or prime rate plus 2%. Certain repayment terms were conditional based on timing of the initial public offering. As a
result of completion of the offering, the amended and restated secured convertible term note is payable over three years in equal monthly payments of principal and interest of $0.3 million. The secured revolving note and secured convertible minimum
borrowing note are due on the third anniversary of the notes with all accrued but unpaid interest payable monthly.

In connection with the
Laurus credit facility, the Company 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 ($8.00) (1,000,000 warrants), and such warrant has
an exercise price equal to our per share initial public offering price ($8.00).

The warrant will expire on the 5th anniversary of the date
of warrant issuance. As a part of the August 2005 amendment to the Laurus credit facility, the Company granted Laurus an additional warrant to purchase up to 277,778 shares of the Companys common stock at an exercise price of $0.001 per share.
This additional warrant is 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 is convertible at the option of Laurus into shares of our common stock at
$6.80 per share.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



9. Long-term debt (continued):



Laurus Master Fund, Ltd. secured revolving term note and convertible term note (d)
(continued)



|                                                       |  |                              |            |  
|------------------------------------------------------ |  | ---------------------------- | ---------- | -
|                                                       |  | December 31, 2007(Unaudited) |           
|Carrying value of note payable, October 1, 2007        |  |                              | 11,586,941 |  
|Accretion of discount                                  |  |                              | 394,060    |  
|Debt repayments, net                                   |  |                              | (1,693,255 | )
|                                                       |  |                              |            |  
|Carrying value of note payable, December 31, 2007      |  | $                            | 10,287,746 |  
|                                                       |  |                              |            |  
|As presented on consolidated balance sheet:            |  |                              |            |  
|Current maturities of convertible amortizing term note |  | $                            | 3,302,191  |  
|Lines of credit-secured revolving note                 |  |                              | 6,985,555  |  
|Long-term debt, net of current maturities (See Note 9) |  |                              |           |  
|                                                       |  |                              |            |  
|Total                                                  |  | $                            | 10,287,746 |  
|                                                       |  |                              |            |  

Included in restricted cash is $1.8 million which is reserved for payment on the Laurus Term Note.

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

Valens Offshore SPV II, Corp, and Valens U.S. SPV I, LLC secured promissory notes (e)

On October 30, 2007, Biovest completed a financing transaction with the Valens Funds. Pursuant to this transaction, the Valens Funds purchased from Biovest two
secured promissory notes in the aggregate principal amount of $500,000 and entered into two royalty agreements whereby the Valens Funds have been granted 2% royalty interests in the worldwide net commercial sales of Biovests biologic products.
The notes are non-amortizing and accrue interest at prime plus 2%, with a minimum of 9% interest. Interest is payable monthly in arrears, commencing November 1, 2007. The principal balance of both notes is due upon maturity on March 31,
2009.

Fair value of debt instruments

The fair value
of certain financial instruments are included 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, 2007 and
September 30, 2007, estimated fair values and respective carrying values for certain debt instruments are as follows:



|                                                     |  |                   |            |                    |   |            |  |               |            |  |   |           
|---------------------------------------------------- |  | ----------------- | ---------- | ------------------ | - | ---------- |  | ------------- | ---------- |  | - | ----------
|                                                     |  | December 31, 2007 |            | September 30, 2007
|                                                     |  | Fair Value        |            | CarryingValue      |   | Fair Value |  | CarryingValue
|$7,799,000 Secured Term Note (Biovest)               |  | $                 | 7,278,907  |                    | $ | 7,222,361  |  | $             | 6,332,730  |  | $ | 7,121,872 
|$24,940,000 Convertible debentures                   |  | $                 | 20,493,340 |                    | $ | 12,122,096 |  | $             | 20,855,984 |  | $ | 13,815,417
|$10,000,000 Face Value Convertible Secured Term Note |  | $                 | 3,754,377  |                    | $ | 3,302,191  |  | $             | 3,557,900  |  | $ | 3,556,173 
|$10,000,000 Revolving Line of Credit                 |  | $                 | 6,636,513  |                    | $ | 6,985,555  |  | $             | 7,607,663  |  | $ | 8,030,768 
|                                                     |  |                   |            |                    |   |            |  |               |            |  |   |           
|                                                     |  | $                 | 38,163,137 |                    | $ | 29,632,203 |  | $             | 38,354,277 |  | $ | 32,524,230
|                                                     |  |                   |            |                    |   |            |  |               |            |  |   |           



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



9. Long-term debt (continued):



Future maturities of long-term debt are as follows as of December 31, 2007:



|                                                                                 |  |   |            |  
|-------------------------------------------------------------------------------- |  | - | ---------- | -
|2008                                                                             |  | $ | 17,833,191 |  
|2009                                                                             |  |   | 17,267,285 |  
|2010                                                                             |  |   | 9,169,733  |  
|2011                                                                             |  |   | 2,931,081  |  
|                                                                                 |  |   |            |  
|                                                                                 |  |   | 47,201,290 |  
|Less unamortized discount and adjustment to fair value on convertible debentures |  |   | (5,062,995 | )
|                                                                                 |  |   |            |  
|                                                                                 |  | $ | 42,138,295 |  
|                                                                                 |  |   |            |  

10. Royalty liability

On April 17, 2007, Biovest executed an amendment agreement (the Amendment) with its senior lender, Laurus, to defer payments of principal on its $7.8 million loan (Note 9). As consideration for the forbearance Biovest
granted to Laurus a non-cancelable royalty equal to three percent of world-wide net sales of AutovaxID instruments for a period of five years commencing on May 31, 2007. Under the terms of the royalty agreement the Companys royalty
payments to Laurus are required to aggregate to a minimum of $8.0 million. On December 10, 2007 the Company paid $0.5 million of the minimum royalty. Future payments are due quarterly with the balance of the royalty (if any), less actual
royalties paid, being due on May 31, 2012.

The Company recorded the royalty liability based on the present value of the minimum payments (discounted
at an annual rate of 11%) due under the Amendment. Management has determined that the recorded liability represents their best estimate of future payments due under this agreement. Additional royalty expense, if any, will be recorded as incurred or
as it becomes reasonably estimable. Therefore, the actual royalty liability could exceed the recorded amount.

Expected future royalty payments are as
follows:



|                           |  |   |            |  
|-------------------------- |  | - | ---------- | -
|Years ending December 31,: |  |   |           
|2008                       |  | $ | 11,421     |  
|2009                       |  |   | 153,450    |  
|2010                       |  |   | 295,350    |  
|2011                       |  |   | 424,230    |  
|2012                       |  |   | 6,615,549  |  
|                           |  |   |            |  
|                           |  |   | 7,500,000  |  
|Unamortized discount       |  |   | (2,762,065 | )
|                           |  |   |            |  
|                           |  | $ | 4,737,935  |  
|                           |  |   |            |  
|                           | 
|Current                    |  | $ | 10,645     |  
|Non-Current                |  |   | 4,727,290  |  
|                           |  |   |            |  
|                           |  | $ | 4,737,935  |  
|                           |  |   |            |  



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



11. Derivative Liabilities

The following tabular presentation reflects the components of derivative financial instruments as of:



|                                            |  |                             |            |                   |   |           
|------------------------------------------- |  | --------------------------- | ---------- | ----------------- | - | ----------
|                                            |  | December 31,2007(Unaudited) |            | September 30,2007
|Embedded derivative instruments, bifurcated |  | $                           | 881,018    |                   | $ | 486,300   
|Freestanding derivatives:                   |  |                             |            |                   |   |           
|Warrants issued with convertible debt       |  |                             | 5,515,121  |                   |   | 3,692,701 
|Warrants issued with notes payable          |  |                             | 4,976,000  |                   |   | 4,928,000 
|Default and investment put options, Biovest |  |                             | 1,087,302  |                   |   | 565,677   
|Investment put option, Accentia             |  |                             | 657,529    |                   |   | 1,141,574 
|                                            |  |                             |            |                   |   |           
|                                            |  | $                           | 13,116,970 |                   | $ | 10,814,252
|                                            |  |                             |            |                   |   |           

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



|                                     |  |                              |  |                  
|------------------------------------ |  | ---------------------------- |  | -----------------
|                                     |  | December 31, 2007(Unaudited) |  | September 30,2007
|Accentia Common shares indexed:      |  |                              |  |                  
|Freestanding and embedded derivative |  | 4,385,844                    |  | 4,385,844        
|Investment put                       |  | 1,498,128                    |  | 1,498,128        
|                                     |  |                              |  |                  
|                                     |  | 5,883,972                    |  | 5,883,972        
|                                     |  |                              |  |                  



|                                                                                                        |  |                              |  |                  
|------------------------------------------------------------------------------------------------------- |  | ---------------------------- |  | -----------------
|                                                                                                        |  | December 31, 2007(Unaudited) |  | September 30,2007
|Biovest Common shares indexed:                                                                          |  |                              |  |                  
|Freestanding derivatives (warrants to purchase Biovest shares issued to Laurus Funds, LTD. by Accentia) |  | 10,000,000                   |  | 10,000,000       
|                                                                                                        |  |                              |  |                  

Derivative income (losses) in the accompanying statements of operations relate to the individual derivatives as
follows as of:



|                                            |  |                              |            |   |                              |   |          |  
|------------------------------------------- |  | ---------------------------- | ---------- | - | ---------------------------- | - | -------- | -
|                                            |  | Three Months Ended:          |           
|                                            |  | December 31, 2007(Unaudited) |            |   | December 31, 2006(Unaudited) |  
|Embedded derivative instruments, bifurcated |  | $                            | (394,718   | ) |                              | $ |         |  
|Freestanding derivatives:                   |  |                              |            |   |                              |   |          |  
|Warrants issued with convertible debentures |  |                              | (1,822,420 | ) |                              |   | (664,123 | )
|Warrants issued with term note payable      |  |                              | (48,000    | ) |                              |   |         |  
|Default and investment put options, Biovest |  |                              | (521,625   | ) |                              |   | 14,192   |  
|Investment put option, Accentia             |  |                              | 484,044    |   |                              |   |         |  
|                                            |  |                              |            |   |                              |   |          |  
|                                            |  | $                            | (2,302,719 | ) |                              | $ | (649,931 | )
|                                            |  |                              |            |   |                              |   |          |  



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



12. Related party transactions:

On December 27, 2007, the Company entered into an Agreement & Consent with Hopkins Capital Group II LLC. (HCGII), an entity controlled by the Companys CEO, Dr. Francis E.
ODonnell M.D., whereby the parties confirmed that the Company had continued access to the full borrowing capability under its existing Line of Credit dated August 16, 2005 with HCGII through December 31, 2008 (Note 7).

On December 27, 2007 the Company issued warrants to purchase up to 175,000 shares of the Companys common stock at an exercise price of $2.91 per share to
HCGII in consideration for previous extensions of credit and the continued availability of the funds under the Companys existing Line of Credit dated August 16, 2005. These warrants were fully vested upon issuance and have a term of five
years (Note 7).

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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



12. Related party transactions (continued):



Agreements with Biovest (continued)



| |  |  | 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, 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.

Notes payable, related party:

On September 11, 2007, Biovest issued two unsecured promissory notes to two directors of Biovest in the amount of $0.2 million. These loans bear interest at prime
plus 2.0% (9.25% at December 31, 2007) and mature September 10, 2008. The notes can be prepaid at any time without penalty and are subordinated to Biovests outstanding loans to Laurus and the Valens Funds. Biovest issued five-year
warrants to purchase 909,090 shares of the Companys common stock at $1.10 per share in conjunction with these loans. In accordance with APB 14 : Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, proceeds
were allocated to debt and stockholders equity based on the relative fair values of the debt and the warrants. The carrying value of these notes as of December 31, 2007 is $145,000. The remaining discount of $55,000 to these notes payable
will be accreted using the effective interest method through September 2008. Interest expense of approximately $17,000 was incurred on these notes during the quarter ended December 31, 2007.

On September 26, 2007, Biovest issued an unsecured promissory note to a shareholder of the Company in the amount of $46,000. This loan bears interest at prime plus
2.0% (9.25% at December 31, 2007) and is payable May 31, 2008. This note is subordinated to Biovests outstanding loan to Laurus and the Valens Funds. Biovest issued five-year warrants to purchase 25,099 shares of Biovests
common stock at $1.10 per share in conjunction with this loan. In accordance with APB 14 : Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants, proceeds were allocated to debt and stockholders equity based
on the relative fair values of the debt and the warrants. The carrying value of this note as of December 31, 2007 is $46,000. Interest expense of approximately $6,000 was incurred on this note during the quarter ended December 31, 2007.

On October 12, 2007, Biovest issued an unsecured promissory note to a director of Biovest in the amount of $300,000. This loan bears interest at
prime plus 2.0% (9.25% at December 31, 2007) and is payable October 11, 2008. Biovest issued warrants to purchase 2,727,270 shares of Biovests common stock at $1.10 per share in conjunction with this loan. Proceeds from the loan were
allocated to debt and stockholders equity based on the relative fair values of the debt and the warrants. The carrying value of this note as of December 31, 2007 is $128,000. Interest expense of approximately $34,000 was incurred on this
note during the quarter ended December 31, 2007.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



13. Loss on extinguishment of debt:

On October 31, 2007, Biovest executed an amendment agreement (the Amendment) with its senior lender, Laurus, to defer payments of principal and interest on its $7.8 million loan until January, 2008,
at which point adjusted principal payments of $0.3 million per month were to commence. Interest on this loan will continue to accrue at prime plus 2.0% and will be due monthly beginning January, 2008. As consideration for the forbearance Biovest
will pay to Laurus an additional $1.8 million upon the maturity of the note, March 31, 2009.

Biovest applied the provisions of EITF 96-19,
Debtors Accounting for Modification or Exchange of Debt Instruments to the Amendment. EITF 96-19 provides that substantial modifications of terms should be treated in the same manner as an extinguishment of debt and thus accounted for
under the provisions of SFAS 125. Biovest determined that the modification of terms of the $7.8 million loan from Laurus in addition to the $1.8 million payment due upon maturity under the Amendment constituted a substantial modification of terms
and thus treated the Amendment as an extinguishment of debt. Biovest incurred a $1.4 million loss on extinguishment of debt as a result of this transaction which is included in other income (expense) in the accompanying condensed consolidated
statement of operations for the three months ended December 31, 2007.

14. Stockholders equity:

Stock options and warrants

The Company provides for three option
plans, the 2003 Stock Option Plan (2003 Plan), the 2005 Equity Incentive Plan (2005 Plan), and the 2008 Equity Incentive Plan (2008 Plan). All of these 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 September 30, 2007, 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, 2007, 784,635 options are outstanding under the 2003 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, 2007, 1,889,108 options are outstanding under the 2005 Plan. The Company may, at any time, amend or modify the Plan without limitation.

On November 29, 2007 and effective as of December 31, 2007, the Companys Board of Directors has adopted the Accentia Biopharmaceuticals, Inc. 2008 Plan,
which is intended to be a Qualified Plan subject to ratification by vote of the Companys shareholders.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



14. Stockholders equity (continued):

Stock options and warrants issued, terminated/forfeited and outstanding during the three months ended December 31, 2007 (unaudited) are as follows:



|                                                       |  |            |   |  |                              
|------------------------------------------------------ |  | ---------- | - |  | -----------------------------
|                                                       |  | Shares     |   |  | AverageExerciseprice pershare
|Options and warrants outstanding, September 30, 2007   |  | 18,767,692 |   |  | 3.64                         
|Activity for the three months ended December 31, 2007: |  |            |   |  |                              
|Options issued                                         |  | 197,431    |   |  | 4.30                         
|Warrants issued                                        |  | 6,094,531  |   |  | 2.55                         
|Options terminated/forfeited                           |  | (53,211    | ) |  | 3.23                         
|Warrants terminated/forfeited                          |  | (2,568,474 | ) |  | 2.67                         
|Warrants exercised                                     |  | (1,738,328 | ) |  | 2.67                         
|                                                       |  |            |   |  |                              
|Options and warrants outstanding, December 31, 2007    |  | 20,699,641 |   |  | 3.56                         
|                                                       |  |            |   |  |                              
|Options outstanding                                    |  | 2,673,743  |   |  | 3.97                         
|Warrants outstanding                                   |  | 18,025,898 |   |  | 3.50                         
|                                                       |  |            |   |  |                              
|                                                       |  | 20,699,641 |   |  |                              
|                                                       |  |            |   |  |                              

The weighted average grant date fair values of stock options and warrants granted during the three months ended
December 31, 2007 (unaudited) were as follows:



|                                     |  |                                       |      |          |   |     
|------------------------------------ |  | ------------------------------------- | ---- | -------- | - | ----
|                                     |  | Weighted AverageGrant Date Fair Value
|                                     |  | Options                               |      | Warrants
|Three months ended December 31, 2007 |  | $                                     | 2.13 |          | $ | 1.53

A summary of the status of the Companys nonvested stock options as of December 31, 2007, and changes
during the three months then ended, is summarized as follows:



|                                |  |          |   |  |                                        |      |                |       
|------------------------------- |  | -------- | - |  | -------------------------------------- | ---- | -------------- | ------
|Nonvested Shares                |  | Shares   |   |  | Weighted-Average Grant-Date Fair Value |      | IntrinsicValue
|Nonvested at September 30, 2007 |  | 928,466  |   |  |                                        |      |                |       
|Granted                         |  | 197,431  |   |  |                                        |      |                |       
|Vested                          |  | (377,447 | ) |  |                                        |      |                |       
|Forfeited                       |  | (53,211  | ) |  |                                        |      |                |       
|                                |  |          |   |  |                                        |      |                |       
|Nonvested at December 31, 2007  |  | 695,239  |   |  | $                                      | 2.13 |                | 46,755
|                                |  |          |   |  |                                        |      |                |       

The total unearned compensation cost of $1,682,622 relating to the 695,239 nonvested options as of
December 31, 2007 will be recognized over a weighted average period of two years.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



15. Operational results for Biovest (unaudited):



|                                                                     |  |                                         |            |   |                            |   |             |         |  |             |                            |  |            |  
|-------------------------------------------------------------------- |  | --------------------------------------- | ---------- | - | -------------------------- | - | ----------- | ------- |  | ----------- | -------------------------- |  | ---------- | -
|                                                                     |  | For the three months ended December 31, |           
|                                                                     |  | 2007                                    |            |   | 2006                       |  
|                                                                     |  | Biovest                                 |            |   | ConsolidatedwithoutBiovest |   |             | Biovest |  |             | ConsolidatedwithoutBiovest | 
|Net sales                                                            |  | $                                       | 1,259,030  |   |                            | $ | 3,077,035   |         |  | 1,327,108   |                            |  | 4,554,635  |  
|Cost of sales                                                        |  |                                         | 682,508    |   |                            |   | 1,026,114   |         |  | 766,092     |                            |  | 859,200    |  
|                                                                     |  |                                         |            |   |                            |   |             |         |  |             |                            |  |            |  
|Gross margin                                                         |  |                                         | 576,522    |   |                            |   | 2,050,921   |         |  | 561,016     |                            |  | 3,695,435  |  
|Operating expenses                                                   |  |                                         | 1,835,106  |   |                            |   | 9,286,350   |         |  | 8,956,560   |                            |  | 4,404,111  |  
|                                                                     |  |                                         |            |   |                            |   |             |         |  |             |                            |  |            |  
|Loss from operations                                                 |  |                                         | (1,258,584 | ) |                            |   | (7,235,429  | )       |  | (8,395,544  | )                          |  | (708,676   | )
|Interest income (expense)                                            |  |                                         | (783,285   | ) |                            |   | (12,170,468 | )       |  | (2,039,692  | )                          |  | (1,183,012 | )
|Other income (expense)                                               |  |                                         | (1,269,538 | ) |                            |   | 70,494      |         |  | (13,529,752 | )                          |  | (4,403,807 | )
|Derivative gain (loss)                                               |  |                                         | (521,626   | ) |                            |   | (1,781,093  | )       |  | 14,192      |                            |  | (664,123   | )
|Non-controlling interest in earnings from variable interest entities |  |                                         | 98,930     |   |                            |   | 8,750       |         |  |            |                            |  |           |  
|Absorption of prior losses against minority interest                 |  |                                         |           |   |                            |   |            |         |  |            |                            |  | 269,401    |  
|                                                                     |  |                                         |            |   |                            |   |             |         |  |             |                            |  |            |  
|Net loss                                                             |  |                                         | (3,734,103 | ) |                            |   | (21,107,746 | )       |  | (23,950,796 | )                          |  | (6,690,217 | )
|Dividends                                                            |  |                                         |           |   |                            |   |            |         |  |            |                            |  |           |  
|                                                                     |  |                                         |            |   |                            |   |             |         |  |             |                            |  |            |  
|Loss attributable to common stockholders                             |  |                                         | (3,734,104 | ) |                            |   | (21,107,746 | )       |  | (23,950,796 | )                          |  | (6,690,217 | )
|                                                                     |  |                                         |            |   |                            |   |             |         |  |             |                            |  |            |  
|Weighted average shares outstanding, basic and diluted               |  |                                         | 41,651,901 |   |                            |   | 41,651,901  |         |  | 31,720,472  |                            |  | 31,720,472 |  
|Loss attributable to common stockholders per common share            |  |                                         | (0.09      | ) |                            |   | (0.51       | )       |  | (0.76       | )                          |  | (0.21      | )



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



16. Segment information:

The Company defines segment operating results as earnings (loss) before general and administrative costs, interest expense, interest income, other income, discontinued operations and income taxes.

Segment information for the three months ended December 31, 2007 is as follows:



|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|------------------------------------------------------------------- |  | ------------------------------------- | ---------- | ------------------------ | - | --------- |  | - | ---------- | -
|                                                                    |  | BiopharmaceuticalProductsand Services |            | SpecialtyPharmaceuticals |   | Total     | 
|Net sales:                                                          |  |                                       |            |                          |   |           |  |   |            |  
|Products                                                            |  | $                                     | 775,260    |                          | $ | 757,153   |  | $ | 1,532,413  |  
|Services                                                            |  |                                       | 2,803,652  |                          |   |          |  |   | 2,803,652  |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|Total net sales                                                     |  |                                       | 3,578,912  |                          |   | 757,153   |  |   | 4,336,065  |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|Cost of sales:                                                      |  |                                       |            |                          |   |           |  |   |            |  
|Products                                                            |  |                                       | 431,566    |                          |   | 491,311   |  |   | 922,877    |  
|Services                                                            |  |                                       | 785,745    |                          |   |          |  |   | 785,745    |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|Total cost of sales                                                 |  |                                       | 1,217,311  |                          |   | 491,311   |  |   | 1,708,622  |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|Gross margin                                                        |  |                                       | 2,361,601  |                          |   | 265,842   |  |   | 2,627,443  |  
|Sales and marketing                                                 |  |                                       | 39,559     |                          |   | 1,686,994 |  |   | 1,726,553  |  
|Research and development                                            |  |                                       | 3,815,600  |                          |   |          |  |   | 3,815,600  |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|Segment loss                                                        |  |                                       | 1,493,558  |                          |   | 1,421,152 |  |   | 2,914,710  |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|General and administrative expenses                                 |  |                                       |            |                          |   |           |  |   | 5,579,303  |  
|Other expense                                                       |  |                                       |            |                          |   |           |  |   | 16,455,517 |  
|Non-controlling interest in losses from variable interest annuities |  |                                       |            |                          |   |           |  |   | (107,680   | )
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|Net loss                                                            |  |                                       |            |                          |   |           |  | $ | 24,841,850 |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|Total assets                                                        |  | $                                     | 30,159,105 |                          | $ | 3,103,451 |  | $ | 33,262,556 |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  
|Goodwill                                                            |  | $                                     | 1,193,437  |                          | $ |          |  | $ | 1,193,437  |  
|                                                                    |  |                                       |            |                          |   |           |  |   |            |  



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



16. Segment information (continued):



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 
|                                                                    |  |                                       |            |                          |   |           |  |   |           
|Segment loss                                                        |  |                                       | 1,834,317  |                          |   | 477,445   |  |   | 2,311,762 
|                                                                    |  |                                       |            |                          |   |           |  |   |           
|General and administrative expenses                                 |  |                                       |            |                          |   |           |  |   | 6,792,458 
|Other expense                                                       |  |                                       |            |                          |   |           |  |   | 21,536,793
|Non-controlling interest in losses from variable interest annuities |  |                                       |            |                          |   |           |  |   |          
|                                                                    |  |                                       |            |                          |   |           |  |   |           
|Net loss                                                            |  |                                       |            |                          |   |           |  | $ | 30,641,013
|                                                                    |  |                                       |            |                          |   |           |  |   |           
|Total assets                                                        |  | $                                     | 38,212,456 |                          | $ | 5,287,527 |  | $ | 43,499,983
|                                                                    |  |                                       |            |                          |   |           |  |   |           
|Goodwill                                                            |  | $                                     | 1,193,437  |                          | $ |          |  | $ | 1,193,437 
|                                                                    |  |                                       |            |                          |   |           |  |   |           

Domestic and foreign operations



|             |  |                                      |             |   |                                      |   |           |       |  |   |             |   |  |                       |             |       |  |   |           |  |   |             |  
|------------ |  | ------------------------------------ | ----------- | - | ------------------------------------ | - | --------- | ----- |  | - | ----------- | - |  | --------------------- | ----------- | ----- |  | - | --------- |  | - | ----------- | -
|             |  | Three months ended December 31, 2007 |             |   | Three months ended December 31, 2006 |  
|             |  | Domestic                             |             |   | International(Europe)                |   |           | Total |  |   | Domestic    |   |  | International(Europe) |             | Total | 
|Net sales    |  | $                                    | 3,197,823   |   |                                      | $ | 1,138,242 |       |  | $ | 4,336,065   |   |  | $                     | 4,603,901   |       |  | $ | 1,277,842 |  | $ | 5,881,743   |  
|Net loss     |  |                                      | (24,712,418 | ) |                                      |   | (129,432  | )     |  |   | (24,841,850 | ) |  |                       | (31,160,866 | )     |  |   | 519,853   |  |   | (30,641,013 | )
|Total Assets |  |                                      | 30,360,165  |   |                                      |   | 2,902,391 |       |  |   | 33,262,556  |   |  |                       | 39,759,118  |       |  |   | 3,740,865 |  |   | 43,499,983  |  
|Goodwill     |  |                                      | 893,000     |   |                                      |   | 300,437   |       |  |   | 1,193,437   |   |  |                       | 893,000     |       |  |   | 300,437   |  |   | 1,193,437   |  



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



17. Commitments and contingencies:

Operating leases

The Company has operating leases for various facilities, automobiles, machinery, and equipment,
which expire at various times through 2012. The annual aggregate rental commitments under non-cancelable leases are as follows:



|                         |  |   |          
|------------------------ |  | - | ---------
|Year ending December 31, |  |  
|2008                     |  | $ | 2,851,515
|2009                     |  |   | 2,255,031
|2010                     |  |   | 1,050,731
|2011                     |  |   | 579,050  
|2012                     |  |   |         
|                         |  |   |          
|                         |  | $ | 6,736,327
|                         |  |   |          

The annual aggregate future rental income from sub-leases is as follows:



|                         |  |   |        
|------------------------ |  | - | -------
|Year ending December 31, |  |  
|2008                     |  | $ | 502,462
|2009                     |  |   | 63,069 
|                         |  |   |        
|                         |  | $ | 565,531
|                         |  |   |        

Rent expense for all operating leases was approximately $0.8 million for the three months ended December 31,
2007 and 2006 respectively. Rental income from subleases aggregated $0.1million for the three months ended December 31, 2007 and 2006, and has been included in general and administrative expenses in the accompanying statements of operations.

Litigation

Accent Rx, Inc. complaint:

In October 2002, the Companys wholly-owned subsidiary, Accent RX, Inc, acquired the assets and certain liabilities of American Prescription
Providers, Inc. and American Prescription Providers of New York, Inc., collectively, referred to as APP, which at the time of purchase operated a mail-order specialty pharmacy focused on filling prescriptions for AIDS patients and organ transplants.
Following the purchase of APPs assets, Accent RX operated the mail-order business until it sold the assets of this business in December 2003 to a third-party in an arms length transaction. After the sale of the APP assets, Accent RX
ceased to engage in business, and Accent RX currently has nominal assets. On May 23, 2007, Accent RX was served with a complaint filed in the United States District Court  District of Massachusetts. The action was brought on behalf of the
United States by the Relator Christine Driscoll and on behalf of the States of California, Delaware, Florida, Hawaii, Illinois, Massachusetts, Nevada, Tennessee, Texas, and Virginia and the District of Columbia (collectively, the States)
by the Co-Relators Christine Driscoll and Frank Garcia under the states respective qui tam statutes. The complaint alleges violations of the Federal False Claims Act (FCA) and of analogous state qui tam statutes. The complaint
identifies APP and other defendants as preferred providers of Serostim, a drug manufactured by Serono, Inc. and used to treat AIDS-associated weight loss, wasting, and/or catabolism. The plaintiffs allege that, although Serono, Inc. gave
the preferred providers a 3.75 percent discount on the price of Serostim, the preferred providers billed the Health Care Finance Administration of the United States (HCFA) and other third party payors for the full price of Serostim. The
complaint further alleges that the preferred providers violated the Anti-Kickback Statute of the Medicare-Medicaid Antifraud and Abuse



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



17. Commitments and contingencies (continued):



Litigation (continued)



Accent Rx, Inc. complaint (continued):



Amendments by (i) failing to disclose the discount to the HCFA and the other third party payors (receipt of
illegal remuneration) and (ii) submitting claims for payment to HCFA for the full price of Serostim rather than the discounted price (submitting false claims). Additionally, the complaint alleges that, through these violations and by accepting
payments from HCFA for the full price of Serostim, the preferred providers violated the Federal False Claim Act. The complaint goes on to allege that the actions of the preferred providers violated the California False Claims Act, the Delaware False
Claims and Reporting Act, the District of Columbia Procurement Reform Amendment Act, the Florida False Claims Act, the Hawaii False Claims Act, the Illinois Whistleblower Reward and Protection Act, the Nevada False Claims Act, the Tennessee Medicaid
False Claims Act, the Texas Medicaid Fraud Prevention Law, and the Virginia Fraud Against Taxpayers Act. The complaint requests, among other things, that each of the preferred providers (i) be ordered to repay and disgorge all money received as
a result of its violations of the Federal False Claim Act, (ii) be assessed and ordered to pay an amount equal to three times the amount of money received as a result of its violations of the Federal False Claim Act, and (iii) be required
to pay damages in an amount equal to three times the amount of damages that California, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Massachusetts, Nevada, Tennessee, and Virginia have sustained as a result of its actions. We
intend to defend this action.

Analytica litigation:

The Companys subsidiary, Analytica International, Inc. 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 alleging that he is owed contractual bonus and other compensation and seeking damages for wrongful
termination against Analytica, the Company and an officer of the Company. We 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. In June
2007, the Court granted our motion and dismissed defendants counterclaims against our officer with prejudice, and dismissed all other counterclaims as well, allowing defendant an opportunity to replead by July 31, 2007. The defendant
refiled an Amended Counterclaim in July 2007, and we have filed a motion seeking to dismiss virtually all claims in the Amended Counterclaim. 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.

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.

Based upon advice of counsel and its own analysis, the Company
believes that there is no likelihood of exposure to material liability on account of these pending litigations. Therefore, no amounts are currently accrued for the above litigations.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



18. Variable Interest Entities:

Accounting for the NMTC financing arrangement and variable interest entities

The Company evaluated the structure of
the NMTC financing arrangements 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.

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

New Market Tax Credit Transaction I:



|                                |  |                                                                                                            |  |                                               
|------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|Variable Interest Holder        |  | Variable Interests Biovax Investment, LLC                                                                  |  | Variable Interests Telesis CDE Two, LLC       
|Biovest and its Related Parties |  | Senior beneficial interest Guaranty Agreement
Indemnification Agreement Put (VIE Equity) Call (VIE Equity) |  | Senior beneficial interest Guarantee
Agreement
|                                |  |                                                                                                           
|Biovax Investment, LLC          |  |                                                                                                            |  | VIE Equity (99.9%)                            
|                                |  |                                                                                                           
|US Bancorp                      |  | VIE Equity (99.9%)                                                                                         |  | Tax Credit Rights                             
|                                |  |                                                                                                           
|Biovax Investment Corp.         |  | VIE Equity (0.01%)                                                                                         |  |                                               
|                                |  |                                                                                                           
|Telesis CDE, Corp               |  |                                                                                                            |  | VIE Equity (0.01%)                            

New Market Tax Credit Transaction II:



|                                  |  |                                                                                                            |  |                                               
|--------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|Variable Interest Holder          |  | Variable Interests AutovaxID Investment, LLC                                                               |  | Variable Interests St. Louis NMTC Fund II, LLC
|Biovest and its Related Parties   |  | Senior beneficial interest Guaranty Agreement
Indemnification Agreement Put (VIE Equity) Call (VIE Equity) |  | Senior beneficial interest Guarantee
Agreement
|                                  |  |                                                                                                           
|AutovaxID Investment, LLC         |  |                                                                                                            |  | VIE Equity (99.9%)                            
|                                  |  |                                                                                                           
|US Bancorp                        |  | VIE Equity (100%)                                                                                          |  | Tax Credit Rights                             
|                                  |  |                                                                                                           
|St. Louis Development Corporation |  |                                                                                                            |  | VIE Equity (0.01%)                            



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



18. Variable Interest Entities (continued):



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

Assets of $20.1 million and liabilities of $15.3 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 Telesis CDE Two, LLC, Biovax Investment, LLC,
AutovaxID Investment, LLC, and St. Louis NMTC Fund II, LLC, reflected on the Companys September 30, 2007 consolidated balance sheet as non-controlling interests in variable interest entities.

Revimmune LLC

On February 27, 2007, the Company entered into a
sublicense agreement (the Sublicense Agreement) with Revimmune LLC (Revimmune) under which the Company was granted the exclusive worldwide rights to Revimmune. Revimmune is based on pulsed, ultra-high dosing
of a well known chemotherapeutic agent under a risk management program. Revimmune will treat numerous autoimmune diseases with an initial indication targeting refractory relapsing-remitting Multiple Sclerosis. Revimmune LLC is affiliated with
Hopkins Capital Group II, LLC and Dr. Frank ODonnell who is an officer and director of the Company.

Under the Sublicense Agreement, the Company
is obligated to pay to Revimmune a royalty of 4% on net sales, and in the event of a sublicense by the Company, to pay 10% of sublicense consideration received. Upon the approval of the sublicensed treatment in the U.S. for each autoimmune
disease, the Company is required to issue to Revimmune vested warrants to purchase 800,000 shares of the Companys common stock. The warrants which will be granted at the approval of the first Sublicensed Product will have an exercise price of
$8 per share and any subsequent warrants to be issued will have an exercise price equal to the average of the volume weighted average closing prices of the Companys common stock during the ten (10) trading days immediately prior to the
grant of such warrant. The Company assumed certain obligations under Revimmunes license with Johns Hopkins University related to the sublicensed technology, including the payment of all royalty obligations due Johns Hopkins University for the
sublicensed products. The Company will be responsible, at its sole cost and expense, for the development, clinical trial(s), promotion, marketing, sales and commercialization of the sublicensed products.

The Company has the controlling financial interest of Revimmune and is considered the primary beneficiary, and therefore, the financial statements of Revimmune have been
consolidated with the Company as of February 27, 2007 and through December 31, 2007. As of December 31, 2007, Revimmunes assets and equity were approximately $37,100. The Companys non-controlling interest in earnings from
Revimmune for the three months ended December 31, 2007 is a loss of $8,750.

Non-controlling interest in income (loss)

The Companys non-controlling interest in (income) loss from variable interest entities on its consolidated statement of operations for the three months ended
December 31, 2007 consist of the following:



|                                                                   |  |                   |          |  
|------------------------------------------------------------------ |  | ----------------- | -------- | -
|                                                                   |  | December 31, 2007 |         
|Biovax Investment LLC                                              |  | $                 | 112,521  |  
|Telesis CDE Two, LLC                                               |  |                   | (17,389  | )
|AutovaxID Investment, LLC                                          |  |                   | 114,489  |  
|St. Louis NMTC Fund II, LLC                                        |  |                   | (110,691 | )
|Revimmune LLC                                                      |  |                   | 8,750    |  
|                                                                   |  |                   |          |  
|Non-controlling interest in losses from variable interest entities |  | $                 | 107,680  |  
|                                                                   |  |                   |          |  



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



19. New Market Tax Credit Transactions:

April 2006 NMTC Transaction

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

On March 31, 2006, in contemplation of Transaction I, 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, $7.5 million 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.

In contemplation of Transaction I, Biovest and the Company formed Biolender, LLC as a
Delaware limited liability company. On April 21, 2006, 2.5 million was released from the Restricted Account created under the Laurus Note. These proceeds were used to purchase a 29.5% equity investment in Biolender for $2.5 million.
Accentia used the proceeds of a $6.0 million intraday loan from First Bank to purchase the remaining 70.5% equity interest in Biolender. On April 27, 2006, Biovest redeemed 10 million shares of its common stock owned of record by Accentia
for a $6.0 million cash payment which equaled the market price of $0.60 per share. Accentia used the proceeds of the stock redemption to repay its intraday loan due First Bank. Subsequently, on October 31, 2006, Biovest entered into a Purchase
Agreement with Accentia whereby Biovest purchased Accentias 70.5% ownership interest in Biolender. In consideration of the sale of this interest in Biolender, Biovest issued to Accentia ten million shares of common stock, representing the
negotiated value of the purchased interest (Note 14).

In contemplation of Transaction I, Biovax Investment, LLC (the Fund) was established.
U.S. Bancorp invested $3.6 million for a 99% equity interest in the Fund. Biovax Investment Corp., the Fund manager, invested an additional $100 for the remaining 0.01% equity interest. On April 25, 2006, Biolender loaned the Fund $8.5 million
pursuant to a 5.18%, annual rate, senior secured, convertible note receivable, due October 27, 2013. Interest on the note is payable as follows: (i) 0.64% interest per annum, non-compounding, shall be payable on the first day of each
calendar month until October 27, 2013; and (ii) any remaining accrued and unpaid interest shall be payable in one installment on October 27, 2013. The note is convertible at the option of the fund into shares of Biovests common
stock near the maturity date.

The proceeds received by the Fund from the aforementioned financing transactions were used to make a contemporaneous 99.99%
equity investment in Telesis CDE II, LLC ($12 million) and payment for associated management, legal and accounting fees ($0.1 million). The $12 million investment by the Fund to the CDE constituted a qualified equity investment
(QEI) under the New Markets Tax Credit Program authorized by Section 45D of the Internal Revenue Code of 1986, as amended (the Code), resulting in $4.7 million in tax credits.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



19. New Market Tax Credit Transactions (continued):



April 2006 NMTC Transaction (continued)



Telesis CDE II, LLC is a Community Development Entity that is certified through the U.S. Treasury Department to make
Qualified Low-Income Community Investments (QLICI), and is managed and partially owned (0.01%) by Telesis CDE Corporation, a private financial institution. Telesis CDE Corporation paid $1,200 in consideration for its 0.01% interest in
the CDE. Telesis CDE II, LLC, upon receipt of its equity funding, contemporaneously issued $11.5 million to Biovax for a 1.0% convertible promissory note payable, due October 27, 2013. The convertible promissory note is convertible into common
stock at the option of 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. Biovest also issued to Telesis CDE Corporation warrants to purchase 1.2 million shares of Biovests common stock over a period of
nine-years at a fixed price of $1.30. These warrants are reflected as an equity financing cost in stockholders equity at a fair value of $517,000 computed using the Black-Scholes option pricing model. Accentia also issued warrants to Telesis
CDE Corporation to purchase 0.2 million shares of Accentias common stock over a period of seven years at a fixed price of $9.00.

Other salient
terms and conditions of Transaction I are as follows:



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



| |  |  | The tax credits arising from this transaction were fully assigned to US Bancorp. Biovest, its subsidiaries and certain related parties (also see 3, below) have
entered into an indemnification agreement directly with US Bancorp that provides for indemnification in the event of tax credit recapture from events caused by Biovest. Biovax, Inc., Biovests wholly owned subsidiary, is contractually required
to maintain the following covenants to avoid tax credit recapture: (i) Biovax shall maintain its status as a qualified active low-income business; (ii) At least fifty percent (50%) of the use of the tangible property of the Biovax
(whether owned or leased) will be within the low-income community as defined by Section 45D(e) of the U.S. Tax Code; (iii) At least fifty percent (50%) of the services performed for Biovax by its employees will be within low-income
community as defined by Section 45D(e) of the U.S. Tax Code; (iv) Less than five percent (5%) of the average of the unadjusted bases of the property of Biovax will be attributable to collectibles (as defined in Section 408(m)(2)
of the Code, and which includes any work of art; any rug or antique; any metal or gem; any stamp or coin; and any alcoholic beverage) other than collectibles that are held primarily for sale to customers in the ordinary course of business;
(v) Less than five percent (5%) of the average of the unadjusted bases of the property of Biovax will be attributable to nonqualified financial property (as defined in Section 1397C(e) of the Code and in
Section 1.45D-1(d)(4)(i)(E) of the Regulations, and which includes debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities and other similar property); (vi) No
part of the business activities of Biovax will consist of the operation of any private or commercial golf course, country club, massage parlor, hot tub facility, or suntan facility, race track or other facility used for gambling, or store the
principal business of which is the sale of alcoholic beverages for consumption off premises; (vii) No part of
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



19. New Market Tax Credit Transactions (continued):



April 2006 NMTC Transaction (continued)



| | Biovaxs business activities will include the rental to others of residential rental property (the term residential rental property is
defined in Section 168(e)(2)(A) of the Code as meaning any building or structure if eighty percent (80%) or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units);
(viii) The predominant trade or business of Biovax will not include the development or holding of intangibles for sale or license, as provided under Section 1.45D-1(d)(5)(iii) of the Regulations; (ix) Farming (within the meaning of
Section 2032A(e)(5)(A) or (B) of the Code) will not be an activity of Biovax; (x) Biovax will generate revenues by the date of April 25, 2009; (xi) Biovax shall not discontinue conducting business, shall not materially
change the nature of its business, and shall not materially change the manner in which its business activities are conducted, other than changes in the nature of its business or the manner in which it conducts its business that do not cause the
making of the Loan by the Lender to cease to constitute a qualified low-income community investment as such term is used in Section 45D of the Code (as determined by the Lender in its good faith judgment and based upon the advice of
counsel); (xii) Biovax will not be a bank, credit union or other financial institution; (xiii) Biovax will not maintain a qualified low-income building under Section 42 of the Code; (xiv) Biovax will not become a single-member
entity treated as disregarded as separate from its owner for federal income tax purposes, nor be liquidated or merged into another entity without the written consent of Telesis CDE II, LLC; and (xv) Biovax and Biovest will operate consistently
with the Asset Purchase and Sale Agreement between Biovax and Biovest, and will not amend such agreement without prior written consent of Telesis CDE II, LLC. An example of an event that would not cause a recapture is changes in the Internal Revenue
Code that results in such recapture. The total indemnification amount could be $4.7 million (representing 39% of the $12.0 million qualified investment). However, in accordance with Financial Interpretation 45 Guarantors Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of the Indebtedness of Others, the conditions and events that could result in recapture are within Biovests control. Therefore, this potential liability is not reflected in
the consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the NMTC financing, Biovest and US Bancorp entered into a put option wherein US Bancorp will have the right to put its investment in the Fund to
Biovest near the maturity of the instruments at a price of $180,000. Biovest has concluded that this contract constitutes a derivative liability that requires accounting recognition at fair value. Biovest utilized a probability-based, discounted
cash flow approach to value the put. In applying this technique, Biovest, on the inception date, concluded that it was probable that US Bancorp would exercise their contractual right to put the investment. Accordingly, the valuation technique
provided for the recognition of the full put amount ($180,000) at the present value of its cash flows, using market interest rates. that would likely be considered by market participants trading similar instruments. The fair value associated with
the put option and included in derivative liabilities in the December 31, 2007 and September 30, 2007 consolidated balance sheets is approximately $100,000 and $98,000 respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Biovest, its subsidiaries and certain related parties have entered into a guarantee arrangement with Telesis CDE II, Inc. for the debt service of Biovax. In
addition, Accentia has partially guaranteed debt service with limitations established at no greater than $60,000 each year the instrument is outstanding. Biovest issued warrants to purchase 1.0 million shares of common stock to the related
parties as compensation for their guarantees. The guarantees were treated in a manner similar to contributed service and their fair value of $460,000 was charged to expense upon issuance. Biovest also indemnified the guarantors from any claims of
any kind to the extent that the guarantors are called upon to pledge funds, assets or collateral in connection with the guarantee being executed.
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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



19. New Market Tax Credit Transactions (continued):



December 2006 NMTC Transaction

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

On December 8, 2006, the Company loaned to Biovest $3.1 million 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 paid $1.1 million to Accentia upon the closing of the Transaction and the remaining
$2.0 million of principal and all accrued and unpaid interest shall be paid by Biovest upon demand by Accentia.

In contemplation of Transaction II,
Biovest formed Biolender II, LLC as a Delaware limited liability company. On December 8, 2006, $2.5 million 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 of $5.6 million in Biolender II owned by Biovest has been pledged to Laurus as collateral to secure the Laurus Note.

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

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

St. Louis New Market Tax Credit Fund II, LLC is a Community Development Entity (CDE) that is certified
through the U.S. Treasury Department to make Qualified Low-Income Community Investments (QLICI), and is managed and partially owned (0.01%) by St. Louis Development Corporation, a not-for-profit corporation organized in Missouri. St.
Louis Development Corporation paid $1,000 in consideration for its 0.01% interest in the CDE. St. Louis New Market Tax Credit Fund II, LLC, upon receipt of its equity funding, contemporaneously issued a QLICI to AutovaxID, evidenced by a $7.7
million Subordinated Promissory Note dated as of December 8, 2006 and described in more detail below.

Other salient terms and conditions of
Transaction II are as follows:



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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



19. New Market Tax Credit Transactions (continued):



December 2006 NMTC Transaction (continued)





| |  |  | The CDE Loan has a principal amount of $7.7 million 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 $5.7 million, in full satisfaction of the principal on the CDE Loan. Interest on the outstanding principal amount of the CDE Loan accrues
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 $5.7 million, in full satisfaction of the principal on the CDE Loan, together with all accrued but unpaid interest.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AutovaxID does not have the right to prepay the CDE Loan prior to June 8, 2014. AutovaxID does have the right to prepay the CDE Loan after this date, provided
that (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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The tax credits arising from this transaction were fully assigned to US Bancorp. Biovest, its subsidiaries and certain related parties (also see 3, below) have
entered into an indemnification agreement directly with US Bancorp that provides for indemnification in the event of tax credit recapture from events caused by Biovest. AutovaxID, Inc., Biovests wholly owned subsidiary, is contractually
required to maintain the following covenants to avoid tax credit recapture: (i) AutovaxID shall maintain its status as a qualified active low-income business; (ii) At least fifty percent (50%) of the use of the tangible property of
the AutovaxID (whether owned or leased) will be within the low-income community as defined by Section 45D(e) of the U.S. Tax Code; (iii) At least fifty percent (50%) of the services performed for AutovaxID by its employees will be
within low-income community as defined by Section 45D(e) of the U.S. Tax Code; (iv) Less than five percent (5%) of the average of the unadjusted bases of the property of AutovaxID will be attributable to collectibles (as defined in
Section 408(m)(2) of the Code, and which includes any work of art; any rug or antique; any metal or gem; any stamp or coin; and any alcoholic beverage) other than collectibles that are held primarily for sale to customers in the ordinary course
of business; (v) Less than five percent (5%) of the average of the unadjusted bases of the property of AutovaxID will be attributable to nonqualified financial property (as defined in Section 1397C(e) of the Code and in
Section 1.45D-1(d)(4)(i)(E) of the Regulations, and which includes debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities and other similar property); (vi) No
part of the business activities of AutovaxID will consist of the operation of any private or commercial golf course, country club, massage parlor, hot tub facility, or suntan facility, race track or other. facility used for gambling, or store the
principal business of which is the sale of alcoholic beverages for consumption off premises; (vii) No part of AutovaxIDs business activities will include the rental to others of
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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



19. New Market Tax Credit Transactions (continued):



December 2006 NMTC Transaction (continued)



| | residential rental property (the term residential rental property is defined in Section 168(e)(2)(A) of the Code as meaning any building or
structure if eighty percent (80%) or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units); (viii) The predominant trade or business of AutovaxID will not include the
development or holding of intangibles for sale or license, as provided under Section 1.45D-1(d)(5)(iii) of the Regulations; (ix) Farming (within the meaning of Section 2032A(e)(5)(A) or (B) of the Code) will not be an activity of
AutovaxID; (x) AutovaxID will generate revenues by the date of December 8, 2009; (xi) AutovaxID shall not discontinue conducting business, shall not materially change the nature of its business, and shall not materially change the
manner in which its business activities are conducted, other than changes in the nature of its business or the manner in which it conducts its business that do not cause the making of the Loan by the Lender to cease to constitute a qualified
low-income community investment as such term is used in Section 45D of the Code (as determined by the Lender in its good faith judgment and based upon the advice of counsel); (xii) AutovaxID will not be a bank, credit union or other
financial institution; (xiii) AutovaxID will not maintain a qualified low-income building under Section 42 of the Code; (xiv) AutovaxID will not become a single-member entity treated as disregarded as separate from its owner for
federal income tax purposes, nor be liquidated or merged into another entity without the written consent of St. Louis New Market Tax Credit Fund II, LLC; and (xv) AutovaxID and Biovest will operate consistently with the License and Asset
Purchase Agreement between AutovaxID and Biovest, and will not amend such agreement without prior written consent of St. Louis New Market Tax Credit Fund II, LLC. An example of an event that would not cause a recapture is changes in the Internal
Revenue Code that results in such recapture. The total indemnification amount could be $3.12 million (representing 39% of the $8.0 million qualified investment). However, in accordance with Financial Interpretation 45 Guarantors Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of the Indebtedness of Others, the conditions and events that could result in recapture are within Biovests control. Therefore, this potential liability is not reflected in
the consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the NMTC financing, Biovest and U.S. Bancorp entered into a put option wherein US Bancorp will have the right to put its investment in the Fund
to Biovests subsidiary, Biolender II starting on December 9, 2013 and ending three months thereafter at a price 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 U.S. Bancorps equity interests in the Leverage Fund based on the fair market value of the equity interests at that time. Biovest has
concluded that this contract constitutes a derivative liability that requires accounting recognition at fair value. Biovest utilized a probability-based, discounted cash flow approach to value the put. In applying this technique, Biovest, on the
inception date, concluded that it was probable that US Bancorp would exercise their contractual right to put the investment. Accordingly, the valuation technique provided for the recognition of the full put amount ($120,000) at the present value of
its cash flows, using market interest rates that would likely be considered by market participants trading similar instruments. The fair value associated with the put option and included in derivative liabilities in the December 31, 2007 and
September 30, 2007 consolidated balance sheets is approximately $62,000 and $61,000, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Biovest, its subsidiaries and certain related parties have entered into a guarantee arrangement with St. Louis New Markets Tax Credit Fund II, LLC for the debt
service of AutovaxID. Biovest issued warrants to purchase 2.6 million shares of common stock to the related parties as compensation for their guarantees. The guarantees were treated in a manner similar to contributed service and their fair
value of $1.4 million was charged to expense upon issuance. Biovest also indemnified the guarantors from any claims of any kind to the extent that the guarantors are called upon to pledge funds, assets or collateral in connection with the guarantee
being executed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Various legal and accounting fees of $802,000 involved in structuring this transaction were recorded as deferred financing costs and other prepaid expenses and will
be amortized over a period of seven and one half years, representing the duration of the note issued by AutovaxID Investment, LLC and payable to Biolender II, LLC.
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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



20. Subsequent Events:

Following the end of the fiscal quarter, in January 2008, the Company entered into definitive agreements and closed a private placement (the Private Placement) of $8.7 million of Convertible Preferred
stock (the Preferred Stock). The net proceeds after placement agent fees of approximately $0.6 million, but before other expenses associated with the transaction, were approximately $8.1 million. In connection with the Private Placement,
the Company also issued to the Placement Agent warrants to purchase an aggregate of 163,464 shares of the Companys common stock at an exercise price of $2.67 per share. The Company plans to use the proceeds of the Private Placement as working
capital, including supporting drug development, regulatory strategies and marketing plans.

The Preferred Stock will be convertible at any
time at the option of the holder into shares of the Companys common stock at $2.67 per share, subject to adjustment for stock splits, stock dividends, and the like. In the event that the Company issues or grants in the future any rights to
purchase shares of the Companys common stock, or other security convertible into the Companys common stock, for an effective per share price less than the conversion price then in effect, the conversion price of all unconverted Preferred
Stock will be decreased to equal such lower price. This adjustment to the conversion price or exchange price for future stock issuances will not apply to certain exempt issuances, including stock issuances pursuant to employee stock option plans and
strategic transactions. The Preferred Stock has liquidation preferences ahead of the holders of common stock and the holders of junior preferred stock in the event of liquidation or bankruptcy up to the amount of the Purchasers purchase price
for the Preferred Stock. The Company has the right to force the conversion of the Preferred Stock into shares of its common stock if the Companys common stock trades at 250% of the purchase price for a stated time and certain defined
conditions are met. All remaining unconverted Preferred Stock will be redeemed by cash payment on the maturity date of March 31, 2011 provided the convertible debentures issued to certain investors in September 2006 and February 2007 (the
Debentures) are no longer outstanding. Commencing on January 18, 2009, the Company has the option to redeem some or all of the outstanding Preferred Stock upon notice by payment of a cash redemption price equal to 130% of the
then-applicable conversion price and providing the Debentures are then converted, redeemed, or otherwise retired or the consent of the holders is obtained. The preferences and features of the Preferred Stock are fully described in a Certificate of
Designation and amendment to the Companys Articles of Incorporation filed on the date of closing of the Private Placement and attached as an exhibit thereto.

As a part of the Private Placement, the Company issued short-term warrants (the Short-Term Warrants) to the purchasers of the Preferred Stock giving them the right to purchase up to 3,269,283 shares of the
Companys common stock at an exercise price of $2.67 per share. The Short-Term Warrant exercise price is subject to adjustment for stock splits, stock dividends, and the like. Each such Short-Term Warrant will be exercisable for cash only and
will terminate 30 days after the initial press release by the Company announcing unblinded results of the current Phase 3 clinical trial for SinuNase. If no such press release is made by the Company prior to December 1, 2008, the exercise
period shall be the 30-day period commencing December 2, 2008. In the event that any proceeds are realized by the Company upon the exercise of Short-Term Warrants described herein, the Placement Agent shall receive an additional placement fee
in an amount equal to 7% of any such Short-Term Warrant proceeds.

In addition, as a part of the Private Placement, the Company issued
long-term warrants (the Long-Term Warrants) to the purchasers of the Preferred Stock giving them the right to purchase up to 1,634,639 shares of the Companys common stock at an exercise price of $2.67 per share. The Long-Term
Warrants will expire on January 17, 2014. In the event that the Company in the future issues or grants any rights to purchase any of the Companys common stock, or other security convertible into the Companys common stock, for a per
share price less than the exercise price then in effect, the exercise price of the Long-Term Warrants will be reduced to equal such lower price. The foregoing adjustments to the exercise price for the Companys Long-Term Warrants for future
stock issues will not apply to certain exempt issuances, including issuances pursuant to employee stock option plans and strategic transactions. In the event that any proceeds are realized by the Company upon the exercise of Short-Term Warrants
described herein, the Placement Agent shall receive an additional placement fee in amount equal to 7% of any such Long-Term Warrant proceeds.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



20. Subsequent Events (continued):

In connection with the Private Placement, the Company and the purchasers of the Preferred Stock entered into a Registration Rights Agreement under which
the Company filed a registration statement with the SEC covering the resale of the shares of Companys common stock issuable pursuant to the Preferred Stock and Warrants. The company is obligated to use its best efforts to have the registration
statement filed on February 4, 2008, to be declared effective at the earliest date (but in no event later than 60 days after the Closing if there is no SEC review of the registration statement, or 90 days if there is an SEC review). The Company
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.

Effective as of January 31, 2008, the Company entered into amendments to its credit facility with Laurus to: (i) extend the maturity date of
the Minimum Borrowing Note dated April 29, 2005 from its present maturity date of March 31, 2008 through April 29, 2008 and (ii) provide for the release of certain collateral from the security interest of Laurus at such time as
the Companys indebtedness to Laurus is paid in full but at a time when the Companys pledge and security commitments with regard to indebtedness of Biovest to Laurus remain outstanding.

Effective as of January 31, 2008, the Company entered into a conditional commitment that once all obligations under the Convertible Debentures dated
September 29, 2006 and February 28, 2007 have been paid or converted in full, the Company will guarantee, and pledge certain shares of Biovest owned by the Company to collateralize, the indebtedness of Biovest to Valens U.S. SPV I, LLC and
Valens Offshore SPV II, Corp. (collectively, the Valens Funds).

Also effective as of January 31, 2008, the Company and
Laurus amended certain redemption terms of the redeemable warrant issued to Laurus on October 30, 2007 (the Redeemable Warrant) to purchase up to 4,024,398 shares of the Companys common stock to specify that the Company shall
be entitled to exercise its right to terminate and cancel the Redeemable Warrant by making a cash payment in an amount equal to approximately $0.99 for each share underlying the Redeemable Warrant through and including March 31, 2008.

Also effective as of January 31, 2008, the Company entered into an agreement with Laurus whereby the Company agreed to decrease the
exercise price on a certain Warrant to purchase one million shares of the Companys common stock previously issued to Laurus on August 16, 2005 (the August 2005 Warrant) from $8.00 per share to $2.67 per share, with the
remaining terms of the August 2005 Warrant remaining the same.

On February 5, 2008, the Company and Biovest entered into an amendment
to the existing royalty agreement on sales of Biovests biologic products, currently known as BiovaxID, to amend and clarify the calculation of royalty payments from any sublicense to specify that in all cases the royalty amounts will be
calculated as a percentage of sales to customers/patients.

On February 5, 2008, the Company was granted an option by Biovest
permitting the Company, in its discretion, to convert part or all of the principal and interest due to the Company on the date of the conversion under the intercompany debt owed by Biovest into shares of Biovest common stock at a conversion price of
$1.10 per share (the Conversion Price) subject to adjustment in the event of for certain recapitalizations or in the event of the sale of Biovest stock at prices below the Conversion Price. Biovest granted demand and piggyback
registration rights to the Company for the shares underlying this Conversion Option.



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ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006

(UNAUDITED)



20. Subsequent Events (continued):

Effective as of January 31, 2008, Biovest entered into amendments of its existing royalty agreements dated December 10, 2007 and
October 29, 2007 on sales of Biovests biologic products, currently known as BiovaxID, with the Valens Funds to amend and clarify the calculation of royalty payments from any sublicense to specify that in all cases the royalty amounts will
be calculated as a percentage of sales to customers/patients.

On February 5,
2008 the Company entered into an Addendum to its Joint Promotion and Distribution Agreement dated April 6, 2007 with Arbor Pharmaceuticals, Inc. (Arbor), whereby the Company acquired the commercial distribution rights to Neotic, a treatment for infections of the middle ear. Pursuant to this Addendum the Company has made payment of $100,000 to Arbor and is obligated to make an additional advance payment of $100,000 on
or before March 15, 2008.

On February 12, 2008, the Company entered into a letter-agreement with Respirics, Inc. (the
Termination Agreement) whereby the parties agreed to terminate the Amended and Restated Distribution and Supply Agreement dated August 12, 2005 (the Supply Agreement). The Company has no further purchase or
payment obligations with respect to the Supply Agreement. Pursuant to the Termination Agreement, the Company is entitled to receive 50% of any proceeds in excess of $110,000 received by Respirics from resale of remaining inventory of MD
Turbo product.

Biovest and Pulaski extended the maturity date of the outstanding notes dated January 17, 2007 and March 22, 2007
in the respective amounts of $1,000,000 and the $750,000 to June 30, 2008. On February 14, 2008, Biovest reduced the outstanding aggregate loan amounts through a payment of $750,000 to Pulaski. Pulaski and Biovest are in the process of
restating the notes to reflect the current aggregate principal amount of $1,050,000 and the current maturity date of June 30, 2008. The notes continue to be unsecured obligations of Biovest and continue to be guaranteed by certain affiliates of
the Company and Biovest. Biovest has agreed to issue to the guarantors, as additional consideration for the continuation of the guarantees, warrants to purchase an aggregate total of 1,862,460 shares of Biovests common stock, par value $0.01
per share, at an exercise price of $1.10 per share (the Warrants) and expiring on February 13, 2013. The guarantors have piggy-back registration rights for the shares underlying the Warrants. In addition, Biovest has agreed to issue
to Pulaski 400,000 shares of the Biovests common stock in full payment of renewal/extension fees due to Pulaski in connection with these Notes.



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

When you read this
section of this Quarterly 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, 2007 those additional risks, discussed in ITEM 1A. of Part II of this quarterly report 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, targeted therapeutic clinical products. We have three products in or entering Phase 3 clinical trials, two of which have fast-track status. All three products modify the immune system to treat
disease. Our first such product candidate, SinuNase, is being developed as a treatment for chronic sinusitis (CS) which the medical establishment also refers to as chronic rhinosinusitis (CRS), which is a chronic inflammatory condition of the
paranasal sinuses that among others, results in nasal congestion, facial pain and pressure, nasal discharge, and headaches. SinuNase is an amphotericin B suspension that is self-administered into a patients nasal cavity for the treatment of
CS. If approved by the FDA, we expect that SinuNase would be the first and only foreseeable pharmaceutical product indicated for the treatment of chronic sinusitis. In April 2005 we submitted an Investigational New Drug Application, or IND, with the
FDA for SinuNase. In December 2006 , we commenced the first of two Phase 3 clinical trials for SinuNase for patients who have recurrent CS whose disease severity has warranted surgical intervention for CS sometime in the past, and in November 2007
we completed randomization of all patients required under the SinuNase Phase 3 clinical trial protocol. We expect unblinding of the Phase 3 primary endpoint before the end of March 2008.

Our second product candidate, BiovaxID, under development by our subsidiary, Biovest International Inc., a publicly held company in which we currently hold approximately 76% of the outstanding capital stock
(Biovest) is a patient-specific anti-cancer vaccine to treat follicular non-Hodgkins lymphoma, or follicular NHL. Follicular NHL is a cancer of the lymphatic system that results when the bodys follicle center cells, which are a
type of white blood cell, become abnormal and eventually spread throughout the body growing and dividing in an uncontrolled fashion. BiovaxID is a customized, patient specific therapeutic anti-cancer vaccine that is derived from a patients own
cancer cells and is designed to utilize the power of the patients immune system to recognize and destroy cancerous lymphoma cells while sparing normal cells. We produce this vaccine by extracting a portion of the patients tumor cells and
then replicating and purifying the unique antigen that is present only on the surface of the patients own tumor cells. Biovest is currently conducting a pivotal Phase 3 clinical trial for BiovaxID in patients with the indolent, or low-grade,
form of B-cell follicular NHL. Based on its analysis of available unblinded clinical trial data from the BiovaxID Phase 3 trial, in June 2007 the independent Data Monitoring Committee (DMC) for BiovaxID recommended that Biovest conduct an interim
analysis of the studys efficacy endpoints and overall safety profile. We implemented a data lock in December 2007 to define the clinical trial data to be analyzed and the focus of the clinical trial shifted to the planned interim analysis.

Our third product candidate, Revimmune, is being developed as a treatment for multiple sclerosis (MS). MS is an autoimmune disease that affects the
central nervous system (CNS). Myelin, a fatty tissue, surrounds and protects the nerve fibers of the CNS and helps those nerve fibers to conduct electrical impulses. In MS that myelin sheath is lost in different areas and results in scar tissue
which is known as sclerosis. Since the myelin or the nerve fibers are damaged the nerves itself cannot conduct electrical impulses from and to the brain which results in the symptoms of MS. As a result MS is characterized by recurrent episodes of
demyelination and inflammation within the central nervous system. Revimmune therapy consists of approximately four consecutive days of in-patient or out-patient treatment with an ultra-high intensity, short-course of an intravenous formulation of an
approved drug (cyclophosphamide). This treatment seeks to reboot a



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patients immune system, thereby eliminating the autoimmunity which is characteristic of MS. The rebooting process is achieved by
temporarily eliminating peripheral immune cells, including the immune cells causing the autoimmunity, while selectively sparing the stem cells in the bone marrow. The surviving stem cells are able, typically within two-three weeks, to repopulate the
body with a nascent immune system which lacks misdirected immunity to self-antigens. In July 2007 the Company filed a pre-IND submission with the FDA for the commencement of a Phase 3 clinical trial and conducted pre-IND meetings. We are preparing
to file our IND with the FDA in the first half of calendar 2008. The Company believes that Revimmune may additionally have applications for the treatment of a variety of autoimmune diseases other than MS, including Systemic Lupus, Myasthenia Gravis
and Aplastic Anemia.

We are a vertically-integrated commercial enterprise with competencies in the identification, development, regulatory approval,
pricing, reimbursement, managed care contracting, manufacturing, and sales and marketing of biopharmaceuticals and medical devices. We currently market pharmaceutical products through our Accentia Pharmaceuticals division, which has a dedicated
specialty sales force. Our pharmaceutical product consulting business provides a broad range of services, including product candidate selection, outcomes research on the economic profiles of pharmaceuticals and biologics, pricing and market
assessment on these products, reimbursement strategies and various services designed to expedite clinical trials to companies and institutions in the pharmaceutical, biotechnology, and medical markets as well as for our internal use. Our instrument
business manufactures equipment used in the production of cells and other biologics based on the hollow-fiber production method and includes our newly introduced automated instrument, AutovaxID.

We were incorporated in Florida in 2002. Our principal executive offices are located at 324 South Hyde Park Avenue, Suite 350, Tampa, Florida 33606. Our telephone number
at that address is (813) 864-2554. Our Internet website address is www.accentia.net, and all of our filings with the Securities and Exchange Commission are available free of charge on our website.

Results of Operations

Three Months Ended December 31,
2007 Compared to the Three Months Ended December 31, 2006

Consolidated Results of Operations

Net Sales.Our net sales for the three months ended December 31, 2007 were $4.3 million, a decrease of $1.6 million, or 28%, from the three months
ended December 31, 2006. The decrease in our consolidated net sales for the three months ended December 31, 2007 reflected a decrease of $1.3 million in net sales in our Specialty Pharmaceuticals segment primarily due to the divestiture of
our Xodol and Histex product lines in October 2006, the discontinuance of our Respi-Tann G product line due to FDA mandate, and product returns, a decrease of $0.2 million in net sales of our Analytica subsidiary and an increase of $0.1 million in
Biovest.

Cost of Sales.Our cost of sales for the three months ended December 31, 2007 was $1.7 million, or 39% of net sales, compared
to $1.6 million, or 28% of net sales, during the three months ended December 31, 2006. This represented an increase of $0.1 million, or .05%, over the three months ended December 31, 2006 primarily due to the creation of reserves of $0.2
million for the Respi~TANN G products, offset by lower sales.

Research and Development Expenses.Our research and development costs were
$3.8 million for the three months ended December 31, 2007; a decrease of $0.6 million, or 13%, over the three months ended December 31, 2006. Our Biovest subsidiary research and development expense decreased by $2.0 million during the
quarter ended December 31, 2007 compared to the quarter ended December 31, 2006. As Biovest intends to file for conditional approval with the FDA and EMEA, Biovest focused on reducing R&D expenses from that of historical levels. This
has resulted in both R&D staffing levels as well as the number of sites participating in our clinical trials to have declined considerably. The Biovest decrease of $2.0 million was offset by an increase of $1.4 million in SinuNase research and
development expense due to the continuing Phase III clinical trials.

Sales and Marketing expenses.Our sales and marketing expenses were
$1.7 million for the three months ended December 31, 2007; a decrease of $0.5 million, or 21%, over the three months ended December 31, 2006. This decrease was primarily due to a $0.5 million reduction in sales related personnel due to
divesture of Histex and Xodol.



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General and Administrative Expenses.Our general and administrative expenses were $5.6 million for the
three months ended December 31, 2007; a decrease of $1.2 million, or 18%, over the three months ended December 31, 2006. This decrease is primarily due to a one-time reduction of bad debt expense due to an adjustment to the accounts
receivable reserve in our Specialty Pharmaceuticals segment. In addition, the three months ended December 31, 2006 included a $0.7 million settlement expense relating to the separation agreements of two employees.

Interest Expense.In the three months ended December 31, 2007, our interest expense was $13.0 million, an increase of $1.7 million, over the three
months ended December 31, 2006. The increase is due primarily from the current period amortization associated with warrants issued of $7.5 million.

Derivative loss.Derivative loss was $2.3 million for the three months ended December 31, 2007 as compared to a loss of $0.6 million for the three months ended December 31, 2006. This increase is related to the
derivative instruments associated with the Laurus financing arrangement that commenced in the 2005 fiscal year, the derivative instruments issued in conjunction with the Midsummer transactions in September 2006 and February 2007 and the put
associated with the termination investment of the McKesson Biologics Distribution Agreement, and results primarily from the increase in our common stock price during the quarter ended December 31, 2007 on which the derivative liabilities are
based.

Loss on financing transaction.In the three months ended December 31, 2007, there was no loss on financing transaction compared
to a $8.8 million loss for the three ended December 31, 2006. This loss is attributable to the issuance of warrants entitling Laurus to purchase Biovest shares owned by Accentia. The warrants were issued 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 losses against minority interest.In the three months ended December 31, 2007, there was no absorption of prior gains against
minority interest, a decrease of $0.3 million, primarily due to the sale of Biovest stock to a third-party in the NMTC 2 transaction during the three months ended December 31, 2007.

Loss on extinguishment of debt.The loss on extinguishment of debt for the three months ended December 31, 2007 was $1.4 million as compared to no loss for the three months ended December 31,
2006. On October 31, 2007, Biovest executed an amendment agreement (the Amendment) with its senior lender, Laurus, to defer payments of principal and interest on its $7.8 million loan until January, 2008, at which point adjusted
principal payments of $0.3 million per month were to commence. Interest on this loan will continue to accrue at prime plus 2.0% and will be due monthly beginning January, 2008. As consideration for the forbearance Biovest will pay to Laurus an
additional $1.8 million upon the maturity of the note, March 31, 2009.

Biovest applied the provisions of EITF 96-19, Debtors Accounting for
Modification or Exchange of Debt Instruments to the Amendment. EITF 96-19 provides that substantial modifications of terms should be treated in the same manner as an extinguishment of debt and thus accounted for under the provisions of SFAS
125. Biovest determined that the modification of terms of the $7.8 million loan from Laurus in addition to the $1.8 million payment due upon maturity under the Amendment constituted a substantial modification of terms and thus treated the Amendment
as an extinguishment of debt. Biovest incurred a $1.4 million loss on extinguishment of debt as a result of this transaction which is included in other income (expense) in the accompanying condensed consolidated statement of operations for the three
months ended December 31, 2007.

Non-controlling interest in losses from variable interest entities.Non-controlling interest in losses
from variable interest entities for the three months ended December 31, 2007 was $0.1 million. $8,750 related to Accentias interest in Revimmune, LLC, the balance relates to Biovests interest in the New Market Tax Credit entities.
The increase over the three months ending December 31, 2006 is due to the consolidation of the variable interest entities not occurring until the quarter ended March 31, 2007.



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Segment Operating Results



|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|--------------------------------------------- |  | --------------------------------------- | --------- | -------------------- | ---- | - | ------ | - | -------------------- |  | --- | -
|                                              |  | For the Three Months Ended December 31, |          
|                                              |  | 2007                                    |           |                      | 2006 |  
|                                              |  | Amount                                  |           | % ofSegmentNet Sales |      |   | Amount |   | % ofSegmentNet Sales | 
|Net Sales:                                    |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biopharmaceutical Products and Services-      |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biovest                                       |  | $                                       | 1,259,030 |                      |      |   |        | $ | 1,327,108            |  |     |  
|All other business units                      |  |                                         | 2,319,882 |                      |      |   |        |   | 2,448,079            |  |     |  
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Biopharmaceutical Products and Services |  |                                         | 3,578,912 |                      |      |   |        |   | 3,775,187            |  |     |  
|Specialty Pharmaceuticals                     |  |                                         | 757,153   |                      |      |   |        |   | 2,106,556            |  |     |  
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Net Sales                               |  | $                                       | 4,336,065 |                      |      |   |        | $ | 5,881,743            |  |     |  
|                                              |  |                                         |           |                     
|Cost of Sales:                                |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biopharmaceutical Products and Services-      |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biovest                                       |  | $                                       | 682,508   |                      |      |   |        | $ | 766,092              |  |     |  
|All other business units                      |  |                                         | 534,804   |                      |      |   |        |   | 423,197              |  |     |  
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Biopharmaceutical Products and Services |  |                                         | 1,217,312 |                      | 34   | % |        |   | 1,189,289            |  | 32  | %
|Specialty Pharmaceuticals                     |  |                                         | 491,310   |                      | 65   | % |        |   | 436,003              |  | 21  | %
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Cost of Sales                           |  | $                                       | 1,708,622 |                      |      |   |        | $ | 1,625,292            |  |     |  
|                                              |  |                                         |           |                     
|Gross Margin:                                 |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biopharmaceutical Products and Services-      |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biovest                                       |  | $                                       | 576,522   |                      |      |   |        | $ | 561,016              |  |     |  
|All other business units                      |  |                                         | 1,785,078 |                      |      |   |        |   | 2,024,882            |  |     |  
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Biopharmaceutical Products and Services |  |                                         | 2,361,600 |                      | 66   | % |        |   | 2,585,898            |  | 68  | %
|Specialty Pharmaceuticals                     |  |                                         | 265,843   |                      | 35   | % |        |   | 1,670,553            |  | 79  | %
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Gross Margin                            |  | $                                       | 2,627,443 |                      |      |   |        | $ | 4,256,451            |  |     |  
|                                              |  |                                         |           |                     
|Research and Development Expenses:            |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biopharmaceutical Products and Services       |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biovest                                       |  | $                                       | 889,044   |                      |      |   |        | $ | 2,848,542            |  |     |  
|All other business units                      |  |                                         | 2,926,556 |                      |      |   |        |   | 1,542,216            |  |     |  
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Biopharmaceutical Products and Services |  |                                         | 3,815,600 |                      | 107  | % |        |   | 4,390,758            |  | 116 | %
|Specialty Pharmaceuticals                     |  |                                         |          |                      | 0    | % |        |   |                     |  | 0   | %
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Research and Development Expenses       |  | $                                       | 3,815,600 |                      |      |   |        | $ | 4,390,758            |  |     |  
|                                              |  |                                         |           |                     
|Sales and Marketing Expenses:                 |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biopharmaceutical Products and Services       |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Biovest                                       |  | $                                       | 39,559    |                      |      |   |        | $ | 29,457               |  |     |  
|All other business units                      |  |                                         |          |                      |      |   |        |   |                     |  |     |  
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Biopharmaceutical Products and Services |  |                                         | 39,559    |                      | 1    | % |        |   | 29,457               |  | 1   | %
|Specialty Pharmaceuticals                     |  |                                         | 1,686,994 |                      | 223  | % |        |   | 2,147,998            |  | 102 | %
|                                              |  |                                         |           |                      |      |   |        |   |                      |  |     |  
|Total Sales and Marketing Expenses            |  | $                                       | 1,726,553 |                      |      |   |        | $ | 2,177,455            |  |     |  



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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, 2007 were $3.6 million, a decrease of $0.2 million, or 5%, from the three
months ended December 31, 2006. This decrease was attributable primarily to a decrease of $0.1 million in net sales of our Analytica International subsidiary and a decrease of $0.1 million in our Biovest subsidiary primarily due to a decrease
in our cell culture instrumentation and disposables sales.

Cost of Sales.Our cost of sales in the Biopharmaceutical Products and Services
segment for the three months ended December 31, 2007 was $1.2 million, or 34% of segment net sales, compared to $1.2 million, or 32% of segment net sales, during the three months ended December 31, 2006.

Research and Development Expenses.Our research and development costs were $3.8 million for the three months ended December 31, 2007; a decrease of
$0.6 million, or 13%, over the three months ended December 31, 2006.

As Biovest intends to file for conditional approval with the FDA and EMEA,
Biovest focused on reducing R&D expenses from that of historical levels. This has resulted in both R&D staffing levels as well as the number of sites participating in our clinical trials to have declined considerably. The Biovest decrease of
$2.0 million was offset by an increase of $1.4 million in SinuNase research and development expense due to the continuing Phase III clinical trials.

Specialty Pharmaceuticals

Net Sales.Net sales in the Specialty Pharmaceuticals segment for the three months ended
December 31, 2007, including net sales to related parties, were $0.8 million, a decrease of $1.3 million, or 64%, from the three months ended December 31, 2006. This decrease was primarily attributable to the divestitures of our Histex and
Xodol product lines, the discontinuance of our Respi~TANN G product due to an FDA mandate, and product returns.

Cost of Sales.Our cost of
sales in the Specialty Pharmaceuticals segment for the three months ended December 31, 2007 was $0.5 million, or 65% of net sales, compared to $0.4 million, or 21% of net sales, during the three months ended December 31, 2006. The increase
was primarily due to the creation of reserves of $0.2 million for the Respi~TANN G products, offset by lower sales.

Research and Development
Expenses.There were no research and development expenses in our Specialty Pharmaceuticals segment in either of the three months ended December 31, 2007 or 2006.

Sales and Marketing Expenses.Our sales and marketing expenses in the Specialty Pharmaceuticals segment were $1.7 million in the three months ended December 31, 2007; a decrease of $0.4 million, or
19%, over the three months ended December 31, 2006. This decrease was primarily due to a reduction in sales related personnel due to divesture of Histex and Xodol.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have funded our operations primarily through public and private placements of our capital stock, debt financing, conversions of debt to equity,
and financing transactions with our strategic partners. These transactions are described throughout the following pages.

At December 31, 2007, our
cash, cash equivalents and current restricted cash totaled $5.6 million. Excluding restricted cash, our cash and cash equivalents were $0.6 million at December 31, 2007 compared with $1.6 million at September 30, 2007. Restricted cash for
December 31, 2007 was $5.0 million held in escrow for payment of principal and interest coming due in the second quarter of fiscal 2008, and to be used for Biovest operations.



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Following the end of the fiscal quarter, in January 2008, we completed a placement of $8.7 million of Convertible
Preferred stock. As a part of this financing, we issued short-term warrants to the purchasers of the Preferred Stock giving them the right to purchase up to 3,269,283 shares of the Companys common stock at an exercise price of $2.67 per share.
Each such Short-Term Warrant will be exercisable for cash only and will terminate 30 days after the initial press release by the Company announcing unblinded results of the current Phase 3 clinical trial for SinuNase. If no such press release is
made by the Company prior to December 1, 2008, the exercise period shall be the 30-day period commencing December 2, 2008. The Company projects that it has sufficient cash from the above Preferred Stock transaction and from availability
under its lines of credit to finance its expected cash outflows into the third quarter of fiscal 2008.

We believe that the forthcoming unblinding of the
Phase 3 clinical trial data for SinuNase and BiovaxID will be significant milestone events. SinuNase results are anticipated to be available in or around March 2008. BiovaxID interim results are anticipated to be available in or around April 2008.
We believe that our current cash resources available under our lines of credit will be sufficient to fund our operations through the anticipated release of unblinded clinical trial data for SinuNase and BiovaxID. We believe that the publication of
the aforementioned clinical trial results, if positive, will significantly enhance our ability to access additional sources of funding.

We are in active
negotiation to restructure or refinance our debt instruments which mature in fiscal year 2008. These debt instruments, excluding Biovest debt instruments, include approximately $13.1 million (net of escrowed funds of approximately $2.5 million) due
Laurus Master Funds and Southwest Bank. Further we anticipate that if not otherwise refinanced our principal payment obligations under the convertible debentures issued in September 2006 and February 2007 will be largely satisfied without cash
payments through redemptions of principal paid with our common stock as permitted by these debt instruments.

We expect to finance our foreseeable cash
requirements following the unblinding of the clinical trial data through public or private equity offerings, debt financings, or corporate collaboration and licensing arrangements. If adequate funds are not available from the foregoing sources, we
may consider additional strategic financing options, including sales of assets or business units (such as specialty pharmaceuticals, market services or cell culture equipment) that are non-essential to the ongoing development or future
commercialization of SinuNase, BiovaxID or Revimmune, or we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or curtail some of our commercialization efforts. We may seek to access the
public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at this time. We cannot be certain that additional funding will be available on acceptable terms, or at all.

Debt Financing

As of December 31, 2007,
our long-term debt and notes payable, including accrued but unpaid interest, current maturities of long-term debt, and lines of credit, not including discount was $70.3 million. We currently have credit facilities with various lenders, including as
listed in the following table and discussed individually in detail below:



|                                                        |  |                                  |            |                                        |   |                             |  |                
|------------------------------------------------------- |  | -------------------------------- | ---------- | -------------------------------------- | - | --------------------------- |  | ---------------
|Instrument                                              |  | CarryingValue atDecember 31,2007 |            | PrincipalAmount Dueat December 31,2007 |   | Balance SheetClassification
|Credit Facility with Laurus Master Fund, Ltd.:          |  |                                  |            |                                        |   |                             |  |                
|Convertible amortizing term note                        |  | $                                | 3,302,191  |                                        | $ | 3,870,969                   |  | Long-term debt 
|Secured revolving note                                  |  |                                  | 6,985,555  |                                        |   | 7,000,510                   |  | Lines of credit
|Credit Facility with Laurus Master Fund, Ltd.  Biovest |  |                                  | 7,222,361  |                                        |   | 7,238,586                   |  | Long-term debt 
|Loans from Pulaski Bank                                 |  |                                  | 1,881,250  |                                        |   | 1,750,000                   |  | Notes payable  
|Line of Credit with Hopkins Capital II                  |  |                                  | 1,005,000  |                                        |   | 1,005,000                   |  | Lines of credit
|Credit Facility with Southwest Bank of St. Louis        |  |                                  | 4,000,000  |                                        |   | 4,000,000                   |  | Lines of credit
|Private Placement of Debentures                         |  |                                  |            |                                        |   |                             |  |                
|September 2006 Convertible Debentures                   |  |                                  | 18,802,379 |                                        |   | 12,012,469                  |  | Long-term debt 
|February 2007 Convertible Debentures                    |  |                                  | 12,122,096 |                                        |   | 23,390,000                  |  | Long-term debt 



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|                                                 |  |                                  |  |                                        |  |                             
|------------------------------------------------ |  | -------------------------------- |  | -------------------------------------- |  | ----------------------------
|Instrument                                       |  | CarryingValue atDecember 31,2007 |  | PrincipalAmount Dueat December 31,2007 |  | Balance SheetClassification 
|Credit Facilities with Valens Offshore  Biovest |  | 3,855,000                        |  | 3,855,000                              |  | Long-term debt/Notes payable
|Credit Facilities with Valens US  Biovest       |  | 5,145,000                        |  | 5,145,000                              |  | Long-term debt/Notes payable
|Other Notes Payable                              |  | 608,269                          |  | 606,066                                |  | Notes payable               
|Other Notes Payable  Related Party              |  | 320,100                          |  | 246,015                                |  | Notes payable               
|Other Long-term Debt                             |  | 189,268                          |  | 189,265                                |  | Long-term debt              

Carrying values and principal amounts due does not include accrued interest in the table above.

Credit Facility with Laurus Master Fund, Ltd.On April 29, 2005, we entered into a credit facility with Laurus. As of December 31, 2007, a total of $3.8
million in principal amount was outstanding under the term loan portion of the credit facility, while $7.0 million in principal amount was outstanding under the revolving loan portion of the credit facility. Laurus Term Loan payments were
approximately $0.6 million for the three months ended December 31, 2007. The Laurus line of credit balance decreased approximately $1.0 million for the three months ended December 31, 2007.

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 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 $6.80 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



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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 and TEAMM Pharmaceuticals, Inc., d/b/a/ Accentia Pharmaceuticals subsidiaries (including the stock of their respective 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.

On August 29, 2007, Laurus agreed to make
loans 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 $4.4 million and was in effect through October 21, 2007.

On October 21, 2007, Laurus extended the overadvance through March 31, 2008. In connection with the extension of the overadvance, we granted Laurus a warrant
to purchase up to 4,024,398 shares of our common stock at an exercise price of $2.67.



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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 and activity related to 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.
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| |  | 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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| |  | Pursuant to the original terms of this secured promissory note, Biovest was required to make certain principal and interest payments commencing in calendar 2007.
Biovest did not commence making such payments when originally due and reached an understanding that such payments would not commence while Biovest sought additional financing. This understanding was formalized into a letter agreement dated
March 21, 2007 (the Letter Agreement). Biovest closed a short-term borrowing of $750,000 from Pulaski Bank and this Letter Agreement became effective on April 17, 2007. In addition to formalizing and continuing Laurus
forbearance, the Letter Agreement rescheduled future payments due from the Company to Laurus under the Note. Under the Letter Agreement past due and ongoing principal payments on the Note are deferred until August 1, 2007, when adjusted monthly
principal payments of $0.3 million per month will commence. As consideration for the forbearance Biovest granted to Laurus a non-cancelable royalty equal to three percent 3% of world-wide net sales of AutovaxID instruments for a period of five years
commencing on the earlier of May 31, 2007 or the completion of a long term financing by Biovest. Under the terms of the royalty agreement Biovests royalty payments to Laurus are required to aggregate a minimum of $8.0 million with $0.5
million of the minimum royalty being payable on December 31, 2007 and the balance (if any), less actual royalties paid, being due at the end of the five year royalty term. In addition, upon satisfaction of certain conditions of the Letter
Agreement, Laurus consented to Biovest seeking and, if available, entering into bridge loans in an aggregate amount of up to $7.0 million.
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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.
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| |  | 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.
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| |  | 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.
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| |  | 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,
approximately $442,000 is recorded as a derivative liability in the accompanying balance sheet on December 31, 2007.

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

The
following parties were involved in Transaction I: Accentia Biopharmaceuticals, Inc., Biovests majority shareholder (Accentia), Biolender, LLC (Biolender), Biovax Investment Corp., Biovax Investment, LLC
(Fund), U.S. Bancorp Community Investment Corporation (US Bancorp), Telesis CDE Two, LLC (CDE), Telesis CDE Corporation, Biovax, Inc., and Laurus Master Fund, Ltd. (Laurus).

Previously, on March 31, 2006 in contemplation of the Transaction, 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, $7.5 million 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.

In contemplation of Transaction I, Biovest and Biovests parent company formed Biolender, LLC as a
Delaware limited liability company. On April 21, 2006, 2.5 million was released from the Restricted Account created under the Laurus Note.

These
proceeds were used to purchase a 29.5% equity investment in Biolender for $2.5 million. Accentia used the proceeds of a $6.0 million intraday loan from First Bank to purchase the remaining 70.5% equity interest in Biolender. On April 27, 2006,
Biovest redeemed 10 million shares of its common stock owned of record by Accentia for a $6.0 million cash payment which equaled the market price of $0.60 per share. Accentia used the proceeds of the stock redemption to repay its intraday loan
due First Bank. Subsequently, on October 31, 2006, Biovest entered into a Purchase Agreement with Accentia whereby Biovest purchased Accentias 70.5% ownership interest in Biolender. In consideration of the sale of this interest in
Biolender, Biovest issued to Accentia ten million shares of common stock, representing the negotiated value of the purchased interest (Note 23).



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In contemplation of Transaction I, Biovax Investment, LLC (the Fund) was established. U.S. Bancorp invested
$3.6 million for a 99% equity interest in the Fund. Biovax Investment Corp., the Fund manager, invested an additional $100 for the remaining 0.01% equity interest. On April 25, 2006, Biolender loaned the Fund $8.5 million pursuant to a 5.18%,
annual rate, senior secured, convertible note receivable, due October 27, 2013. Interest on the note is payable as follows: (i) 0.64% interest per annum, non-compounding, shall be payable on the first day of each calendar month until
October 27, 2013; and (ii) any remaining accrued and unpaid interest shall be payable in one installment on October 27, 2013. The note is convertible at the option of the fund into shares of Biovests common stock near the
maturity date.

The proceeds received by the Fund from the aforementioned financing transactions were used to make a contemporaneous 99.99% equity
investment in Telesis CDE II, LLC ($12 million) and payment for associated management, legal and accounting fees ($0.1 million). The $12 million investment by the Fund to the CDE constituted a qualified equity investment (QEI) under the
New Markets Tax Credit Program authorized by Section 45D of the Internal Revenue Code of 1986, as amended (the Code), resulting in $4.7 million in tax credits.

Telesis CDE II, LLC is a Community Development Entity that is certified through the U.S. Treasury Department to make Qualified Low-Income Community Investments (QLICI), and is managed and partially owned
(0.01%) by Telesis CDE Corporation, a private financial institution. Telesis CDE Corporation paid $1,200 in consideration for its 0.01% interest in the CDE. Telesis CDE II, LLC, upon receipt of its equity funding, contemporaneously issued $11.5
million to Biovax for a 1.0% convertible promissory note payable, due October 27, 2013. The convertible promissory note is convertible into common stock at the option of 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. Biovest also issued to Telesis CDE Corporation warrants to purchase 1.2 million shares of Biovests common stock over a period of nine-years at a fixed price of $1.30. These warrants are reflected as an equity financing
cost in stockholders equity at a fair value of $517,000 computed using the Black-Scholes option pricing model. Accentia also issued warrants to Telesis CDE Corporation to purchase 0.2 million shares of Accentias common stock over a
period of seven years at a fixed price of $9.00.

Other salient terms and conditions of Transaction I are as follows:



| |  |  | Under an Asset Purchase and Sale Agreement dated as of April 18, 2006, Biovest transferred all or substantially all of the assets of its vaccine manufacturing
business situated at 377 Plantation Street, Worcester, Massachusetts (the Plant and the assets hereinafter the Equipment) and its rights under that certain lease agreement for the Plant and that certain letter of intent with
the landlord to potentially lease additional space adjacent to the Plant (collectively the Leasehold) to Biovax. As full purchase price for the Equipment, Biovax paid Biovest $1.5 million and assumed certain liabilities, including a
portion of a demand note payable to Accentia. In addition, Biovax advanced rental payments for the Leasehold in the amount of $4.5 million. Under the Asset Purchase Agreement, Biovest is required to treat the advance as unrestricted and
non-segregated funds provided that Biovest uses the funds to make all required lease payments. Finally, Biovax also hired all of Biovests employees that are related to the vaccine manufacturing business and assumed responsibility for all
accrued vacation time and the maintenance of existing health and other benefits.
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| |  |  | The tax credits arising from this transaction were fully assigned to US Bancorp. Biovest, its subsidiaries and certain related parties (also see 3, below) have
entered into an indemnification agreement directly with US Bancorp that provides for indemnification in the event of tax credit recapture from events caused by Biovest. Biovax, Inc., Biovests wholly owned subsidiary, is contractually required
to maintain the following covenants to avoid tax credit recapture: (i) Biovax shall maintain its status as a qualified active low-income business; (ii) At least fifty percent (50%) of the use of the tangible property of the Biovax
(whether owned or leased) will be within the low-income community as defined by Section 45D(e) of the U.S. Tax Code; (iii) At least fifty percent (50%) of the services performed for Biovax by its employees will be within low-income
community as defined by Section 45D(e) of the U.S. Tax Code; (iv) Less than five percent (5%) of the average of the unadjusted bases of the property of Biovax will be attributable to collectibles (as defined in Section 408(m) (2)
of the Code, and which includes any work of art; any rug or antique; any metal or gem; any stamp or coin; and any alcoholic beverage) other than collectibles that are held primarily for sale to customers in the ordinary course of business;
(v) Less than five percent (5%) of the average of the unadjusted bases of the property of Biovax will be attributable to nonqualified financial property (as defined in Section 1397C(e) of the Code and in
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| | Section 1.45D-1(d)(4)(i)(E) of the Regulations, and which includes debt, stock, partnership interests, options, futures contracts, forward contracts,
warrants, notional principal contracts, annuities and other similar property); (vi) No part of the business activities of Biovax will consist of the operation of any private or commercial golf course, country club, massage parlor, hot tub
facility, or suntan facility, race track or other facility used for gambling, or store the principal business of which is the sale of alcoholic beverages for consumption off premises; (vii) No part of Biovaxs business activities will
include the rental to others of residential rental property (the term residential rental property is defined in Section 168(e)(2)(A) of the Code as meaning any building or structure if eighty percent (80%) or more of the gross
rental income from such building or structure for the taxable year is rental income from dwelling units); (viii) The predominant trade or business of Biovax will not include the development or holding of intangibles for sale or license, as
provided under Section 1.45D-1(d)(5)(iii) of the Regulations; (ix) Farming (within the meaning of Section 2032A(e)(5)(A) or (B) of the Code) will not be an activity of Biovax; (x) Biovax will generate revenues by the date of
April 25, 2009; (xi) Biovax shall not discontinue conducting business, shall not materially change the nature of its business, and shall not materially change the manner in which its business activities are conducted, other than changes in
the nature of its business or the manner in which it conducts its business that do not cause the making of the Loan by the Lender to cease to constitute a qualified low-income community investment as such term is used in Section 45D
of the Code (as determined by the Lender in its good faith judgment and based upon the advice of counsel); (xii) Biovax will not be a bank, credit union or other financial institution; (xiii) Biovax will not maintain a qualified low-income
building under Section 42 of the Code; (xiv) Biovax will not become a single-member entity treated as disregarded as separate from its owner for federal income tax purposes, nor be liquidated or merged into another entity without the
written consent of Telesis CDE II, LLC; and (xv) Biovax and Biovest will operate consistently with the Asset Purchase and Sale Agreement between Biovax and Biovest, and will not amend such agreement without prior written consent of Telesis CDE
II, LLC. An example of an event that would not cause a recapture is changes in the Internal Revenue Code that results in such recapture. The total indemnification amount could be $4.7 million (representing 39% of the $12.0 million qualified
investment). However, in accordance with Financial Interpretation 45 Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of the Indebtedness of Others, the conditions and events that could result in
recapture are within Biovests control. Therefore, this potential liability is not reflected in the financial statements.
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| |  |  | In connection with the NMTC financing, Biovest and US Bancorp entered into a put option wherein US Bancorp will have the right to put its investment in the Fund to
Biovest near the maturity of the instruments at a price of $180,000. Biovest has concluded that this contract constitutes a derivative liability that requires accounting recognition at fair value. Biovest utilized a probability-based, discounted
cash flow approach to value the put. In applying this technique, Biovest, on the inception date, concluded that it was probable that US Bancorp would exercise their contractual right to put the investment. Accordingly, the valuation technique
provided for the recognition of the full put amount ($180,000) at the present value of its cash flows, using market interest rates that would likely be considered by market participants trading similar instruments. The present value associated with
the put option and included in the December 31, 2007 balance sheet is approximately $100,000.
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| |  |  | Biovest, its subsidiaries and certain related parties have entered into a guarantee arrangement with Telesis CDE II, Inc. for the debt service of Biovax. In
addition, Accentia has partially guaranteed debt service with limitations established at no greater than $60,000 each year the instrument is outstanding. Biovest issued warrants to purchase 1.0 million shares of common stock to the related
parties as compensation for their guarantees. The guarantees were treated in a manner similar to contributed service and their fair value of $460,000 was charged to expense upon issuance. Biovest also indemnified the guarantors from any claims of
any kind to the extent that the guarantors are called upon to pledge funds, assets or collateral in connection with the guarantee being executed.
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| |  |  | Various legal and accounting fees of $757,000 involved in structuring this transaction were recorded as deferred financing costs and will be amortized over a period
of seven and one half years, representing the duration of both convertible notes issued by the Fund and Biovax, Inc.
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On December 8, 2006, Biovest through its wholly owned subsidiary, AutovaxID, Inc. (AutovaxID) closed a
second New Market Tax Credit financing transaction (Transaction II). The following parties were involved in Transaction II: AutovaxID, Accentia, Biolender II, LLC (Biolender II), St. Louis New Market Tax Credit Fund II, LLC,
St. Louis Development Corp., AutovaxID Investment LLC (Leverage Fund), U.S. Bancorp, and Laurus.

On December 8, 2006, Accentia loaned to
Biovest $3.1 million 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) $1.1 million was paid to Accentia upon the closing of the Transaction and (b) the remaining $2.0 million of principal and all accrued and unpaid interest shall be paid by Biovest upon demand by Accentia.

In contemplation of Transaction II, Biovest formed Biolender II, LLC as a Delaware limited liability company. On December 8, 2006, $2.5 million 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 of $5.6 million in Biolender II owned by Biovest has been pledged to Laurus as collateral to secure the Laurus Note.

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

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

St.
Louis New Market Tax Credit Fund II, LLC is a Community Development Entity (CDE) that is certified through the U.S. Treasury Department to make Qualified Low-Income Community Investments (QLICI), and is managed and partially
owned (0.01%) by St. Louis Development Corporation, a not-for-profit corporation organized in Missouri. St. Louis Development Corporation paid $1,000 in consideration for its 0.01% interest in the CDE. St. Louis New Market Tax Credit Fund II, LLC,
upon receipt of its equity funding, contemporaneously issued a QLICI to AutovaxID, evidenced by a $7.7 million Subordinated Promissory Note dated as of December 8, 2006 and described in more detail below.

Other salient terms and conditions of Transaction II are as follows:



| |  |  | Under a License and Asset Purchase Agreement dated as of December 8, 2006, Biovest granted a nonexclusive license to the intellectual property enabling
AutovaxID to manufacture and sell automated cell culture instruments in the United States, Canada and Mexico (the License), which license became exclusive upon the occupancy by AutovaxID of a space located at 1031 Macklind Avenue, St.
Louis, Missouri (the New Plant) in June 2007. As full purchase price for the License and related business opportunity, AutovaxID paid Biovest $5.6 million. Biovest also agreed to sell AutovaxID certain equipment upon the occupancy by
AutovaxID of the New Plant for the fair market value of $0.5 million.
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| |  |  | The CDE Loan has a principal amount of $7.7 million 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 $5.7 million, 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.
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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 Biovest 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 $5.7 million, in full satisfaction of the principal on the CDE Loan, together with all accrued but unpaid interest.
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| |  |  | AutovaxID does not have the right to prepay the CDE Loan prior to June 8, 2014. AutovaxID does have the right to prepay the CDE Loan after this date, provided
that (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.
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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 Biovest.
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| |  |  | The tax credits arising from this transaction were fully assigned to US Bancorp. Biovest, its subsidiaries and certain related parties (also see 3, below) have
entered into an indemnification agreement directly with US Bancorp that provides for indemnification in the event of tax credit recapture from events caused by Biovest. AutovaxID, Inc., Biovests wholly owned subsidiary, is contractually
required to maintain the following covenants to avoid tax credit recapture: (i) AutovaxID shall maintain its status as a qualified active low-income business; (ii) At least fifty percent (50%) of the use of the tangible property of
the AutovaxID (whether owned or leased) will be within the low-income community as defined by Section 45D(e) of the U.S. Tax Code; (iii) At least fifty percent (50%) of the services performed for AutovaxID by its employees will be
within low-income community as defined by Section 45D(e) of the U.S. Tax Code; (iv) Less than five percent (5%) of the average of the unadjusted bases of the property of AutovaxID will be attributable to collectibles (as defined in
Section 408(m)(2) of the Code, and which includes any work of art; any rug or antique; any metal or gem; any stamp or coin; and any alcoholic beverage) other than collectibles that are held primarily for sale to customers in the ordinary course
of business; (v) Less than five percent (5%) of the average of the unadjusted bases of the property of AutovaxID will be attributable to nonqualified financial property (as defined in Section 1397C(e) of the Code and in
Section 1.45D-1(d)(4)(i)(E) of the Regulations, and which includes debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities and other similar property); (vi) No
part of the business activities of AutovaxID will consist of the operation of any private or commercial golf course, country club, massage parlor, hot tub facility, or suntan facility, race track or other facility used for gambling, or store the
principal business of which is the sale of alcoholic beverages for consumption off premises; (vii) No part of AutovaxIDs business activities will include the rental to others of residential rental property (the term residential
rental property is defined in Section 168(e)(2)(A) of the Code as meaning any building or structure if eighty percent (80%) or more of the gross rental income from such building or structure for the taxable year is rental income from
dwelling units); (viii) The predominant trade or business of AutovaxID will not include the development or holding of intangibles for sale or license, as provided under Section 1.45D-1(d)(5)(iii) of the Regulations; (ix) Farming
(within the meaning of Section 2032A(e)(5)(A) or (B) of the Code) will not be an activity of AutovaxID; (x) AutovaxID will generate revenues by the date of December 8, 2009; (xi) AutovaxID shall not discontinue conducting
business, shall not materially change the nature of its business, and shall not materially change the manner in which its business activities are conducted, other than changes in the nature of its business or the manner in which it conducts its
business that do not cause the making of the Loan by the Lender to cease to constitute a qualified low-income community investment as such term is used in Section 45D of the Code (as determined by the Lender in its good faith
judgment and based
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | upon the advice of counsel); (xii) AutovaxID will not be a bank, credit union or other financial institution; (xiii) AutovaxID will not maintain a
qualified low-income building under Section 42 of the Code; (xiv) AutovaxID will not become a single-member entity treated as disregarded as separate from its owner for federal income tax purposes, nor be liquidated or merged into another
entity without the written consent of St. Louis New Market Tax Credit Fund II, LLC; and (xv) AutovaxID and Biovest will operate consistently with the License and Asset Purchase Agreement between AutovaxID and Biovest, and will not amend such
agreement without prior written consent of St. Louis New Market Tax Credit Fund II, LLC. An example of an event that would not cause a recapture is changes in the Internal Revenue Code that results in such recapture. The total indemnification amount
could be $3.12 million (representing 39% of the $8.0 million qualified investment). However, in accordance with Financial Interpretation 45 Guarantors Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of the
Indebtedness of Others, the conditions and events that could result in recapture are within Biovests control. Therefore, this potential liability is not reflected in the financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In connection with the NMTC financing, Biovest and U.S. Bancorp entered into a put option wherein US Bancorp will have the right to put its investment in the Fund
to Biovests subsidiary, Biolender II starting on December 9, 2013 and ending three months thereafter at a price 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 U.S. Bancorps equity interests in the Leverage Fund based on the fair market value of the equity interests at that time. Biovest has
concluded that this contract constitutes a derivative liability that requires accounting recognition at fair value. Biovest utilized a probability-based, discounted cash flow approach to value the put. In applying this technique, Biovest, on the
inception date, concluded that it was probable that US Bancorp would exercise their contractual right to put the investment. Accordingly, the valuation technique provided for the recognition of the full put amount ($120,000) at the present value of
its cash flows, using market interest rates that would likely be considered by market participants trading similar instruments. The present value associated with the put option and included in the December 31, 2007 balance sheet is
approximately $62,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Biovest, its subsidiaries and certain related parties have entered into a guarantee arrangement with St. Louis New Markets Tax Credit Fund II, LLC for the debt
service of AutovaxID. Biovest issued warrants to purchase 2.6 million shares of common stock to the related parties as compensation for their guarantees. The guarantees were treated in a manner similar to contributed service and their fair
value of $1.4 million was charged to expense upon issuance. Biovest also indemnified the guarantors from any claims of any kind to the extent that the guarantors are called upon to pledge funds, assets or collateral in connection with the guarantee
being executed.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Various legal and accounting fees of $649,000 involved in structuring this transaction were recorded as deferred financing costs and will be amortized over a period
of seven and one half years, representing the duration of the note issued by AutovaxID Investment, LLC and payable to Biolender II, LLC.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Loans from Pulaski Bank. 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 maturity date
of this Note (pursuant to an extension) is December 31, 2007(1). Biovest issued warrants to purchase 25,000 shares of Biovests common stock as a
loan origination fee. 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. The Note is an unsecured obligation of Biovest and is subordinated to Biovests outstanding loan to Laurus.



|(1) | Biovest and Pulaski have extended the maturity date of these two notes to
June 30, 2008. On February 14, 2008, Biovest paid $750,000 to Pulaski resulting in the current aggregate principal balance of $1,050,000. This transaction is described in more detail in Note 20 (Subsequent Events) herein.
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On March 22, 2007, Biovest entered into a short term
financing transaction (the Loan) with Pulaski, pursuant to which Pulaski agreed to loan up to $750,000 to Biovest pursuant to an unsecured Promissory Note (the Note). The Note as extended, with interest at the rate of the prime
rate minus .05% (7.75% per annum initially) became due on May 21, 2007. On May 3, 2007, Biovest entered into a renewal of the Note, pursuant to which Pulaski and Biovest extending the maturity date of the Note from April 22, 2007 to
May 21, 2007. In consideration of this extension, Biovest paid additional closing fees relating to the loan transaction. The Notes maturity date subsequently been extended to December 31, 2007(1). The Note is guaranteed by entities and individuals affiliated with Biovest. Biovest has entered into Indemnification Agreements with each of the guarantors. Biovest issued to the
guarantors warrants to purchase an aggregate total of 409,090 shares of Biovests Common Stock, par value $0.01 per share, at an exercise price of $1.10 per share (the Guarantor Warrants). The Guarantor Warrants will expire on
March 21, 2012. Under the terms of the Warrants, the guarantors shall have piggy-back registration rights for the shares underlying the Warrants. Under the terms of the Note, $18,750 out of the gross proceeds of the Initial Borrowing was paid
to Pulaski to cover closing fees relating to the transaction. The Company issued to Pulaski a warrant (the Pulaski Warrant) to purchase up to 25,000 shares of the Companys Common Stock, par value $0.01 per share, at an exercise
price of $1.10 per share. The Pulaski Warrant will expire on March 21, 2012. Under the terms of the Pulaski Warrant, Pulaski shall have piggy-back registration rights for the shares underlying the Warrant.

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 McKesson.

Line of Credit with 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 (Hopkins II). Dr. Francis E. ODonnell, Jr., our Chief Executive Officer and Chairman, is the sole member 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 consolidated these borrowings into a new bridge loan agreement with Hopkins II
that provided for the Company to have aggregate borrowing availability of up to $7.5 million in principal amount at an interest rate of 4.25% per annum (the Line of Credit). In connection with this agreement, the $4.2 million
advanced under the previous Hopkins II bridge loans was converted into an obligation under the Line of Credit. The Line of Credit (including all accrued interest) will become due upon the earlier of December 31, 2008 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 Line of Credit 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 Line of Credit will not become due and cannot be paid until the first day on which both of these conditions are satisfied. Currently, the amount due Laurus under
the Laurus credit facility exceeds $2.5 million.

Under the August 2005 Line of Credit with Hopkins II, the Company has borrowed $1.7 million as of
September 30, 2007 and subsequent to this date has made payments to Hopkins II of $.7 million. As of December 31, 2007, we have the right to borrow up to $6.5 million in the aggregate upon ten days prior written notice to Hopkins II.
Provided, however, 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 or with
the consent of Laurus. Loan under the Line of Credit 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 December 31, 2008, the maturity date of the loan.
The Hopkins II Line of Credit 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 II elected to convert $3.3 million of outstanding principal and interest into 412,892 shares at $8.00 per share
which was an approximate 40% premium over the market price at conversion. Giving effect to this conversion, the outstanding balance on December 31, 2007 was $1.0 million.



|(1) | Biovest and Pulaski have extended the maturity date of these two notes to
June 30, 2008. On February 14, 2008, Biovest paid $750,000 to Pulaski resulting in the current aggregate principal balance of $1,050,000. This transaction is described in more detail in Note 20 (Subsequent Events) herein.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 March 31, 2008 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 (shareholders of our company). As of December 31,
2007, all 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain additional financing in the future for working capital, capital expenditures or acquisitions may be limited;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be unable to refinance our indebtedness on terms acceptable to us or at all;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Private Placement of Convertible Debentures

September 2006 Private Placement

The September 2006 private
placement of $25.0 million in principal amount of 8% Secured Convertible Debentures due September 29, 2010 resulted in gross proceeds of $23.5 million after placement agent fees of $1.5 million but before other expenses associated with the
transaction.

The September 2006 Debentures are 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. Interest is payable quarterly in arrears in cash, or, at our option, in shares of our common stock. From and after an event of default under the September 2006 Debentures and for
so long as the event of default is continuing, the September 2006 Debentures will bear default interest at a rate of 18% per annum.

Beginning October 1, 2007, and on the 1stof each month thereafter, we were required to redeem 1/37thof the face value of the September 2006 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. On October 31, 2007, we and holders of 84% of the 8% Convertible Debenture Financing dated September 29, 2006 (the
September Debentures) agreed to defer required monthly redemption payments under the September Debentures from November 1, 2007 through May 1, 2008 and to allow any unconverted balance of those amounts to be redeemed on the
Maturity Date of the September Debentures.

As a part of the September 2006 Private Placement, we issued warrants to the purchasers of the
September 2006 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.



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February 2007 Private Placement

The February 2007 private placement of $24.7 million in principal amount of 8% Secured Convertible Debentures is due four years from the date of issuance (the September 2006 Debentures).

The February 2007 Debentures are convertible at any time at the option of the holder into shares of our common stock at an initial price of $2.67 per share, subject to
adjustment for stock splits, stock dividends, and the like.

Beginning on March 1, 2008, and on
the 1stof each month thereafter, we may redeem 1/37thof the
face value of the February 2007 Debentures in cash or, at our election, with shares of our common stock.

As a part of the February 2007
Private Placement, we issued warrants to the purchasers of the February 2007 Debentures initially giving them the right to purchase up to an aggregate of 2.2 million shares of our common stock at an exercise price of $2.94 per share (the
Long Term Warrants) and an aggregate of 3.1 million shares of our common stock at an exercise price of $2.67 per share (the Short Term Warrants and, together with the Long Term Warrants, the February 2007
Warrants).

In connection with the February 2007 Private Placement, we entered into a Registration Rights Agreement under which we filed a
registration statement with the SEC covering the resale of the shares of our common stock issuable pursuant to the February 2007 Debentures and Warrants. The registration statement was declared effective on July 17, 2007. Included in the
registration statement are short term warrants which were to expire on September 15, 2007; however, they were extended through October 19, 2007. On October 19, 2007, the Company engaged in an effort to have the holders exercise the
short-term warrants in connection with the February 28, 2007 Convertible Debenture Financing. The Short-term Warrants which, as amended, were scheduled to expire on October 19, 2007.

As a consequence of this effort, we received an aggregate of $5.6 million in cash from the exercise of the Short-term Warrants at $2.67 per share, 2,568,564 Short-term
Warrants expired unexercised and we also issued additional warrants to certain of the holders of the February 2007 debentures to purchase an additional 1,895,133 shares of our Common Stock. These additional warrants have an exercise price of the
$2.67 per share and a term expiring on the first to occur of January 19, 2009 or three days following notice of our common stock trading at $6 per share based on a 10-day volume weighted average.

Credit Facilities with Valens Funds

On October 30, 2007,
Biovest completed a financing transaction with the Valens Funds. Pursuant to this transaction, the Valens Funds purchased from Biovest two secured promissory notes in the aggregate principal amount of $500,000 and entered into two royalty agreements
whereby the Valens Funds have been granted 2% royalty interests in the worldwide net commercial sales of Biovests biologic products. The notes are non-amortizing and accrue interest at prime plus 2%, with a minimum of 9% interest. Interest is
payable monthly in arrears, commencing November 1, 2007. The principal balance of both notes is due upon maturity on March 31, 2009.

On
December 10, 2007, Biovest completed a financing transaction with Valens Offshore SPV II, Corp. and Valens U.S. SPV I, LLC., (collectively the Valens Funds), both of which are subsidiary companies of Laurus, pursuant to which the
Valens Funds purchased from Biovest two secured promissory notes in the aggregate principal amount of $8,500,000 and entered into two royalty agreements whereby the Valens Funds have been granted royalty interests in the worldwide net commercial
sales of the Biovests biologic products. The notes are non-amortizing, bear interest at prime plus 2.0%, with a minimum interest rate of 11% and are payable in a single payment of principal and accrued interest on June 5, 2008. The
obligations pursuant to the Notes are secured by a lien against all assets of Biovest and its subsidiaries and are guaranteed by Biovest and its subsidiaries. Proceeds of the notes, after designated payments to the Valens Funds and Laurus in payment
of outstanding obligations and prepayment of certain scheduled principal and interest payments, were disbursed into a restricted account and will be released to Biovest based upon an agreed schedule. These notes also contain a default put option
whereby upon an event of default Biovest would be required to pay to the Valens Funds a default payment of 130% of the outstanding principal, interest and fees due. Biovest has concluded that this feature constitutes a derivative liability that
requires accounting recognition at fair value. Biovest has utilized a probability-based, discounted cash flow approach to value the put.



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Cash Flows for the Three Months Ended December 31, 2007

For the three months ended December 31, 2007, we used $7.7 million in cash to fund our operating activities of which $3.8 million was Biovests use for
operating activities. The use for operating activities included a net loss of $24.8 million, a decrease in inventory of $0.5 million, an increase in accrued expenses of $0.9 million, payment for accounts payable of $1.9 million, and a net change in
unbilled revenues and unearned revenue of $0.5 million.

This use of cash was offset by non-cash uses of approximately $17.6 million related to $2.5
million accretion of debt discount, $6.3 million for change in fair market value of convertible debentures, $1.0 million of stock-based compensation, $3.3 million accretion of capitalized finance costs, $0.3 million amortization, $0.2 million of
depreciation and $1.4 million in loss on extinguish of debt, and a $2.3 million derivative loss.

We had net cash outflow from investing activities of $2.5
million for the three months ended December 31, 2007, primarily consisting of $2.5 million in deposit of restricted cash.

We had net cash flows from
financing activities of $9.2 million for the three months ended December 31, 2007. Proceeds from notes payable were $8.6 million, proceeds from the exercise of stock warrants were $4.6 million, proceeds from notes payable, related party were
$0.3 million, and from long-term debt of $0.5 million. This was offset by payments on notes payable and long-term debt of $2.5 million, net payments to the line of credit of $1.0 million, payments of deferred financing costs of $0.4 million, and
payments on line of credit, related party of $0.7 million.

Our net working capital deficit at December 31, 2007 increased from September 30,
2007 by $9.5 million to $62.6 million, which was attributed largely to our year-to-date fiscal 2008 loss and increase in current maturities of long-term debt and notes payable.

Cash Flows for the Three Months Ended December 31, 2006

For the three months ended December 31,
2006, we used $13.5 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, $0.6 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 $3.6 million for the three months ended December 31, 2006, primarily consisting of $2.4 million proceeds from
restricted cash, and $4.8 million in proceeds from the sale of assets. This was offset by acquisition on product rights and other intangibles of $3.5 million, and 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.



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Funding Requirements

We expect to devote substantial resources to further our commercialization efforts for our late-stage clinical products in our Biopharmaceutical Products and Services division, including regulatory approvals of SinuNase, BiovaxID and
Revimmune, as well as the commercial launch of additional pharmaceutical products. Our future funding requirements and our ability to raise additional capital will depend on factors that include:



| |  | the timing and amount of expense incurred to complete our clinical trials;
|- |  | --------------------------------------------------------------------------



| |  | the costs and timing of the regulatory process as we seek approval of our products in development;
|- |  | --------------------------------------------------------------------------------------------------



| |  | the advancement of our products in development;
|- |  | -----------------------------------------------



| |  | the timing, receipt and amounts of milestone payments to our existing development partners;
|- |  | -------------------------------------------------------------------------------------------



| |  | our ability to generate new relationships with industry partners whose business plans seek long-term commercialization opportunities which allow for up-front
deposits or advance payments in exchange for license agreements;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the timing, receipt and amount of sales, if any, from our products in development in our Biopharmaceutical Products and Services segment;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | the timing, receipt and amount of sales in our Specialty Pharmaceuticals segment;
|- |  | ---------------------------------------------------------------------------------



| |  | the cost of manufacturing (paid to third parties) of our licensed products, and the cost of marketing and sales activities of those products;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | the continued willingness of our vendors to provide trade credit on historical terms;
|- |  | -------------------------------------------------------------------------------------



| |  | the costs of prosecuting, maintaining, and enforcing patent claims, if any claims are made;
|- |  | -------------------------------------------------------------------------------------------



| |  | our ability to maintain existing collaborative relationships and establish new relationships as we advance our products in development; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | the receptivity of the financial market to biopharmaceutical companies.
|- |  | -----------------------------------------------------------------------



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Contractual Obligations and Off-Balance Sheet Arrangements

The following chart summarizes our contractual payment obligations as of December 31, 2007. The long- and short-term debt is reflected as liabilities on our
consolidated balance sheet as of December 31, 2007. 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)         |  | $                      | 46,374 |                 | $ | 28,577             |  | $               | 2,991 |       | $ |  |  | $ | 77,942
|Employment agreements      |  |                        | 1,845  |                 |   | 1,130              |  |                 |      |       |   |  |  |   | 2,975 
|Operating lease agreements |  |                        | 2,349  |                 |   | 3,243              |  |                 | 579   |       |   |  |  |   | 6,171 
|Milestone payments         |  |                        |       |                 |   | 250                |  |                 |      |       |   |  |  |   | 250   
|                           |  |                        |        |                 |   |                    |  |                 |       |       |   |   |  |   |       
|                           |  | $                      | 50,568 |                 | $ | 33,200             |  | $               | 3,570 |       | $ |  |  | $ | 87,338
|                           |  |                        |        |                 |   |                    |  |                 |       |       |   |   |  |   |       



|(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 $8.0 million in fiscal year 2008.

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.

During the three months ended December 31, 2007, we made no milestone payments.

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.



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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.

Part II
OTHER INFORMATION



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

Accent Rx, Inc. complaint:

In October 2002, the Companys wholly-owned subsidiary, Accent RX, Inc, acquired the assets and certain liabilities of American Prescription Providers, Inc. and
American Prescription Providers of New York, Inc., collectively, referred to as APP, which at the time of purchase operated a mail-order specialty pharmacy focused on filling prescriptions for AIDS patients and organ transplants. Following the
purchase of APPs assets, Accent RX operated the mail-order business until it sold the assets of this business in December 2003 to a third-party in an arms length transaction. After the sale of the APP assets, Accent RX ceased to engage
in business, and Accent RX currently has nominal assets. On May 23, 2007, Accent RX was served with a complaint filed in the United States District Court  District of Massachusetts. The action was brought on behalf of the United States by
the Relator Christine Driscoll and on behalf of the States of California, Delaware, Florida, Hawaii, Illinois, Massachusetts, Nevada, Tennessee, Texas, and Virginia and the District of Columbia (collectively, the States) by the
Co-Relators Christine Driscoll and Frank Garcia under the states respective qui tam statutes. The complaint alleges violations of the Federal False Claims Act (FCA) and of analogous state qui tam statutes. The complaint identifies
APP and other defendants as preferred providers of Serostim, a drug manufactured by Serono, Inc. and used to treat AIDS-associated weight loss, wasting, and/or catabolism. The plaintiffs allege that, although Serono, Inc. gave the
preferred providers a 3.75 percent discount on the price of Serostim, the preferred providers billed the Health Care Finance Administration of the United States (HCFA) and other third party payors for the full price of Serostim. The
complaint further alleges that the preferred providers violated the Anti-Kickback Statute of the Medicare-Medicaid Antifraud and Abuse Amendments by (i) failing to disclose the discount to the HCFA and the other third party payors (receipt of
illegal remuneration) and (ii) submitting claims for payment to HCFA for the full price of Serostim rather than the discounted price (submitting false claims). Additionally, the complaint alleges that, through these violations and by accepting
payments from HCFA for the full price of Serostim, the preferred providers violated the Federal False Claim Act. The complaint goes on to allege that the actions of the preferred providers violated the California False Claims Act, the Delaware False
Claims and Reporting Act, the District of Columbia Procurement Reform Amendment Act, the Florida False Claims Act, the Hawaii False Claims Act, the Illinois Whistleblower Reward and Protection Act, the Nevada False Claims Act, the Tennessee Medicaid
False Claims Act, the Texas Medicaid Fraud Prevention Law, and the Virginia Fraud Against Taxpayers Act. The complaint requests, among other things, that each of the preferred providers (i) be ordered to repay and disgorge all money received as
a result of its violations of the Federal False Claim Act, (ii) be assessed and ordered to pay an amount equal to three times the amount of money received as a result of its violations of the Federal False Claim Act, and (iii) be required
to pay damages in an amount equal to three times the amount of damages that California, Delaware, the District of Columbia, Florida, Hawaii, Illinois, Massachusetts, Nevada, Tennessee, and Virginia have sustained as a result of its actions. We
intend to defend this action.



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Analytica litigation:

The Companys subsidiary, Analytica International, Inc. 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 alleging that he is owed contractual bonus and other compensation and seeking damages for wrongful
termination against Analytica, the Company and an officer of the Company. We 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. In June
2007, the Court granted our motion and dismissed defendants counterclaims against our officer with prejudice, and dismissed all other counterclaims as well, allowing defendant an opportunity to replead by July 31, 2007. The defendant
refiled an Amended Counterclaim in July 2007, and we have filed a motion seeking to dismiss virtually all claims in the Amended Counterclaim. 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.

Based upon advice of counsel and its own analysis, we believe that
there is no likelihood of exposure to material liability on account of these pending litigations. Therefore, no amounts are currently accrued for the above litigations.

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



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

We anticipate that we will need substantial additional funding in the future, and if we are
unable to raise capital when needed, we would be forced to delay, reduce, or eliminate our product development programs or commercialization efforts.

Developing biopharmaceutical products, conducting clinical trials, establishing manufacturing capabilities, and marketing developed products is expensive. We anticipate that we will need to raise substantial additional capital in the future
in order to complete the commercialization of SinuNase following the submission of the NDA and to fund the development and commercialization of Revimmune and our specialty pharmaceutical product candidates. We have received a report from our
independent registered public accounting firm on our consolidated financial statements for our fiscal years ended September 30, 2007, 2006, 2005, in which our auditors have included explanatory paragraphs indicating that our significant net
losses and working capital deficiency cause substantial doubt about our ability to continue as a going concern. Based on our current operating plans, we expect, but can not be certain, that our existing capital and cash flow from operations,
together with borrowing availability under our existing lines of credit, will be sufficient to fund our operations and development activities, excluding the operations and development activities of Biovest, through the availability of the unblinded
results of the first SinuNase Phase 3 clinical trial and the unblinded interim results of the BiovaxID Phase 3 clinical trial.

We expect to
finance future cash needs through public or private equity offerings, debt financings, or corporate collaboration and licensing arrangements or the sale of assets that are considered to not be critical to our development of SinuNase or Revimmune. To
the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. We cannot be certain that additional funding will be
available on acceptable terms, or at all, in which case we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or curtail some of our commercialization efforts. We may seek to access the
public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at this time.



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Biovest will need substantial additional funding from sources other than the Company in the future, and if Biovest is
unable to raise capital when needed, it would be forced to delay, reduce, or eliminate its product development programs or commercialization efforts or consider disposing of assets or divisions not deemed critical to the ongoing clinical trial of
BiovaxID.

Our majority owned subsidiary Biovest received a report from its independent registered public accounting firm on Biovests
consolidated financial statements for its fiscal years ended September 30, 2007 and 2006 in which its auditors have included explanatory paragraphs indicating that Biovests significant net losses and working capital deficiency cause
substantial doubt about Biovests ability to continue as a going concern. As of December 31, 2007, Biovest had cash of $3.5 million, of which $3.2 million was restricted (Note 4). Under the terms of certain agreements, the Company is
prohibited from providing any further loans to or investments in to Biovest. Accordingly, Biovest will need to raise substantial additional capital from sources other than the Company in the near future in order to continue the clinical trials for
BiovaxID and continue its operations. Biovest is currently seeking additional financing from a number of sources, including the sale of Biovest equity or debt securities, strategic collaborations, recognized research funding programs, as well as
domestic and/or foreign licensing of Biovests vaccine. Biovest management is currently in the process of exploring various financing alternatives, and has hired investment consultants to assist in these efforts. If our Biovest subsidiary
raises funds through the issuance of equity securities, our equity interest in Biovest could be substantially diminished. In addition, if Biovest raises additional funds through collaboration and licensing arrangements, it may be necessary to
relinquish some rights to our technologies or our product candidates or grant licenses on terms that are not favorable to us. We cannot be certain that additional funding will be available to Biovest on acceptable terms, or at all.



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

Unregistered Sales of Equity Securities

On November 1, 2007, the Company entered into an understanding with Ellenoff Grossman & Schole, LLP (Ellenoff), whereby
the Company agreed to issue to Ellenoff and Ellenoff agreed to accept a total of 52,435 shares of the Companys common stock in full payment of outstanding invoices and for future services.

On February 1, 2008, the Company entered into an understanding with Nixon Peabody, LLP, whereby the Company agreed to issue to Nixon Peabody and Nixon Peabody
agreed to accept a total of 121,952 shares of the Companys common stock in full payment of outstanding invoices.



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

None.



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

None



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

None



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

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



|       |  |                                                                                                                                                                  
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description of Document                                                                                                                                          
|10.1   |  | Letter Termination of the Amended and Restated Distribution and Supply Agreement between Respirics, Inc. and TEAMM Pharmaceuticals, Inc. dated February 12, 2008.
|       | 
|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, 2008 |  | /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, 2008 |  | /s/ Alan M. Pearce                                            
|                        |  | Alan M. Pearce                                                
|                        |  | Chief Financial Officer; Director                             
|                        |  | (Principal Financial Officer and Principal Accounting Officer)



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