Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

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 March 31, 2006

¨	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 an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x

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

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, or a non-accelerated filer. (Check one):

Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x

As of March 31, 2006, the aggregate market value of the voting stock held by non–affiliates of the registrant, computed by reference to the last sale price of such stock as of such date on the Nasdaq National Market, was approximately $73,939,043.

As of May 15, 2006, there were 29,156,751 shares of the registrant’s Common Stock outstanding.

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, 2005 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.

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Accentia Biopharmaceuticals, Inc.

INDEX TO FINANCIAL STATEMENTS


Accentia Biopharmaceuticals, Inc. and Subsidiaries Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2006 and September 30, 2005		4

Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005, and the six months ended March 31, 2006 and 2005		7

Condensed Consolidated Statements of Stockholders’ Deficit for the six months ended from October 1, 2005 to March 31, 2006		8

Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2006 and 2005		10

Notes to Condensed Consolidated Financial Statements		11

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31, 2006 (Unaudited)			September 30, 2005 (Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	744,796		$	2,763,452
Cash restricted		7,799,000			—
Accounts receivable:
Trade, net of allowance for doubtful accounts of $345,458 and $150,000 at March 31, 2006 and September 30, 2005, respectively		2,947,327			3,715,488
Stockholder		829,991			676,752
Inventories		1,324,139			1,013,896
Inventory deposits		759,800			844,740
Unbilled receivables		1,181,204			690,886
Prepaid expenses and other current assets		834,761			385,241

Total current assets		16,421,018			10,090,455

Goodwill		1,193,437			1,193,437

Other intangible assets:
Product rights		22,281,334			21,216,334
Non-compete agreements		2,104,000			2,104,000
Trademarks		1,634,658			1,631,474
Purchased customer relationships		1,268,950			1,268,950
Other intangible assets		648,288			648,040
Accumulated amortization		(6,833,405	)		(5,631,122	)

Total other intangible assets		21,103,825			21,237,676

Furniture, equipment and leasehold improvements, net		1,610,579			1,775,819
Deferred offering costs		—			821,573
Deferred finance costs		1,660,895			1,497,012
Other assets		138,337			64,621

	$	42,128,091		$	36,680,593

(Continued)

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(CONTINUED)


	March 31, 2006 (Unaudited)		September 30, 2005 (Restated) (Audited)
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current maturities of long-term debt:
Related party	$	1,310,940	$	7,414,742
Other		7,189,995		8,888,847
Lines of credit		9,362,265		5,052,604
Accounts payable (including related party of $303,020 at March 31, 2006 and $346,423 at September 30, 2005, respectively)		5,325,839		5,519,626
Accrued expenses (including related party accrued interest of $74,850 at March 31, 2006 and $147,983 at September 30, 2005, respectively)		9,487,764		6,917,721
Unearned revenues		1,284,158		863,096
Product development obligations (including $-0- and $200,000 due to related party at March 31, 2006 and September 30, 2005)		300,000		500,000
Dividends payable		616,186		575,447
Stockholder note payable		350,000		350,000
Customer deposits		710,653		828,050
Deposits, related party		3,000,000		3,000,000
Derivative liability		—		10,802,825

Total current liabilities		38,937,800		50,712,958

Long-term debt, net of current maturities:
Related party		—		3,661,917
Other		7,386,881		4,902,666
Line of credit, related party		4,180,000		4,180,000
Other liabilities, related party		2,400,505		2,574,865

Total liabilities		52,905,186		66,032,406

(Continued)

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(CONTINUED)


	March 31, 2006 (Unaudited)			September 30, 2005 (Restated) (Audited)
Commitments and contingencies (Note 14)
Stockholders’ deficit:
Common stock, $0.001 par value; 300,000,000 shares authorized; 29,121,950 and 5,170,421 shares issued and outstanding at March 31, 2006 and September 30, 2005, respectively.		29,130			5,170
Preferred stock, Series A, $1.00 par value; 10,000,000 shares authorized; -0- and 2,937,013 shares issued and outstanding at March 31, 2006 and September 30, 2005, respectively.		—			6,183,000
Preferred stock, Series B, $1.00 par value; 30,000,000 shares authorized; -0- and 3,895,888 shares issued and outstanding at March 31, 2006 and September 30, 2005, respectively.		—			239,919
Preferred stock, Series C, $1.00 par value; 10,000,000 shares authorized; -0- and 3,562,607 shares issued and outstanding at March 31, 2006 and September 30, 2005, respectively.		—			7,500,000
Preferred stock, Series D, $1.00 par value; 15,000,000 shares authorized; -0- and 4,672,482 shares issued and outstanding at March 31, 2006 and September 30, 2005, respectively.		—			219,769
Preferred stock, Series E, $1.00 par value; 60,000,000 shares authorized; -0- and 20,506,178 shares issued and outstanding at March 31, 2006 and September 30, 2005, respectively.		—			49,789,554
Additional paid-in capital		121,488,029			24,851,870
Accumulated deficit		(132,294,254	)		(118,141,095	)

Total stockholders’ deficit		(10,777,095	)		(29,351,813	)
	$	42,128,091		$	36,680,593

See notes to consolidated financial statements.

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	For the Three Months Ended						For the Six Months Ended
	2006			2005			2006			2005
Net Sales:
Products	$	3,559,402		$	3,742,990		$	5,706,080		$	5,383,211
Services		3,030,596			2,778,714			6,074,058			5,321,495
Related party, products		463,928			1,053,488			2,091,753			1,387,605

Total net sales		7,053,926			7,575,192			13,871,891			12,092,311

Cost of sales:
Products		1,460,562			1,169,321			2,389,123			2,227,924
Services		1,190,053			1,003,837			2,137,265			2,159,565

Total cost of sales (exclusive of amortization of acquired product rights)		2,650,615			2,173,158			4,526,388			4,387,489

Gross margin		4,403,311			5,402,034			9,345,503			7,704,822

Operating expenses:
Research and development		2,964,234			2,242,376			6,030,124			3,608,766
Research and development, related party		—			282,979			93,982			775,143
Sales and marketing		3,598,754			3,539,686			6,858,701			7,390,293
General and administrative		5,916,730			5,293,604			11,236,019			9,828,808
Royalties		255,370			518,269			819,762			619,476
Stock-based compensation, general and administrative		804,530			74,065			850,963			281,325

Total operating expenses		13,539,618			11,950,979			25,889,551			22,503,811

Operating loss		(9,136,307	)		(6,548,945	)		(16,544,048	)		(14,798,989	)
Other income (expense):
Interest expense, net		(905,064	)		(153,428	)		(1,520,282	)		(390,405	)
Interest expense, net, related party		(329,334	)		(706,532	)		(720,097	)		(1,047,360	)
Loss on extinguishment of debt, related party		—			—			—			(2,361,894	)
Derivative gain (loss)		(3,480,442	)		—			2,883,035			—
Other income (expense)		53,614			(80,158	)		97,033			(83,265	)

Loss from continuing operations before income taxes		(13,797,533	)		(7,489,063	)		(15,804,359	)		(18,681,913	)
Income tax benefit		—			—			—

Net loss from continuing operations		(13,797,533	)		(7,489,063	)		(15,804,359	)		(18,681,913	)
Absorption of prior losses against minority interest		—			—			1,689,800			— —

Net loss		(13,797,533	)		(7,489,063	)		(14,114,559	)		(18,681,913	)

Constructive preferred stock dividend		—			(46,857	)		—			(4,949,031	)
Preferred stock dividends, other		—			(176,002	)		(40,739	)		(294,069	)

Loss attributable to common stockholders	$	(13,797,533	)	$	(7,711,922	)	$	(14,155,298	)	$	(23,925,013	)

Weighted average shares outstanding, basic and diluted		29,124,526			5,161,589			24,863,557			5,127,793
Per share amounts, basic and diluted:
Loss attributable to common stockholders per common share for:
Continuing operations and minority interest	$	(0.47	)	$	(1.49	)	$	(0.57	)	$	(4.67	)

See notes to consolidated financial statements.

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD FROM SEPTEMBER 30, 2005 TO March 31, 2006

(UNAUDITED)


	Common Stock			Preferred Stock					Additional Paid-In Capital		Accumulated Deficit			Total
	Shares	Amount		Shares		Amount			Additional Paid-In Capital		Accumulated Deficit			Total
Balances, September 30, 2005	5,170,421	$	5,170	35,574,168		$	63,932,242		$	24,851,870	$	(118,141,095	)	$	(29,351,813	)
Conversion of preferred shares to common stock	20,910,907		20,911	(35,574,168	)		(63,932,242	)		63,911,331		—			—
Issuance of common stock for cash at IPO	2,400,000		2,400	—			—			14,738,962		—			14,741,362
Biovest notes converted in Accentia common stock	493,842		494	—			—			3,740,303		—			3,740,797
Issuance of common stock for cash – options exercise	11,958		12	—			—			26,709		—			26,721
Issuance of common stock cashless exercise	142,615		143	—			—			—		—			143
Other comprehensive income	—		—	—			—			—		2,139			2,139
Stock-based compensation	—		—	—			—			850,963		—			850,963
Preferred stock dividends	—		—	—			—			—		(40,739	)		(40,739	)
Reclassification of derivative liability to equity	—		—	—			—			8,467,353		—			8,467,353
Issuance of warrants for financing costs	—		—	—			—			4,817,797		—			4,817,797
Issuance of common stock warrants for services	—		—	—			—			82,741		—			82,741
Net loss for the period	—		—	—			—			—		(14,114,559	)		(14,114,559	)

Balances, March 31, 2006	29,129,743	$	29,130	—		$	—		$	121,488,029	$	(132,294,254	)	$	(10,777,095	)

(Continued)

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE PERIOD FROM SEPTEMBER 30, 2005 TO MARCH 31, 2006

(UNAUDITED)

(continued)


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

Balances, March 31, 2006	—		$	—		—		$	—		—		$	—		—		$	—		—		$	—		$	—

See notes to consolidated financial statements.

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Six Months Ending March 31,
	2006			2005
Cash flows from operating activities:
Net loss	$	(14,114,559	)	$	(18,681,913	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Loss on sale of assets		113,186			—
Derivative gain		(2,883,035	)		—
Depreciation		350,976			320,899
Amortization		1,160,807			1,374,419
Stock-based compensation		850,963			281,325
Accretion of debt discounts		761,242			—
Loss on conversion of stockholder debt to preferred stock		—			2,516,494
Issuance of common stock warrants		82,741			—
Other non-cash charges		(63,560	)		375,024
Increase (decrease) in cash resulting from changes in:
Accounts receivable		614,936			(1,336,956	)
Inventories		(310,242	)		(250,221	)
Inventory deposits		84,940			—
Deferred offering costs		818,073			—
Unbilled receivables		(484,962	)		87,769
Prepaid expenses and other current assets		(333,855	)		(15,008	)
Other assets		99,295			(29,744	)
Accounts payable		(193,790	)		(1,503,857	)
Accrued expenses		3,090,112			(743,584	)
Unearned revenues		415,707			(28,157	)
Customer deposits		(156,195	)		72,528

Net cash flows from operating activities		(10,097,220	)		(17,560,982	)

Cash flows from investing activities:
Proceeds from sale of assets		14,803			—
Acquisition of furniture, equipment, and leasehold improvements		(385,805	)		(210,848	)
Cash paid for acquisition of product rights and other intangibles		(1,268,431	)		(3,456,061	)

Net cash flows from investing activities		(1,639,433	)		(3,666,909	)

Cash flows from financing activities:
Payments on notes payable and long-term debt		(7,592,115	)		(1,908,049	)
Proceeds from issuance of common stock		14,741,362			602,240
Proceeds from issuance of preferred stock		—			20,488,603
Proceeds from the exercise of stock options		26,721			—
Due from related party		(12,093	)		—
Payment of preferred stock dividends		—			(316,311	)
Proceeds from line of credit		4,243,922			1,489,500
Payments line of credit		—			(250,000	)
Proceeds from minority interest investment		(1,689,800	)		—

Net cash flows from financing activities		9,717,997			20,105,983

Net change in cash and cash equivalents		(2,018,656	)		(1,121,908	)

Cash and cash equivalents at beginning of period		2,763,452			1,904,938
Cash and cash equivalents at end of period	$	744,796		$	783,030

Supplemental cash flow information:
Cash paid for:
Interest	$	1,127,687		$	473,500
Income taxes		—			—

ACCENTIA BIOPHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIX MONTHS ENDED MARCH 31, 2006 AND 2005

1. Description of the company

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

2. Significant accounting policies

Basis of presentation

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

Operation results for the three and six months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year. For Further information, refer to the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

Principles of consolidation

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

Use of estimates

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

Cash and cash equivalents

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

Restricted cash

Restricted cash consists of proceeds from the Biovest financing from Laurus Master Fund, Ltd. as discussed in Note 3. Such proceeds were being held in escrow at March 31, 2006 pending completion of the New Market Tax Credit transactions discussed in Note 15 and are restricted for usage to fund future working capital needs, the entering into other equity transactions, and the redemption of Accentia common stock.

Inventories

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

Furniture, equipment and leasehold improvements

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

Goodwill and intangible assets

Intangible assets include trademarks, product rights, noncompete agreements, technology rights, purchased customer data relationships and patents, and are accounted for based on Financial Accounting Standard Statement No. 142 Goodwill and Other Intangible Assets (“FAS 142”). In that regard, goodwill and intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company has identified certain trademarks, product rights and technology rights as intangible assets with indefinite lives and, therefore, these assets are not amortized. The company did not recognize an impairment during the three months or six months ended March 31, 2006 or 2005

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


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

Valuation of Derivative Instruments

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

Income taxes

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

Net loss per common share

The Company had net losses for all periods presented in which potential common shares were in existence. Diluted loss per share assumes conversion of all potentially dilutive outstanding common stock options, warrants, and convertible debt. 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 outstanding options, warrants and convertible debt is anti-dilutive.

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


	For the Six Months Ended
	March 31, 2006			March 31, 2005
Numerator:
Net loss applicable to common stockholders	$	(14,155,298	)	$	(23,925,013	)
Denominator:
For basic loss per share—weighted average shares		24,863,557			5,127,793
Effect of dilutive securities		—			—
Weighted average shares for dilutive loss per share		24,863,557			5,127,793
Net loss per share applicable to common stockholders, basic and dilutive	$	(0.57	)	$	(4.67	)
EPS effect of preferred dividends	$	0.00		$	(1.02	)

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


	For the Six Months Ended
	March 31, 2006	March 31, 2005
Options and warrants to purchase common stock	3,603,149	1,808,725
Preferred stock convertible to common stock	—	33,040,643
Preferred stock options and warrants convertible to preferred which is then convertible to common	—	8,790,624

Stock based compensation

In December 2004, the Financial Accounting Standards Board issued Statement No. 123R (FAS 123R), which revised FAS 123, “Accounting for Stock-Based Compensation,” by requiring the expensing of share-based compensation based on the grant-date value of the award. FAS 123 had provided companies the option of expensing such awards or merely disclosing the pro forma effects of such expensing in the notes to financial statements. As of October 1, 2002, Accentia began expensing employee stock options in accordance with FAS 123 and its related amendments. Accentia has now adopted FAS 123R. There are currently no significant differences between FAS 123 and FAS 123R; however FAS 123R also requires that an additional caption in the financial section of the Statements of Consolidated Cash Flows to present separately the excess tax benefits related to share based-payments. Because the Company has losses and deferred tax benefits of such losses would be fully reserved, they have not yet inventoried such assets.

Severance Claim

In December 2005 Biovest settled any and all severance claims from its former Chief Executive Officer and former director by issuing 800,000 shares of restricted common stock. In addition, the Company will pay this former officer and director $200,000 cash to be paid in bi-weekly installments at the same rate as his 2005 compensation. The Company accrued all costs of the settlement as of September 30, 2005 as compensation expense.

Recent accounting pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140” which is effective for fiscal years beginning after September 15, 2006. The statement was issued to clarity the application of FASB Statement No. 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments. The

Company is currently evaluating the new statement to determine if it will have an impact on the determination of our financial results.

In March 2006, the FASB issued Statement of Financial Accounting Standards No, 156, “Accounting for Services of Financial Assets – an amendment of FASB Statement No. 140” which is effective for fiscal years beginning after September 15, 2006. This statement was issued to simplify the accounting for servicing and to reduce the volatility that results from using different measurement attributes. The Company is currently evaluating the new statement to determine if it will have an impact on the determination of our financial results.

Reclassification:

Certain amounts in the 2005 financial statements have been reclassified to conform to the 2006 presentation.

3. Liquidity and management’s plans

The Company is projecting that operating cash flow deficits for the first two quarters of fiscal 2006 will be offset by net cash inflows from financing activities, such as debt or equity placements, accessing existing or new credit facilities, receipt of repayment of inter-company demand loans and from proceeds from the Company’s IPO completed in the first quarter of fiscal 2006. At March 31, 2006, the Company had $8.5 million in cash on hand, of which $7.8 million is cash held by its subsidiary, Biovest pending the closing of proposed financings by Biovest, including financings based on tax enhanced programs such as the New Market Tax Credit program. $3.3 million is potential availability under existing lines of credit, and $8.2 million, which was reduced to $7.2 million in April 2006 in demand note receivable from Biovest. Upon Biovest obtaining additional financing, which it is seeking to consummate in calendar 2006 and equity offerings, debt financing, corporate collaborations, or licensing transactions, it is anticipated that Biovest will repay some or all of the outstanding demand notes and Biovest will commence the funding of its ongoing operations without additional inter-company loans from Accentia. Of the restricted cash, $2.5 million was released in April 2006 upon the closing of a financing by Biovest which was based on a tax enhancement program.

Based on current operating plans, and a private equity offering completed May 2006, the Company anticipates that its existing capital resource, and cash flow from operations, together with potential future equity and debt financings by the Company and its subsidiary, Biovest, borrowing availability under its lines of credit and receipt or repayment of demand intercompany debt and the potential disposition of assets, products, or operations will be sufficient to fund its operation and development activities through the second quarter of fiscal year 2007. The company is currently engaged in an effort to restructure certain of its existing indebtedness in order to increase available funds on a near-term basis, and the Company also intends to seek additional financing through one or more private equity offerings, addition debt financings, corporate collaboration licensing transactions or disposition of assets, products or operations. The Company cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available from the foregoing sources, or if the Company determines it to otherwise be in the Company’s best interest, the Company may consider additional strategic financing options, including sales of assets or business units ( such as specialty pharmaceuticals, market services or cell culture equipment) that are non-essential to the ongoing development or future commercialization of SinuNase, or the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs or curtail some of its commercialization efforts.

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

4. Inventories

Inventories consist of the following:


	March 31, 2006		September 30, 2005
Pharmaceutical products held for sale	$	1,041,370	$	814,862
Finished goods, other, net of $0.3 million allowance for obsolescence		36,730		35,787
Work-in-process		121,475		120,977
Raw materials		124,564		42,270

		1,324,139		1,013,896

5. Unbilled receivables and unearned revenues

Unbilled receivables and unearned revenues are as follows:


	March 31, 2006			September 30, 2005
Costs incurred on uncompleted service contracts	$	8,750,198		$	7,020,113
Estimated earnings		9,040,682			7,286,296

		17,790,880			14,306,409
Less billings to date		(17,893,834	)		(14,478,619	)

	$	(102,954	)	$	(172,210	)

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


	March 31, 2006			September 30, 2005
Unbilled receivables	$	1,181,204		$	690,886
Unearned revenues		(1,284,158	)		(863,096	)

	$	(102,954	)	$	(172,210	)

6. Other intangible assets

The company’s Product Rights increased by $1.1 million during the six months ended March 31, 2006. This increase represents a payment of $0.5 million to Collegium for AllerNase, a payment of $0.1 million to Mayo for SinuNase, and a payment of $0.5 million to Argent for MD-Turbo.

7. Furniture, equipment and leasehold improvements

Furniture, equipment and leasehold improvements consist of the following:


	March 31, 2006			September 30, 2005
Furniture	$	255,073		$	253,130
Office and laboratory equipment		2,800,445			2,737,291
Leasehold improvements		900,567			791,687

		3,956,085			3,782,108
Less: accumulated depreciation and amortization		(2,345,506	)		(2,006,289	)

	$	1,610,579		$	1,775,819

8. Lines of credit

Lines of credit consists of the following:


	March 31, 2006		September 30, 2005
Secured revolving note of which $2.5 million is convertible due to Laurus Master Fund, Ltd., interest at prime plus 2% (9.75% at March 31, 2006); matures April 2008; principal and accrued interest convertible at fixed conversion price of $6.80 per share (See Note 9)	$	5,362,265	$	5,052,604
Bridge note, related party interest at 4.25%, unsecured, matures August 2007 or completion of a debt or equity financing resulting in more than $35.0 million in net proceeds (a)		4,180,000		4,180,000
Revolving credit agreement, interest at prime rate (7.75% at March 31, 2006); maturity in 2007; secured by Company’s accounts receivable and guarantee of major stockholder		4,000,000		—

	$	13,542,265	$	9,232,604
Less current maturities		9,362,265		5,052,604

	$	4,180,000	$	4,180,000

(a)

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

Under the August 2005 bridge loan agreement with Hopkins II, the Company has the unconditional right to borrow up to $5.0 million in the aggregate upon ten days’ prior written notice to Hopkins II, provided that the Company’s right to borrow any amounts in excess of $5.0 million is conditioned upon the Company either being in default under its credit facility with Laurus or having less than $5.0 million cash on hand at the time of the advance. As of March 31, 2006, a total of $4.2 million had been borrowed under this bridge loan. The loan is unsecured and bears interest at a rate equal to 4.25% per annum, simple interest. No payments of principal or interest are due until the maturity date of the loan.

Weighted average interest on all short-term borrowings aggregated 7.39% and 6.42% at March 31, 2006 and September 30, 2005 respectively. At March 31, 2006, the Company has an aggregate of $3.3 million available under its lines of credit.

9. Long-term debt

Long-term debt consists of the following:


	March 31, 2006			September 30 2005
Related party:
Term loan due to McKesson, a holder of shares of common stock and major supplier, payable at 10% contract rate (a)	$	—		$	3,900,000
Note due to McKesson, interest payable monthly at 10% (b)		800,000			2,095,414
Notes payable, former Biovest management, interest at 7%; due in June 2006; working capital loans due in fiscal 2006; bridge financing due in fiscal year 2006; and other notes due in installments through 2006(c)		445,888			4,439,328
Accrued interest (c)		65,052			641,917

		1,310,940			11,076,659
Less current maturities		(1,310,940	)		(7,414,742	)

	$	—		$	3,661,917

Other:
Convertible amortizing term note due to Laurus Master Fund, LTD., interest payable monthly at prime rate plus 4%; due April 2008 (d)(g)	$	6,273,476		$	6,496,127
Note payable, Harbinger Mezzanine Partners, LP, net of discount; secured by assets of TEAMM; interest payable monthly at 13.5%; $5.0 million principal balance matures June 2006 (e)		4,842,122			6,589,854
Convertible notes payable, Biovest bridge financing, due in 2006		—			100,000
Convertible notes payable, Biovest 2000 bridge financing, interest at 10%, due in 2006(f)		175,469			175,469
Note payable, Laurus Master Fund, Ltd. amortizing term note, interest payable monthly at the greater of prime rate plus 2% or 9%, due March 31, 2009 (g)		2,980,783			—
Note payable, former employee settlement		195,198			—
Other		109,828			119,050
Long term accrued interest(c)		—			311,013

		14,576,876			13,791,513
Less current maturities		(7,189,995	)		(8,888,847	)

	$	7,386,881		$	4,902,666

Footnotes to long-term debt

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

(b)	McKesson note was paid down to $0.8 million during the six months ended March 31, 2006, balance is due July 2006.

(c)

Note as of March 31, 2006 matures in 2006, accruing interest at 7.5% and paid monthly. Collateralized by certain assets of Biovest; convertible at the option of the holder into Biovest common stock (at $0.25 per share) or Accentia common stock (at a discount of $1.60 of the $8.00 IPO offering price). $5.0 million of notes as of September 30, 2005, due in 2007, were converted to equity during the three months ended December 1, 2005. Former legal counsel note of $0.5 million was paid in full in April 2006.

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

(e)	Note was paid down to $4.8 million (net of discount) as of March 31, 2006, balance is due June 30, 2006.

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

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

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


Years ending March 31,
2007	$	10,983,400
2008		6,470,651
2009		5,180,280

		22,634,331
Less unamortized discount		(8,057,455	)

Total	$	14,576,876

The Laurus secured revolving note and term note is shown on the balance sheet under the following accounts:


Principal balance of notes	$	15,000,000
Less reduction for:
Fair value of beneficial conversion of options		(4,413,514	)
Fair value of warrants		(3,989,610	)

Recorded at closing		6,596,876
Accretion of discount (interest expense) through December 31, 2005 using effective interest method		897,606
Loss on extinguishment of debt		4,808,782
Debt payments		(667,523	)

Carrying value at March 31, 2006	$	11,635,741

As presented on balance sheet:
Current maturities of long-term debt-other	$	1,296,780
Lines of credit-current		5,362,265
Long-term debt, net of current maturities-other		4,976,696

	$	11,635,741

Derivative gain (loss) in the accompanying 2006 statement of operations associated with the above Laurus notes is related to the individual derivatives as follows:


	For the three months ended March 31, 2006		For the six months ended March 31, 2006
Free standing warrants	(631,890	)	792,072
Embedded beneficial conversion option	(2,848,552	)	2,090,963

	(3,480,442	)	2,883,035

10. Related party transactions

Accounts receivable, stockholder

Accounts receivable stockholder at March 31, 2006 and September 31, 2005 consist of amounts due from McKesson, a holder of common stock. These amounts are due in accordance with customary trade terms in the Specialty Pharmaceuticals segment.

Stockholder Note payable

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

11. Stockholders’ deficit

During the six months ended March 31, 2006, 100% of preferred stock was converted to the following shares of common stock at the initial public offering date (November 2, 2005):


Shares of Series A preferred stock		2,937,013
Shares of Series B preferred stock		1,990,796
Shares of Series C preferred stock		1,478,482
Shares of Series D preferred stock		2,214,746
Shares of Series E preferred stock		12,289,870

Total common shares issued upon conversion of preferred stock		20,910,907

In addition to the conversion of preferred shares above, the following shares of common stock were issued during the six months ended March 31, 2006:

142,615 shares upon the exercise of warrants

493,842 shares upon the conversion of debt

11,958 upon the exercise of stock options

12. Operational results for Biovest


	For the three months ended March 31,
	2006						2005
	Biovest			Consolidated without Biovest			Biovest			Consolidated without Biovest
Net sales	$	2,288,996		$	4,764,930		$	1,537,670		$	6,037,522
Cost of sales		1,228,539			1,422,076			1,016,919			1,156,239

Gross margin		1,060,457			3,342,854			520,751			4,881,283
Operating expenses		3,683,551			9,856,067			3,006,987			8,943,992

Loss from operations		(2,623,094	)		(6,513,213	)		(2,486,236	)		(4,062,709	)
Interest expense, net		(161,043	)		(1,073,355	)		(99,186	)		(760,774	)
Other income (expense)		5,341			(3,432,169	)		—			(80,158	)

Net loss		(2,778,796	)		(11,018,737	)		(2,585,422	)		(4,903,641	)
Dividends		—			—			—			(222,859	)

Loss attributable to common shareholders	$	(2,778,796	)	$	(11,018,737	)	$	(2,585,422	)	$	(5,126,500	)

Weighted average shares outstanding, basic and diluted		29,124,526			29,124,526			5,161,589			5,161,589
Loss attributable to common stockholder per common share	$	(0.09	)	$	(0.38	)	$	(0.50	)	$	(0.99	)


	For the six months ended March 31,
	2006						2005
	Biovest			Consolidated without Biovest			Biovest			Consolidated without Biovest
Net sales	$	3,373,971		$	10,497,920		$	2,610,468		$	9,481,843
Cost of sales		1,831,442			2,694,946			2,219,898			2,167,591

Gross margin		1,542,529			7,802,974			390,570			7,314,252
Operating expenses		7,108,500			18,781,051			5,526,855			16,976,957

Loss from operations		(5,565,971	)		(10,978,077	)		(5,136,285	)		(9,662,704	)
Interest expense, net		(269,633	)		(1,970,746	)		(203,609	)		(1,234,156	)
Other income (expense)		42,841			2,937,227			—			(2,445,159	)
Absorption of prior losses against minority interest		—			1,689,800			—			—

Net loss		(5,792,763	)		(8,321,796	)		(5,339,894	)		(13,342,019	)
Dividends		—			(40,739	)		—			(5,243,100	)

Loss attributable to common stockholders	$	(5,792,763	)	$	(8,362,535	)	$	(5,339,894	)	$	(18,585,119	)

Weighted average shares outstanding, basic and diluted		24,863,557			24,863,557			5,127,793			5,127,793
Loss attributable to common stockholder per common share	$	(0.23	)	$	(0.34	)	$	(1.04	)	$	(3.63	)

13. Segment information

We define our segment operating results as earnings (loss) before general and administrative costs, interest expense, interest income, other income, discontinued operations and income taxes. Inter-segment sales were $-0- and $0.3 million for the three months ended March 31, 2006 and 2005 respectively. Intersegment sales were $0.1 million and $0.4 million for the six months ended March 31, 2006 and 2005 respectively. Intersegment sales representing the sale of services from the Biopharmaceutical Products and Services segment to the Specialty Pharmaceuticals segment, which have been eliminated from segment sales.

Segment information for the three months ended March 31, 2006 is as follows:


	Biopharmaceutical Products and Services		Specialty Pharmaceuticals		Total
Net sales:
Products	$	1,751,765	$	2,271,565	$	4,023,330
Services		3,030,596		—		3,030,596

Total net sales		4,782,361		2,271,565		7,053,926

Cost of sales:
Products		724,810		735,752		1,460,562
Services		1,190,053		—		1,190,053

Total cost of sales		1,914,863		735,752		2,650,615

Gross margin		2,867,498		1,535,813		4,403,311
Sales and marketing		47,145		3,551,609		3,598,754
Research and development		2,964,234		—		2,964,234
Total assets		29,879,411		12,248,680		42,128,091
Goodwill		1,193,437		—		1,193,437

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


	Biopharmaceutical Products and Services		Specialty Pharmaceuticals		Total
Net sales:
Products	$	1,174,691	$	3,536,286	$	4,710,977
Services		2,864,215		—		2,864,215

Total net sales		4,038,906		3,536,286		7,575,192

Cost of sales:
Products		566,365		584,507		1,150,872
Services		1,022,286		—		1,022,286

Total cost of sales		1,588,651		584,507		2,173,158

Gross margin		2,450,255		2,951,779		5,402,034

Sales and marketing		402,541		3,137,145		3,539,686
Research and development		2,525,355		—		2,525,355
Total assets		23,166,398		10,506,530		33,672,928
Goodwill		1,193,437		—		1,193,437

Segment information for the six months ended March 31, 2006 is as follows:


	Biopharmaceutical Products and Services		Specialty Pharmaceuticals		Total
Net sales:
Products	$	2,623,225	$	5,174,608	$	7,797,833
Services		6,074,058		—		6,074,058

Total net sales		8,697,283		5,174,608		13,871,891

Cost of sales:
Products		1,106,155		1,282,968		2,389,123
Services		2,137,265		—		2,137,265

Total cost of sales		3,243,420		1,282,968		4,526,388

Gross margin		5,453,863		3,891,640		9,345,503

Sales and marketing		410,166		6,448,535		6,858,701
Research and development		6,124,106		—		6,124,106
Total assets		29,879,411		12,248,680		42,128,091
Goodwill		1,193,437		—		1,193,437

Segment information for the six months ended March 31, 2005 is as follows:


	Biopharmaceutical Products and Services		Specialty Pharmaceuticals		Total
Net sales:
Products	$	1,811,214	$	4,959,602	$	6,770,816
Services		5,321,495		—		5,321,495

Total net sales		7,132,709		4,959,602		12,092,311

Cost of sales:
Products		1,200,141		1,027,783		2,227,924
Services		2,159,565		—		2,159,565

Total cost of sales		3,359,706		1,027,783		4,387,489

Gross margin		3,773,003		3,931,819		7,704,822

Sales and marketing		1,120,757		6,269,536		7,390,293
Research and development		4,383,909		—		4,383,909
Total assets		23,166,398		10,506,530		33,672,928
Goodwill		1,193,437		—		1,193,437

Domestic and foreign operations

Total assets and net losses of the Company’s foreign subsidiary were insignificant; however, total revenues aggregated approximately 15% of total revenues of the Company in the three months ended March 31, 2006. This entity, which is based in Germany, operates in the Biopharmaceutical Products and Services Segment and its general segment data is included therein. Segment information on a geographic basis for the three months ended March 31, 2006 is as follows:


	Domestic			International (Europe)			Total
Net sales	$	5,962,003		$	1,091,922		$	7,053,925
Net loss		(13,440,092	)		(357,441	)		(13,797,533	)
Total Assets		39,596,699			2,531,392			42,128,091
Goodwill		893,000			300,437			1,193,437

Total revenues from the foreign subsidiary aggregated approximately 15% of total revenues of the Company in the six months ended March 31, 2006. Segment information on a geographic basis for the six months ended March 31, 2006 is as follows:


	Domestic			International (Europe)			Total
Net sales	$	11,755,015		$	2,116,876		$	13,871,891
Net loss		(13,682,404	)		(432,155	)		(14,114,559	)
Total Assets		39,596,699			2,531,392			42,128,091
Goodwill		893,000			300,437			1,193,437

Segment information on a geographic basis for the three months ended March 31, 2005 is as follows:


	Domestic			International (Europe)		Total
Net sales	$	6,283,024		$	1,292,168	$	7,575,192
Net loss		(7,637,246	)		148,183		(7,489,063	)
Total Assets		30,887,976			2,784,952		33,672,928
Goodwill		893,000			300,437		1,193,437

Segment information on a geographic basis for the six months ended March 31, 2005 is as follows:


	Domestic			International (Europe)		Total
Net sales	$	9,730,060		$	2,362,251	$	12,092,311
Net loss		(18,934,061	)		252,148		(18,681,913	)
Total Assets		30,887,976			2,784,952		33,672,928
Goodwill		893,000			300,437		1,193,437

14. Commitments and contingencies

a) Operating leases

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


Year ending March 31,
2006	$	2,238,277
2007		1,687,357
2008		1,410,298
2009		1,366,086
2010		412,452
Thereafter		233,271

	$	7,347,741

Rent expense for all operating leases was approximately $0.9 million, and $0.8 million, for the three months ended March 31, 2006 and March 31, 2005, respectively. Rent expense for all operating leases was approximately $1.7 million, and $1.1 million, for the six months ended March 31, 2006 and March 31, 2005, respectively.

Rental income from subleases aggregated $0.04 million and $0.1 million in the three months ended March 31, 2006 and March 31, 2005, respectively, and has been included in loss from discontinued operations in the accompanying statements of operations. Rental income from subleases aggregated $0.1 and $0.2 million in the six months ended March 31, 2006 and March 31, 2005, respectively, and has been included in loss from discontinued operations in the accompanying statements of operations

b) Litigation

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

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

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

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

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

15. Subsequent Events

On April 26, 2006, the Company’s majority-owned subsidiary, Biovest International, Inc., (“Biovest”), through its wholly owned subsidiary, Biovax, Inc. (“Biovax”) closed a financing transaction (the “Transaction”) that was structured in an effort to obtain certain perceived advantages and enhancements from the New Market Tax Credit regulations adopted under the auspices of the United States Department of the Treasury in 2002 to provide incentive for investing in businesses located in “qualifying census tracts,” or areas with a median income below the poverty line. Biovax’s Plant (as defined below) is presently located in a qualifying census tract.

In the Transaction, Biovax entered into a Convertible Loan Agreement where Telesis CDE purchased from Biovax a Subordinated Convertible Promissory Note dated as of April 25, 2006 in the principal amount of $11,500,000 (“CDE Loan”). The CDE Loan has a maturity date of October 27, 2013. The following parties were involved in the Transaction: Accentia, Biovest, Biovax, Biolender, Telesis CDE Two, LLC (“Telesis CDE”), Telesis CDE Corporation, Biovax Investment LLC (“Leverage Fund”), U.S. Bancorp Community Investment Corporation (“USBCIC”), First Bank and Laurus Master Fund, Ltd. (“Laurus”).

Under an Asset Purchase 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.

Previously, on March 31, 2006 in contemplation of the Transaction and other potential New Market Tax Credit financings and other financings, Biovest closed a financing transaction with Laurus pursuant to which Laurus purchased from Biovest a secured promissory note in the principal amount of $7.8 million (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, The Analytica Group, Inc. and Laurus also entered into an Amended and Restated Stock Pledge Agreement pledging the Company’s shares of TEAMM Pharmaceuticals, Inc., The Analytica Group, Inc., Biovest and Biolender to secure the obligations owed to Laurus as a result of the Laurus Note and Transaction.

In contemplation of the Transaction, Biovest and Accentia formed Biolender. On April 27, 2006, $2.5 million was released from the Restricted Account created under the Laurus Note to fund the purchase of a 29.5% equity interest in Biolender for the benefit of Biovest. In addition on April 27, 2006, Accentia, the majority shareholder in Biovest, used the proceeds of a $6.0 million intraday loan from First Bank to purchase the remaining 70.5% equity interest in Biolender. The loan obligation was also subject to a First Bank Subordination Agreement with respect to the Laurus obligations as a senior lender. All of the equity interests in Biolender owned by Biovest and Accentia have been pledged to Laurus as collateral to secure the Laurus Note and Accentia’s guarantee of the Laurus Note. On April 27, 2006, Biovest redeemed 10 million shares of its common stock owned of record by Accentia for $6 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.

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

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The CDE Loan has a principal amount of $11.5 million and matures on October 27, 2013. Interest on the outstanding principal amount of the CDE Loan shall accrue at the rate of one percent (1.0%) per annum, non-compounding and shall be payable in arrears on a monthly basis commencing on May 1, 2006 and continuing until maturity. The CDE Loan is unsecured and is guaranteed by Biovest.

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The CDE Loan shall be due and payable by Biovax as follows: (i) Two Hundred Thousand and 00/100 Dollars ($0.2 million) of the outstanding principal amount of the CDE Loan shall be paid in cash on April 25, 2013, and (ii) the remaining Eleven Million Three Hundred Thousand and 00/100 Dollars ($11.3 million) of the outstanding principal amount of the CDE Loan shall be repaid in cash or, in shares of common stock of Biovest on October 27, 2013 at the option of Telesis CDE at the average closing price of the common stock on the NASD OTC Bulletin Board or other market where the common stock is listed for the five business days immediately before the conversion notice supplied by Telesis CDE, or, otherwise, shall be repaid in full in cash.

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Biovest granted a Warrant to Telesis CDE that provides that Telesis CDE Corporation may purchase up to 1,200,000 shares of Biovest’s common stock at an exercise price equal to $1.30 per share, subject to customary adjustments. The Biovest Warrant vests 300,000 shares three years form the closing date of the Transaction and 300,000 shares each year thereafter. The Biovest Warrant will expire on April 24, 2015. Telesis CDE was granted limited registration rights in certain circumstances if the shares of common stock of Biovest owned of record by Accentia are registered.

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In connection with the Transaction, Telesis CDE Corporation received a similar warrant for the purchase of up to 100,000 shares of common stock of Accentia with an exercise price of $9.00 per share with an adjustment downward to $8.00 per share, provided that by April 25, 2007 Telesis CDE Corporation provides for or arranges a suballocation of $8.0 million in New Markets Tax Credits (the “Credits”) for the benefit of Biovest. 70,000 shares of the Accentia Warrant vested as of April 25, 2006, while the other 30,000 shares will vest on the suballocation of the Credits as described above. The Accentia Warrant will expire on April 24, 2013.

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All amounts payable by Biovax under its indemnity to USBCIC are guaranteed by Biovest. In addition, Biovest and certain officers and directors of Accentia, and related trusts (“Individual Guarantors”) guarantee the payment of all obligations under the CDE Loan. Accentia also guarantees the payment of $0.06 million per year on the CDE Loan and any expenses incurred thereunder by Telesis CDE Corporation or the Leverage Fund. Both Biovest and Accentia entered into Indemnity Agreements with the Guarantors.

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 !, BUSINESS” in our annual report on Form 10-K for the fiscal year ended September 30, 2005 and other risks and uncertainties discussed in filings made with the Securities and Exchange Commission.

Overview

We are a biopharmaceutical company focused on the development and commercialization of late-stage clinical products in the therapeutic areas of respiratory disease and oncology. We have two product candidates entering or in Phase 3 clinical trials. One of these product candidates, SinuNase, has been developed at Mayo Clinic as a novel application and formulation of a known therapeutic to treat chronic rhinosinusitis, a long-term inflammatory condition of the paranasal sinuses for which there is currently no FDA approved therapy. We submitted an Investigational New Drug Application, or IND, with the FDA for SinuNase in April 2005, and the IND was accepted by the FDA in May 2005. We expect to commence our Phase 3 trial for the product in 2006. Our other late-stage product candidate, BiovaxID^™, is a patient-specific anti-cancer vaccine focusing on the treatment of follicular non-Hodgkin’s lymphoma. BiovaxID was developed at the National Cancer Institute and is currently in a pivotal Phase 3 clinical trial. In May 2006, the FDA granted fast track status to BiovaxID, which means that the Company is now eligible to submit a biologics license application (BLA) on a rolling basis, allow the FDA to review sections of the BLA in advance of receiving the Company’s full submission and permitting the Company to apply for expedited review of its BLA. In addition to these product candidates, we have a growing specialty pharmaceutical business with a portfolio of currently marketed pharmaceutical products and a pipeline of additional products under development by third parties. In addition to our late-stage product candidates and our specialty pharmaceutical business, we have a broad range of in-house capabilities and resources that we market to third parties and use to develop and commercialize our own products. These capabilities include analytical and consulting services relating to the biopharmaceuticals industry, such as pricing and market assessment, reimbursement strategies, clinical trial services, and outcomes research. We also produce custom biologics and cell culture systems for biopharmaceutical and biotechnology companies, medical schools, universities, hospitals, and research institutions.

Critical Accounting Policies and Estimates

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

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

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

Revenue recognition

Biopharmaceutical Products and Services

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

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

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

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

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

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

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

Specialty Pharmaceuticals

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

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

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

Inventories

Inventories are recorded at the lower of cost or market. We periodically review inventory quantities of raw materials, instrumentation components and disposables on hand, and completed pharmaceutical products in our third-party distribution center, and we record write-downs of inventories to market value based upon contractual provisions and obsolescence, as well as assumptions about future demand and market conditions. If assumptions about future demand change and/or actual market conditions are less favorable than those projected by management, additional write-downs of inventories may be required.

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

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

Valuation of Goodwill and Intangible Assets

Our intangible assets include goodwill, trademarks, product rights, non-compete agreements, technology rights, purchased customer relationships, and patents, all of which are accounted for based on Financial Accounting Standard Statement No. 142 Goodwill and Other Intangible Assets (“FAS 142”). As described below, goodwill and intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with limited useful lives are amortized using the straight-line method over their estimated period of benefit, ranging from two to eighteen and one-half years. We obtain a valuation of all intangibles purchased in any acquisition and undertake an annual impairment analysis. Goodwill is tested for impairment by comparing the carrying amount to the estimated fair value, in accordance with SFAS 142. Impairment exists if the carrying amount is less than its estimated fair value, resulting in a write-down equal to the difference between the carrying amount and the estimated fair value. We have made no impairment adjustments to recorded goodwill. Our carrying value of goodwill at March 31, 2006 and September 30, 2005 was $1.2 million. The values recorded for goodwill and other intangible assets represent fair values calculated by accepted valuation methods. Such valuations require critical estimates and assumptions derived from and which include, but are not limited to: (i) information included in our business plan, (ii) estimated cash flows, (iii) discount rates, (iv) patent expiration information, (vi) terms of license agreements, and (vii) expected timelines and costs to complete any in-process research and development projects to commercialize our products under development.

We capitalized goodwill in the amount of $0.9 million in connection with our acquisition of Analytica in April 2002. In connection with the foreign subsidiary acquisition in December 2003, we initially capitalized goodwill in the amount of $0.6 million based on the fair value of the acquired assets net of assumed liabilities. Following this acquisition, we discovered that the assumed liabilities were

$0.3 million in excess of the amount represented to us in the acquisition agreement. We recorded an impairment to goodwill in the amount of $0.3 million in the fiscal quarter in which the acquisition occurred.

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

Impairment Testing

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

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

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

Purchased In-Process Research and Development

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

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

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

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

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

Stock-Based Compensation

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

In December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”). The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which the employee is required to provide service in exchange for the award.

We use the Black-Scholes options-pricing model to determine the fair value of each option grant as of the date of grant for expense incurred. In applying the Black-Scholes options-pricing model, we assumed no dividend yield, risk-free interest rates ranging from 1.62% to 4.65%, expected option terms ranging from 0.5 to 5 years, volatility factors ranging from 0% to 50%, share prices ranging from $0.02 to $8.00, and option exercise prices ranging from $1.05 to $8.00.

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

Fair value determination of privately-held equity securities

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

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

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

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

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

Income Taxes

We incurred net operating losses for the three and six months ended March 31, 2006 and 2005, and consequently did not or will not be required to pay federal or foreign income taxes, but we did pay nominal state taxes in several states where we have operations. We have a federal net operating loss carryover of approximately $99.6 million as of March 31, 2006, which expires through 2025 and of which $30.0 million is subject to various Section 382 limitations.

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

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

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

Results of Operations

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

Consolidated Results of Operations

Net Sales. Our net sales for the three months ended March 31, 2006 were $7.1 million, a decrease of $0.5 million, or 7%, from the three months ended March 31, 2005. The decrease in our consolidated net sales for the three months ended March 31, 2006 reflected

a decrease of $1.3 million in net sales in our Specialty Pharmaceuticals segment, primarily resulting from a increase in our reserve for returns relating to the Histex I/E recall. This was offset by an increase of $0.8 million in net sales in our Biopharmaceutical Products and Services segment, primarily resulting from an increase of $0.5 million in our Biovest subsidiary.

Cost of Sales. Our cost of sales for the three months ended March 31, 2006 was $2.7 million, or 37% of net sales, compared to $2.2 million, or 29% of net sales, during the three months ended March 31, 2005. This represented a decrease of $0.5 million, or 2%, over the three months ended March 31, 2005. The increase in cost of sales as a percentage of net sales was attributable primarily to an increase in the sales of lower margin products in are specialty pharmaceutical segment.

Research and Development Expenses. Our research and development costs were $3.0 million for the three months ended March 31, 2006, an increase of $0.4 million, or 17%, over the three months ended March 31, 2005. This increase included $0.1 million in SinuNase development compared to no SinuNase development for the same period last year. Biovest research and development expense increased from $2.3 million in the three months ended March 31, 2005 to $2.5 million in the three months ended March 31, 2006 due to increased emphasis on BiovaxID product development.

Sales and Marketing expenses. Our sales and marketing expenses were $3.6 million for the three months ended March 31, 2006; a increase of $0.1 million, or 2%, over the three months ended March 31, 2005.

General and Administrative Expenses. Our general and administrative expenses were $6.0 million for the three months ended March 31, 2006, an increase of $0.7 million, or 13%, over the three months ended March 31, 2005. This increase was a result of the growth of our corporate infrastructure to support an anticipated increase in our business activities. We expect that our general and administrative expenses will continue to increase as we hire new personnel and build up our corporate infrastructure necessary for the management of our business. The costs associated with being a public company will increase our general and administrative expenses.

Interest Expense, net. In the three months ended March 31, 2006, our net interest expense was $1.2 million, an increase of $0.4 million, over the three months ended March 31, 2005. The increase was due primarily to interest on our Laurus term note, Laurus revolver, and Hopkins II line of credit. Interest income in both years was nominal.

Derivative Loss. Derivative loss was $3.4 million for the three months ended March 31, 2006 as compared to no derivative loss for the three months ended March 31, 2005. This increase was due to the Laurus financing arrangement that commenced in the quarter ended June 30, 2005 as further described in Note 2 to the financial statements.

Preferred Stock Dividends. In the three months ended March 31, 2006, we incurred no dividend costs, compared to $0.2 million in the three months ended March 31, 2005. There was no dividend cost in the three months ended March 31, 2006 due to the conversion of all Series E preferred stock to common stock at our Initial Public Offering in November 2005. Dividends for the three months ended March 31, 2005 consisted of dividends accrued on our Series E preferred stock.

Segment Operating Results


	For the Three months ended March 31,
	2006				2005
	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales
Net Sales:
Biopharmaceutical Products and Services-
Biovest	$	2,288,996			$	1,537,670
All other business units		2,493,364				2,501,236

Total Biopharmaceutical Products and Services		4,782,360				4,038,906
Specialty Pharmaceuticals		2,271,565				3,536,286

Total Net Sales	$	7,053,925			$	7,575,192

Cost of Sales:
Biopharmaceutical Products and Services-
Biovest	$	1,228,539			$	1,016,919
All other business units		686,324				571,732

Total Biopharmaceutical Products and Services		1,914,863	40	%		1,588,8651	39	%
Specialty Pharmaceuticals		735,752	32	%		584,507	17	%

Total Cost of Sales	$	2,650,615			$	2,173,158

Gross Margin:
Biopharmaceutical Products and Services-
Biovest	$	1,060,457			$	520,751
All other business units		1,807,040				1,929,504

Total Biopharmaceutical Products and Services		2,867,497	60	%		2,450,255	61	%
Specialty Pharmaceuticals		1,535,813	68	%		2,951,779	83	%

Total Gross Margin	$	4,403,310			$	5,402,034

Research and Development Expenses:
Biopharmaceutical Products and Services
Biovest	$	2,465,236			$	2,254,782
All other business units		498,998				270,573

Total Biopharmaceutical Products and Services		2,964,234	62	%		2,525,355	63	%
Specialty Pharmaceuticals		—	0	%		—	0	%

Total Research and Development Expenses	$	2,964,234			$	2,525,355

Sales and Marketing Expenses:
Biopharmaceutical Products and Services
Biovest	$	47,114			$	104,185
All other business units		—				298,356

Total Biopharmaceutical Products and Services		47,114	1	%		402,541	10	%
Specialty Pharmaceuticals		3,551,609	156	%		3,137,145	89	%

Total Sales and Marketing Expenses	$	3,598,753			$	3,539,686

Biopharmaceutical Products and Services

Net Sales. Net sales in our Biopharmaceutical Products and Services segment for the three months ended March 31, 2006, including

net sales to related parties, were $4.8 million, an increase of $0.7 million, or 18%, from the three months ended March 31, 2005. This increase was attributable primarily to an increase in sales of $0.5 million in our Biovest subsidiary and an increase of $0.2 million in our Analytica subsidiary.

Cost of Sales. Our cost of sales in the Biopharmaceutical Products and Services segment for the three months ended March 31, 2006 was $1.9 million, or 40% of segment net sales, compared to $1.6 million, or 39% of segment net sales, during the three months ended March 31, 2005.

Research and Development Expenses. Our research and development costs in the Biopharmaceutical Products and Services segment were $3.0 million for the three months ended March 31, 2006; an increase of $0.4 million, or 17%, over the three months ended March 31, 2005. This increase is due to increased emphasis on BiovaxID and the phase 3 clinical trial.

Sales and Marketing Expenses. Our sales and marketing expenses in the Biopharmaceutical Products and Services segment were $0.01 million in the three ended March 31, 2006; a decrease of $0.4 million, or 88%, over the three months ended March 31, 2005. This increase was attributable to our shift in emphasis in that segment away from cell culture products and services and more toward the development of BiovaxID.

Specialty Pharmaceuticals

Net Sales. Net sales in the Specialty Pharmaceuticals segment for the three months ended March 31, 2006, including net sales to related parties, were $2.3 million, a decrease of $1.3 million, or 36%, from the three months ended March 31, 2005. This decrease was primarily attributable to a decrease in sales attributable to the return of our Histex I/E product due to manufacturer’s recall totaling approximately $0.6 million, an increase in sales of our pain product line of approximately $2.7 million in sales of our cough, cold and allergy line of product totaling $1.8 million and in increase in the reserve for product returns, chargebacks and rebates of $1.6 million.

Cost of Sales. Our cost of sales in the Specialty Pharmaceuticals segment for the three months ended March 31, 2006 was $0.7 million, or 32% of net sales, compared to $0.6 million, or 17% of net sales, during the three months ended March 31, 2005. The increase in cost of sales as a percentage of net sales was attributable to a an increase of sales of our pain product line for this period which has greater cost of goods per unit than our cough, cold and allergy products which had a decrease in sales for the comparative period.

Research and Development Expenses. There were no research and development expenses in our Specialty Pharmaceuticals segment in either of the three month periods ended March 31, 2006 or 2005.

Sales and Marketing Expenses. Our sales and marketing expenses in the Specialty Pharmaceuticals segment were $3.6 million in the three months ended March 31, 2006; an increase of $0.4 million, or 13%, over the three months ended March 31, 2005. This increase was primarily due to a change in the allocation of sales and marketing expenses previously charged to the Biopharmaceutical Products and Services segment.

Six Months Ended March 31, 2006 Compared to the Six Months Ended March 31, 2005

Consolidated Results of Operations

Net Sales. Our net sales for the six months ended March 31, 2006 were $13.9 million, an increase of $1.8 million, or 15%, from the six months ended March 31, 2006. The increase in our consolidated net sales for the six months ended March 31, 2005 reflected an increase of $1.6 million in net sales in our Biopharmaceutical Products and Services segment, primarily resulting from an $0.8 million increase in net sales of our Biovest subsidiary and a $0.8 million increase in net sales of our Analytica International subsidiary. The increase in our consolidated net sales for the six months ended March 31, 2006 also reflected a $0.2 million increase in net sales in our Specialty Pharmaceuticals segment.

Cost of Sales. Our cost of sales for the six months ended March 31, 2006 was $4.5 million, or 33% of net sales, compared to $4.4 million, or 36% of net sales, during the six months ended March 31, 2005. This represented an increase of $0.1 million, or 3%, over the six months ended March 31, 2005.

Research and Development Expenses. Our research and development costs were $6.1 million for the six months ended March 31, 2006, an increase of $1.7 million, or 40%, over the six months ended March 31, 2005. This increase included $0.6 million in SinuNase development compared to no SinuNase development for the same period last year. Biovest research and development expense increased from $4.1 million in the six months ended March 31, 2005 to $5.2 million in the six months ended March 31, 2006 due to increased emphasis on BiovaxID and its phase 3 clinical trial.

Sales and Marketing expenses. Our sales and marketing expenses were $6.9 million for the six months ended March 31, 2006; a decrease of $0.5 million, or 7%, over the six months ended March 31, 2005. This decrease was due in part to $0.7 million of decreased costs in our Biopharmaceutical Products and Services segment resulting from our shift in emphasis in that segment away from cell culture products and services and more toward the development of BiovaxID. This decrease was offset by higher costs of $0.2 million due in part to an incremental increase in sales force personnel in our Specialty Pharmaceuticals segment.

General and Administrative Expenses. Our general and administrative expenses were $11.2 million for the six months ended March 31, 2006, an increase of $1.4 million, or 14%, over the six months ended March 31, 2005. This increase was a result of the growth of our corporate infrastructure to support an anticipated increase in our business activities. We expect that our general and administrative expenses will continue to increase as we hire new personnel and build up our corporate infrastructure necessary for the management of our business. The costs associated with being a public company will increase our general and administrative expenses.

Interest Expense, net. In the six months ended March 31, 2006, our net interest expense was $2.2 million, an increase of $0.8 million, over the six months ended March 31, 2005. The increase was due primarily to interest on our Laurus term note, Laurus revolver, and Hopkins II line of credit. Interest income in both years was nominal.

Derivative gain. Derivative gain was $2.9 million for the six months ended March 31, 2006 as compared to no derivative gain for the six months ended March 31, 2005. This increase was due to the Laurus financing arrangement that commenced in the quarter ended June 30, 2005 as further described in Note 2 to the financial statements.

Preferred Stock Dividends. In the six months ended March 31, 2006, we incurred dividend costs of $0.01 million, compared to $5.2 million in the six months ended March 31, 2005. There was minimal dividend cost in the six months ended March 31, 2006 due to the conversion of all Series E preferred stock to common stock at our Initial Public Offering in November 2005. Dividends for the three months ended March 31, 2005 consisted of dividends accrued on our Series E preferred stock.

Segment Operating Results


	For the Six months ended March 31,
	2006				2005
	Amount		% of Segment Net Sales		Amount		% of Segment Net Sales
Net Sales:
Biopharmaceutical Products and Services-
Biovest	$	3,373,971			$	2,610,468
All other business units		5,323,312				4,522,241

Total Biopharmaceutical Products and Services		8,697,283				7,132,709
Specialty Pharmaceuticals		5,174,608				4,959,602

Total Net Sales	$	13,871,891			$	12,092,311

Cost of Sales:
Biopharmaceutical Products and Services-
Biovest	$	1,831,442			$	2,219,898
All other business units		1,411,978				1,139,808

Total Biopharmaceutical Products and Services		3,243,420	37	%		3,359,706	47	%
Specialty Pharmaceuticals		1,282,968	25	%		1,027,783	21	%

Total Cost of Sales	$	4,526,388			$	4,387,489

Gross Margin:
Biopharmaceutical Products and Services-
Biovest	$	1,542,529			$	390,570
All other business units		3,911,334				3,382,433

Total Biopharmaceutical Products and Services		5,453,863	63	%		3,773,003	53	%
Specialty Pharmaceuticals		3,891,640	75	%		3,931,819	79	%

Total Gross Margin	$	9,345,503			$	7,704,822

Research and Development Expenses:
Biopharmaceutical Products and Services
Biovest	$	5,158,991			$	4,113,336
All other business units		965,115				270,573

Total Biopharmaceutical Products and Services		6,124,106	70	%		4,383,909	61	%
Specialty Pharmaceuticals		—	0	%		—	0	%

Total Research and Development Expenses	$	6,124,106			$	4,383,909

Sales and Marketing Expenses:
Biopharmaceutical Products and Services
Biovest	$	89,220			$	199,979
All other business units		320,946				920,778

Total Biopharmaceutical Products and Services		410,166	5	%		1,120,757	16	%
Specialty Pharmaceuticals		6,448,535	125	%		6,269,536	126	%

Total Sales and Marketing Expenses	$	6,858,701			$	7,390,293

Biopharmaceutical Products and Services

Net Sales. Net sales in our Biopharmaceutical Products and Services segment for the six months ended March 31, 2006, including net sales to related parties, were $8.7 million, an increase of $1.6 million, or 22%, from the six months ended March 31, 2005. This increase was attributable primarily to an increase in sales of instrument hardware and disposals sales.

Cost of Sales. Our cost of sales in the Biopharmaceutical Products and Services segment for the six months ended March 31, 2006 was $3.2 million, or 37% of segment net sales, compared to $3.4 million, or 47% of segment net sales, during the six months ended March 31, 2005.

Research and Development Expenses. Our research and development costs in the Biopharmaceutical Products and Services segment were $6.1 million for the six months ended March 31, 2006; an increase of $1.7 million, or 40%, over the six months ended March 31, 2005. This increase included additional expenses relating to our BiovaxID project.

Sales and Marketing Expenses. Our sales and marketing expenses in the Biopharmaceutical Products and Services segment were $0.4 million in the six ended March 31, 2006; a decrease of $0.7 million, or 63%, over the six months ended March 31, 2005. This decrease was attributable to our shift in emphasis in that segment away from cell culture products and services and more toward the development of BiovaxID.

Specialty Pharmaceuticals

Net Sales. Net sales in the Specialty Pharmaceuticals segment for the six months ended March 31, 2006, including net sales to related parties, were $5.2 million, an increase of $0.2 million, or 4%, from the six months ended March 31, 2005. This increase was primarily attributable to a decrease in sales attributable to the return of our Histex I/E product due to a manufacturer’s recall totaling approximately $0.6 million, an increase in sales of our pain product line of approximately $3.2 million, a reduction in sales of our cough, cold and allergy line of products totaling $1.0 million and an increase in the reserve for product returns, chargebacks and rebated of $1.4 million.

Cost of Sales. Our cost of sales in the Specialty Pharmaceuticals segment for the six months ended March 31, 2006 was $1.3 million, or 25% of net sales, compared to $1.0 million, or 21% of net sales, during the six months ended March 31, 2005. The increase in cost of sales as a percentage of net sales was attributable to an increase in our pain product line for this period which has a greater cost of goods per unit than our cough, cold and allergy products which had a decrease in sales for the comparative period.

Research and Development Expenses. There were no research and development expenses in our Specialty Pharmaceuticals segment in either of the six month periods ended March 31, 2006 or 2005.

Sales and Marketing Expenses. Our sales and marketing expenses in the Specialty Pharmaceuticals segment were $6.5 million in the six months ended March 31, 2006; an increase of $0.2 million, or 3%, over the six months ended March 31, 2005. This increase was primarily due to a change in the allocation of sales and marketing expenses previously charged to the Biopharmaceutical Products and Services segment.

Restatement of Portions of Previously-Filed Financial Statements

The Company’s management and the Audit Committee of its Board of Directors have determined that the consolidated balance sheets, consolidated statements of stockholders’ deficit and related notes to consolidated financial statements included in the consolidated financial statements and information contained in the Company’s Form 10-K filed on December 29, 2005 for the fiscal year ended September 30, 2005 and the Company’s Form 10-Q filed with the Securities and Exchange Commission on February 14, 2006 for the quarter ended December 31, 2005, did not account for certain embedded derivatives contained in the convertible debentures and certain other notes payable issued in April 2005 in conformity with recent clarifications of SEC standards regarding embedded derivatives. Such consolidated financial statements should no longer be relied upon.

In particular, the Company applied certain accounting principles to the Company’s convertible debenture financing and the issuance of certain other notes payable, which were completed in April 2005, in a manner other than that mandated by recent clarifications of SEC standards. Analysis completed subsequent to our initial filing and the clarifications of these accounting standards by the SEC identified embedded derivative instruments within the convertible debenture agreements and the certain other notes payable that required separate valuation under FAS 133 “Accounting for Derivative Instruments and Hedging Activities.” Our analysis identified several derivative instruments to be bifurcated and measured at their fair value, and resulted in a restatement to the Company’s consolidated balance sheet at September 30, 2005 to reflect convertible debt and embedded derivative instruments in conformity with recent clarifications of SEC standards. In addition, the debenture agreements contained variable share settlement provisions that required the Company to adjust the fair value of certain previously issued warrants and reclassify them from additional paid in capital in the consolidated statement of stockholders’ deficit to a derivative liability account in the consolidated balance sheet, in accordance with EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Own Stock.”

The decision to restate the consolidated financial statements was made by the Board, upon the recommendation of the Company’s management, the Audit Committee and with the concurrence of the Company’s independent auditors, Aidman Piser & Company. In addition, the Board, upon the recommendation of management and the Audit Committee, made an internal determination that the previously issued consolidated financial statements and other financial information contained in the Form 10-K for the year ended September 30, 2005 should not be relied upon and should be amended accordingly.

On May 11, 2006, the Board discussed the matters disclosed in this section with management, the Audit Committee and with the Company’s independent auditors. The Company’s auditors informed the Board that they concur with the conclusions described above. Following the correction of the errors reported in this section, the Company has filed an amended Form 10-K for the relevant period in which it restated its consolidated financial statements and the Company has filed an amended quarterly report on Form 10-Q for the quarter ended December 31, 2005. The net effect of the restatements as a percentage of the March 31, 2006 balances on accumulated deficit and additional paid-in-capital was 1.7% and 3.2%, respectively.

Liquidity and Capital Resources

Sources of Liquidity

We are anticipating that operating cash flow deficits for the early part of fiscal 2006 will be offset by net cash inflows from financing activities, such as debt or equity placements, accessing existing or new credit facilities, receipt of repayment of inter-company demand loans and from proceeds from our IPO completed in the first quarter of fiscal 2006. At March 31, 2006, we had $ 0.8 million in cash on hand, $8.0 million in restricted cash, $2.9 million in accounts receivable, $1.2 million of earned but unbilled receivables, $3.3 million in availability under existing lines of credit, and $8.2 million in demand notes receivable from Biovest. Upon Biovest obtaining additional financing which it is seeking to consumate through equity offerings, debt financings by the end of calendar 2006 corporate collaborations, or licensing transaction, it is anticipated that Biovest may repay some or all of the outstanding demand notes and Biovest will commence the funding of its ongoing operations without additional intercompany loans from us.

Based on our current operating plans, and a private equity offering completed May 2006, we expect that our existing capital resources and cash flow from operations, together with borrowing availability under our existing lines of credit and receipt of repayment of demand inter-company debt will be sufficient to fund our operations and development activities into the second quarter of fiscal year 2007. We are currently engaged in efforts to restructure certain of our existing indebtedness in order to increase available funds on a near-term basis, and we also intend to seek additional financing through one or more public or private equity offerings, additional debt financings, corporate collaborations or licensing transactions. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available from the foregoing sources, or if we determine it to otherwise be in the Company’s best interest, we may consider additional strategic financing options, including sales of assets or business units (such as specialty pharmaceuticals, market services or cell culture equipment) that are non-essential to the ongoing development or future commercialization of SinuNase, or we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or curtail some of our commercialization efforts. There are currently no commitments in place for any debt or equity financing being sought by us or by Biovest, nor can assurances be given that such financing will be available. While we are confident that we will raise the capital necessary to fund operations and achieve successful commercialization of the products under development, there can be no assurances in that regard.

The investment in our subsidiary Biovest International, Inc. is consolidated in our financial statements. We currently own approximately 75% of Biovest, or 53,115,818 shares, which had a market value of approximately $79.7 million as of May 12, 2006.

Debt Financing

As of March 31, 2006, our long-term debt, including accrued but unpaid interest, current maturities of long-term debt, and lines of credit, not including discount was $34.8 million. We currently have credit facilities with various lenders, including the following:

Credit Facility with Laurus Master Fund, Ltd., Accentia - Under a credit facility with Laurus Master Fund, Ltd., or Laurus, we have total borrowing availability of up to $15.0 million. We entered into this credit facility in April 2005, and it has been amended in August 2005, December 2005, and February 2006. A total of $11.6 million in principal and $0.2 million in accrued but unpaid interest was outstanding under this credit facility as of March 31, 2006. The Laurus credit facility consists of two components: a term loan in the principal amount of $10.0 million, under which $9.7 million in principal and $0.1 million in accrued but unpaid interest were outstanding as of March 31, 2006, and a revolving loan of up to $5.0 million, under which $5.4 million in principal and $0.1 million in accrued but unpaid interest were outstanding as of March 31, 2006. Under the revolving loan portion of the credit facility, we have the right to borrow up to the sum of 85% of all of eligible accounts receivable and 50% of eligible inventory and other assets pledged to secure the loan (with the eligibility criteria being set forth in the loan agreements). The Laurus credit facility is secured by a first priority security interest in all of the tangible and intangible assets of Accentia Biopharmaceuticals, Inc. and our Analytica subsidiary (including the stock of their respective subsidiaries). This security interest does not extend to any assets of our TEAMM, Biovest, or foreign subsidiary. The notes are also secured by certain publicly traded securities owned by the Francis E. O’Donnell Jr. Irrevocable Trust #1. The principal and accrued but unpaid interest under the Laurus credit facility is convertible by Laurus into shares of our common stock at a fixed conversion price of $6.80 per share, provided that there are certain limitations on when and how much of the loan can be converted at any one period of time, and further provided that no more than $2.5 million of the revolving loan can be converted into shares of our common stock.

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

Credit Facility with 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 the Company has been the primary source of financing for Biovest; however, this Transaction with Laurus represents the initial financing by Biovest from sources other than Accentia.

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

•

Under the terms of the Note, $299,000 of the principal amount was disbursed at the closing to 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.

•

Unless otherwise agreed by Laurus, 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, 2005, $2.5 million was released from the restricted account as part of a financing transaction involving New Market Tax Credits.

•

The Note will become due and payable on March 31, 2009, provided that any portion of the principal amount not contained in the Restricted Account will be amortized in equal monthly payments of principal and interest beginning on July 1, 2006 and ending on the maturity date. The initial monthly payment amount will be $9,060.61 per month, provided that as amounts are released from the Restricted Account from time to time, such amounts will be added to the amortizing portion of the Note, and the monthly payments will increase accordingly. The Note can be prepaid by Biovest at any time without penalty.

•

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

•

Sixty-four percent (64%) of the Note is guaranteed by Accentia. We also have a separate credit facility with Laurus pursuant to which Accentia has pledged its assets as collateral, and pursuant to the Transaction documents, this pledge of collateral by Accentia will also secure our guarantee of the Note. Additionally, all of the assets of Biovest, including its intellectual property and the stock of its Biovax, Inc. subsidiary, were pledged by Biovest as collateral for the Note and Obligations to Laurus.

•

The Warrant provides that Laurus may purchase up to 18,087,889 shares of Biovest’s common stock at an exercise price equal to $.01 per share. The Warrant will expire on March 31, 2021.

•

In connection with the Transaction, Laurus and Biovest entered into a registration rights agreement providing that Laurus will have the right to require Biovest to file a registration statement with the U.S. Securities and Exchange Commission to register the resale of the shares issuable to Laurus pursuant to the exercise of the warrant. Biovest will be required to file such registration statement within sixty (60) days after written demand by Laurus, provided that in no event with Biovest be required to file such registration statement earlier than ninety (90) days after the closing of the Transaction.

Credit Facility with Missouri State Bank. In addition to the Laurus credit facility, in December 2005, we secured a $3.0 million subordinated revolving credit agreement with Missouri State Bank and Trust Company. 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. The $1.0 million expansion is due July 2006. This loan bears interest at prime per annum and has a January 2007 maturity date. The agreement is secured by the accounts receivable and inventory of our TEAMM subsidiary. Additionally, the agreement is secured by assets and personal guarantees of the Francis E. O’Donnell Jr. Irrevocable Trust #1, Steven Stogel and Dennis Ryll (directors and/or principal shareholders of our company). As of March 31, 2006, the entire $4.0 million credit facility had been drawn and was outstanding.

Credit Facility with Hopkins II. We are also a party to a bridge loan credit facility from The Hopkins Capital Group II, LLC, otherwise referred to as Hopkins II. Dr. Francis E. O’Donnell, our Chief Executive Officer and Chairman, is the sole manager of Hopkins II, and several irrevocable trusts established by Dr. O’Donnell collectively constitute the largest equity owners of Hopkins II. In August 2005, we entered into a bridge loan agreement with Hopkins II that provides for aggregate borrowing availability of up to $7.5 million in principal amount at an interest rate of 4.25% per annum simple interest. This loan (including all accrued interest) will become due upon the earlier of August 16, 2007 or the completion by our company of a debt or equity financing that results in proceeds of more than $35.0 million (net of underwriting discounts, commissions, or placement agent fees). We may prepay the bridge loan at any time without penalty or premium. Notwithstanding the foregoing, on the date on which the bridge loan becomes due or on which we desire to prepay the loan, we must not be in default under our credit facility with Laurus, and the remaining balance under the Laurus credit facility at such time must be $2.5 million or less. If both of these conditions are not satisfied, then the bridge loan will not become due and cannot be paid until the first day on which both of these conditions are satisfied. Under the bridge loan agreement with Hopkins II, we have the unconditional right to borrow up to $5.0 million in the aggregate upon ten days’ prior written notice to Hopkins II, provided that our right to borrow any amounts in excess of $5.0 million is conditioned upon us either being in default under our credit facility with Laurus or having less than $5.0 million cash on hand at the time of the advance. As of March 31, 2006, a total of $4.2 million in principal had been borrowed under this facility and $0.1 million in accrued but unpaid interest was outstanding. No payments of principal or interest are due until the maturity date of the loan. The Hopkins II bridge loan is subordinate to the Laurus credit facility, provided that we may repay the bridge loan prior to the full satisfaction of our obligations to Laurus so long as the above-described conditions are satisfied.

Loan from McKesson Corporation. In October 2002, we entered into a credit facility with McKesson Corporation in the initial amount of approximately $10 million. As of September 30, 2005, prior to our initial public offering, approximately $6.0 million in principal and interest had been outstanding under this credit facility. During the six months ended March 31, 2006, we reduced this indebtedness by $5.5 million, such that as of March 31, 2006, $0.8 million in principal and $0.006 million accrued but unpaid interest remained outstanding under this loan. The remaining balance of this loan will become due July 2006. This loan bears interest at a rate of 10% per year and is secured all of the assets of Accentia Biopharmaceuticals, Inc., including its stock in each of its subsidiaries, as well as certain publicly traded securities owned by two irrevocable trusts established by Dr. O’Donnell.

Loan from Harbinger Mezzanine Partners, L.P. As of March 31, 2006, we had a loan outstanding from Harbinger Mezzanine Partners, L.P. in the principal amount $5.0 million. The outstanding balance as of March 31, 2006 takes into account a $2.0 million pay down of this loan during the six months ended March 31, 2006. This loan bears interest at a rate of 13.5% per annum and will become due in June 2006, with interest payable monthly. The loan is secured by receivables, inventories, and intangible assets of our TEAMM subsidiary.

Other Financing Arrangements

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

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

Financing Relationship with Biovest

In June 2003, we purchased 81% of the outstanding capital stock of Biovest International, Inc. for $20.0 million pursuant to an Investment Agreement with Biovest. Under the Investment Agreement, as amended, we paid $2.5 million in cash at closing, $2.5 million by a 90-day note, and the balance of $15.0 million by a non-interest-bearing promissory note. As of December 31, 2005, this note had been satisfied in full, and during the three months ended March 31, 2005 we advanced an additional $2.0 million to Biovest in the form of an intercompany demand loan that does not bear interest. This loan does not appear in our consolidated financial statements because it is eliminated upon consolidation. Biovest is actively pursuing one of more financing transactions in the form of a debt financing, equity financing, or collaboration or licensing transaction. We anticipate that we will demand payment of the inter-company demand loan when Biovest completes an adequate financing transaction, although there is no assurance as to when and if Biovest will be able to complete such a financing.

Cash Flows for the Six Months Ended March 31, 2006

For the six months ended March 31, 2006, we used $10.1 million in cash to fund our operating activities. This consisted primarily of a net loss of $14.1 million and $2.9 million derivative gain, reduced by non-cash charges for $0.4 million of depreciation, $1.2 million in amortization of intangibles, $0.9 million of stock-based compensation, and $0.8 million in accretion of debt discounts. Cash increased primarily due to the $2.9 million change in accounts payable and accrued liabilities, $0.6 million change in accounts receivable, $0.8 million conversion of deferred offering costs to equity, offset by $0.3 million payments for inventory, $0.2 million for inventory deposits, and $0.2 million return of customer deposits.

We used net cash in investing activities of $1.6 million for the six months ended March 31, 2006, primarily consisting of payments for product rights of $1.2 million, and improvements to our Worcester laboratory facility of $0.4 million.

We had net cash flows from financing activities of $9.7 million for the six months ended March 31, 2006, consisting primarily of $14.7 million in proceeds from the issuance common stock, and funding from lines of credit of $4.2 million. We reduced debt by $7.6 million, and received proceeds from a minority interest investment in our Subsidiary of $1.7 million.

Our net working capital deficit at March 31, 2006 decreased from September 30, 2005 by $18.1 million to $22.5 million, which was attributed largely to the proceeds from our initial public offering and proceeds from the conversion of preferred stock to common stock. This was offset by a fiscal six months 2005 loss that was funded through debt and equity proceeds and refinancing of certain short-term debt to long-term.

The amount of our net working capital, a deficit of $22.5 million at March 31, 2006, will continue to be affected by our accounts receivable, and we expect that our accounts receivable will grow in connection with an anticipated growth in revenues from sales of products in our Specialty Pharmaceuticals segment. At March 31, 2006, our net accounts receivable and earned but unbilled receivables was $4.1 million, a decrease of $0.3 million from September 30, 2005.

We expect to pay, and have budgeted for payment, periodic and contractually-committed milestone payments that are quantified based on product development activities of our development partners and are not always predictable. We expect that these payments will be made from cash flow generated from our anticipated receivables growth, as well as through the proceeds from our initial public offering and other financing activities. Although we expect that our net cash flows from operating activities will continue to be negative until (and if) we are able to commence sales of SinuNase and BiovaxID, we expect that increasing sales from products in our Specialty Pharmaceuticals segment will offset research and development expenses associated with SinuNase and BiovaxID.

Cash Flows for the Six Months Ended March 31, 2005

For the six months ended March 31, 2005, we used $17.6 million in cash to fund our operating activities. This consisted primarily of a net loss of $18.7 million, an increase in accounts receivables of $1.4 million, increase in inventory of $0.3 million, decrease in accounts payable of 1.5 million, decrease in accrued expenses of $0.7 million, reduced by non-cash charges approximately $0.3 million in depreciation, $1.4 million in amortization of intangibles, $0.5 million in stock-based compensation, and $2.5 million loss on conversion of shareholder debt to preferred stock., and other non-cash charges of $0.2 million.

We used net cash in investing activities of $3.7 million for the six months ended March 31, 2005, primarily consisting of payments for product rights of $3.5 million, and computer equipment of $0.2 million.

We had net cash flows from investing activities of $20.1 million, consisting primarily of the proceeds from the issuance of preferred

stock of $20.5 million, proceeds from the issuance of common stock of $0.6 million, and drawing upon our lines of credit of $1.5 million. We reduced debt by $1.9 million, reduced lines of credit by $0.3 million, and paid $0.3 million in dividends.

Our net working capital deficit at March 31, 2005 decreased from September 30, 2004 by $11.5 million to $19.9 million, which was attributed largely to the proceeds from the sale of preferred stock and common stock. This was offset by a fiscal six month 2004 loss.

Contractual Obligations and Off-Balance Sheet Arrangements

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

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

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


	Payments Due by Period
	Less than One Year		One to Two Years		Three to Five Years		After Five Years		Total
	(in thousands)
Long-term debt ^(a) (b)	$	14,659	$	13,012	$	—	$	—	$	27,671
Product distribution agreements		21		—		—		—		21
License agreements		300		—		—		—		300
Minimum royalty payments		1,288		3,000		1,887		—		6,175
Product manufacturing and supply agreements		250		308		—		—		558
Cooperative research and development agreement		180		400		—		—		580
Employment agreements		3,234		5,976		1,173		—		10,383
Operating lease obligations		2,238		3,098		2,012		—		7,348


	$	22,169	$	25,794	$	5,073	$	—	$	53,035

(a)	Includes interest on long-term debt.

(b)

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

The above table does not include any additional amounts that we may be required to pay under license or distribution agreements upon the achievement of scientific, regulatory, and commercial milestones that may become payable depending on the progress of scientific development and regulatory approvals, including milestones such as the submission of drug approval applications to the FDA and approval of such applications. While we cannot predict when and if such events will occur, depending on the successful achievement of such scientific, regulatory and commercial milestones, we may owe up to $4.6 million, $6.4 million, and $5.0 million in twelve months ended March 31, 2006, 2007 and 2008, respectively.

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

Under the September 2004 Royalty Stream Purchase Agreement with PPD, as described above, if PPD does not receive at least $2.5 million in royalties from SinuNase under this agreement by 2009, then PPD has the right to terminate the agreement. In the event of such a termination, we will be required to refund up to the $2.5 million which PPD paid to us upon the execution of the agreement in consideration of the future royalty rights, offset by any amounts paid to the date of termination. As of March 31, 2006, we had paid $0.1 million to PPD.

Under the promissory note that we issued to Biovest in connection with our June 2003 investment agreement with Biovest, a total of $15.0 million became payable to Biovest on various dates through June 2007. In August 2004, we entered into an amendment of the investment agreement under which we agreed to use reasonable efforts to make advances to Biovest under the note prior to the due date of the payments thereunder. We completed funding of our commitment under the note by December 31, 2005, and have advanced approximately $8.2 million in additional funds subsequent to completing the funding of that note.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Interest Rates

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

Foreign Exchange Rates

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

Part II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS –

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

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

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

We cannot predict whether AccentRx or our company could be held liable for the prior acts of APP as a result of AccentRx’s purchase of APP’s assets or whether the government will commence any actions against AccentRx. However, we believe that it is unlikely that our company, which has always been operated as a distinct legal entity from AccentRx, will have material financial exposure in the event that AccentRx or APP incurs a material penalty in connection with this matter. Similarly, we do not believe that any adverse legal or regulatory determinations regarding APP, our company, or AccentRx or any persons associated with APP, our company, or AccentRx would have any material effect on the ability of our company and its subsidiaries to

conduct their current or expected business operations. On October 17, 2005, the U.S. Department of Justice announced a settlement of criminal and civil allegations against Serono. According to the terms of the settlement, Serono, together with its U.S. subsidiaries and related entities, agreed to pay $704 million in connection with illegal schemes to promote, market, and sell its drug Serostim. We cannot predict the impact, if any, that this settlement will have on the government’s investigation relating to APP’s purchases and sales of Serostim.

ITEM 1A.

RISK FACTORS

Not Applicable

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

Unregistered Sales of Equity Securities

On February 13, 2006, in connection with a modification of our credit facility with Laurus Master Fund, Ltd., we granted to Laurus an additional warrant to purchase up to 62,000 shares of our common stock at an exercise price of $0.01 per share. We claimed exemption from registration for this transaction under the Securities Act of 1933, as amended (the “Securities Act”), by virtue of Section 4(2) of the Securities Act and by virtue of Rule 506 of Regulation D. The grant of this warrant and the offer of the underlying shares did not involve any public offering, was made without general solicitation or advertising, and Laurus was an accredited investor with access to all relevant information necessary to evaluate the investment and represented to us that the warrant and underlying shares were being acquired for investment.

Use of Proceeds

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

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

Subsequent to our IPO and as of March 31, 2006, we had used the net proceeds of our IPO as follows:

(a) $1.3 million to fund milestone and similar product-related payments to our development partners in our specialty pharmaceuticals business for the acquisition on maintenance of product rights.

(b) $3.2 million to fund debt reductions as part of a plan to restructure existing debt in order to facilitate future financings. The restructuring plan included: (i) establishing a new credit facility with Missouri State Bank under which we borrowed $4.0 million; (ii) $2.0 million reduction in outstanding principal due under our credit agreement with Harbinger Mezzanine Partners and (iii) $5.2 million reduction in our outstanding debt to McKesson Corporation. While not a specified use of our IPO proceeds as described in our prospectus for the IPO, we elected to make the debt reductions because of the availability of a new credit facility with Missouri State Bank and because we believe the restructure plan will facilitate future debt and equity financing.

(c) $4.5 million to fund inter-company demand loans made to our subsidiary, Biovest, for its working capital, development and clinical trial activities. We anticipated that Biovest would have access to financing and accordingly we did not plan to use IPO proceeds to fund Biovest beyond the commitment in the Investment Agreement. While not specifically separately identified as a use of IPO proceeds in our prospectus for the IPO, we elected to fund these inter-company demand loans because of the continuing positive nature of the follow-up data from the Phase 2 clinical trial of BiovaxID, the continued progress in developing the AutovaxID automated production instrument. We anticipate that we will call these demand loans if Biovest completes an adequate debt or equity financing.

(d)	$4.6 million to fund our additional working capital and general corporate purposes

Options Exercised

In the six months ended March 31, 2006, 11,958 common stock options were exercised.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

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	-	Note and Warrant Purchase Agreement, dated March 31, 2006, between Biovest International, Inc. (“Biovest”) and Laurus Master Fund, Ltd. (“Laurus”). (1)

10.2	-	Secured Promissory Note, dated March 31, 2006, issued by Biovest to Laurus. (1)

10.3	-	Common Stock Purchase Warrant, dated March 31, 2006, issued by Biovest to Laurus. (1)

10.4	-	Restricted Account Agreement, dated March 31, 2006, among Biovest, Laurus, and North Fork Bank. (1)

10.5	-	Restricted Account Letter Agreement, dated March 31, 2006, between Biovest and Laurus. (1)

10.6	-	Registration Rights Agreement, dated March 31, 2006, between Biovest and Laurus. (1)

10.7	-	Master Security Agreement, dated March 31, 2006, among Laurus, Biovest, and Biovax, Inc. (1)

10.8	-	Stock Pledge Agreement, dated March 31, 2006, between Laurus and Accentia Biopharmaceuticals, Inc. (“Accentia”). (1)

10.9	-	Guaranty, dated March 31, 2006, made by Accentia in favor of Laurus. (1)

10.10	-	Amended and Restated Stock Pledge Agreement, dated as of April 29, 2005 and amended and restated as of April 25, 2006, among Laurus, Accentia and each other Pledgor party thereto. (2)

10.11	-	Demand Note, dated April 25, 2006, issued by Biovest to Laurus. (2)

10.12	-	First Bank Subordination Agreement, dated as of April 25, 2006, by and among Laurus, First Bank (“First Bank”) and Accentia. (2)

10.13	-	Telesis Subordination Agreement, dated as of April 25, 2006, by and among Laurus, Telesis CDE Two, LLC (“Telesis CDE”), Biovax, Inc. (“Biovax”), Biovest and Accentia. (2)

10.14	-	Promissory Note, dated April 25, 2006, issued by Biovax Investment LLC (“Leverage Fund”) to Biolender, LLC (“Biolender”). (2)

10.15	-	Loan and Security Agreement, dated as of April 25, 2006, between Leverage Fund and Biolender. (2)

10.16	-	Subordinated Convertible Promissory Note, dated April 25, 2006, from Biovax to Telesis CDE. (2)

10.17	-	Convertible Loan Agreement, dated as of April 25, 2006, by and among Biovax, Telesis CDE and Biovest. (2)

10.18	-	Guaranty, dated April 25, 2006, made by Frances E. O’Donnell, Jr., Kathleen M. O’Donnell (as Trustee of the Frances E. O’Donnell, Jr. Irrevocable Trust), Dennis L. Ryll, Ronald Osman, Steven J. Stogel, Donald L. Ferguson, Donald L. Ferguson (as trustee of the Donald L. Ferguson Revocable Trust), Biovest and Accentia in favor of U.S. Bancorp Community Investment Corporation (“USBCIC”) and Telesis CDE. (2)

10.19	-	Limited Liability Company Agreement of Biolender, LLC, dated April 25, 2006, between Biovest and Accentia. (2)

10.20	-	Put Option Agreement dated April 25, 2006, between Biovax IC, Leverage Fund, USBCIC and Biolender. (2)

10.21	-	Purchase Option Agreement dated April 25, 2006, between Biovax IC, Leverage Fund, USBCIC and Biolender. (2)

10.22	-	Common Stock Purchase Warrant, dated April 25, 2006, issued by Biovest to Telesis CDE. (2)

10.23	-	Common Stock Purchase Warrant, dated April 25, 2006, issued by Accentia to Telesis CDE. (2)

10.24	-	Tax Credit Reimbursement and Indemnity Agreement, dated as of April 25, 2006, between Biovax and USBCIC. (2)

10.25	-	Asset Purchase Agreement dated April 18, 2006 between Biovest and Biovax. (2)

10.26	-	Vaccine Purchase and Sale Agreement, dated as of April 28, 2006, between Biovax and Biovest. (2)

10.27	-	Indemnification Agreement, dated as of April 25, 2006, from Biovest to Dennis Ryll. (2)

10.28	-	Indemnification Agreement, dated as of April 25, 2006, from Biovest to Steven Stogel. (2)

10.29	-	Indemnification Agreement, dated as of April 25, 2006, from Biovest to Donald Ferguson. (2)

10.30	-	Indemnification Agreement, dated as of April 25, 2006, from Biovest to Ronald Osman. (2)

10.31	-	Indemnification Agreement, dated as of April 25, 2006, from Biovest to Francis O’Donnell. (2)


Number		Description of Document
31.1	-	Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 302 of Sarbanes – Oxley Act.

31.2	-	Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes – Oxley Act.

32.1	-	Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 906 of Sarbanes – Oxley Act.

32.2	-	Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes – Oxley Act

99.1	-	Press Release dated May 15, 2006 incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 15, 2006

(1)	Incorporated by reference as attached to the Company’s Current Report on Form 8-K dated April 6, 2006

(2)	Incorporated by reference as attached to the Company’s Current Report on Form 8-K dated May 2, 2006

(b)	Reports on Form 8-K.

Current Report on Form 8-K dated March 2, 2006

Current Report on Form 8-K dated April 6, 2006

Current Report on Form 8-K dated April 12, 2006

Current Report on Form 8-K dated May 2, 2006

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 BIOPHARMACEUTICALS, INC. (Registrant)

Date: May 15, 2006								/s/ Francis E. O’Donnell, Jr., MD
								Francis E. O’Donnell, Jr., MD Chairman and Chief Executive Officer (Principal Executive Officer)



Date: May 15, 2006								/s/ Alan M. Pearce
								Alan M. Pearce Chief Financial Officer (Principal Financial and Accounting Officer)