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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2008

OR

Commission file number 0-11480

BIOVEST INTERNATIONAL, INC.

(Exact name of issuer as specified in its charter)

324 S. Hyde Park Ave, Suite 350, Tampa, FL 33606

(Address of principal executive offices) (Zip Code)

(813) 864-2554

Registrant’s telephone number, including area code

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

Common Stock, par value $0.01 per share

(Title of class)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  x

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

As of July 31, 2008, there were 96,451,503 shares of the registrant’s Common Stock outstanding.

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Forward-Looking Statements

Statements in this quarterly report on Form 10-Q that are not strictly historical in nature are forward-looking statements. These statements may include, but are not limited to, statements about: the timing of the commencement, enrollment, and completion of our clinical trials for our product candidates; the progress or success of our product development programs; the status of regulatory approvals for our product candidates; the timing of product launches; our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and our estimates for future performance, anticipated operating losses, future revenues, capital requirements, and our needs for additional financing. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” “goal,” or other variations of these terms (including their use in the negative) or by discussions of strategies, plans or intentions. 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. DESCRIPTION OF BUSINESS” of our Form 10-K for the fiscal year ended September 30, 2007 and those set forth in our other filings with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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INDEX

BIOVEST INTERNATIONAL, INC.

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BIOVEST INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

NINE MONTHS ENDED JUNE 30, 2008

(UNAUDITED)

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Supplemental disclosure of cash flow information:

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

1. Description of the Company:

Biovest International, Inc. (the “Company” or “Biovest”) is a biotechnology company focusing primarily on the development of BiovaxID^®, a patient-specific anti-cancer vaccine focusing on the treatment of follicular non-Hodgkin’s lymphoma, or follicular NHL. Follicular NHL is a cancer of the lymphatic system that results when the body’s follicle center cells, which are a type of white blood cell, become abnormal and eventually spread throughout the body growing and dividing in an uncontrolled fashion. BiovaxID is a customized anti-cancer vaccine that is derived from a patient’s own cancer cells and is designed to utilize the power of the patient’s immune system to recognize and destroy cancerous lymphoma cells while sparing normal cells. The Company produces this vaccine by extracting some of the patient’s tumor cells and then replicating and purifying the unique antigen that is present only on the surface of the patient’s own tumor cells. The Company is currently conducting a pivotal Phase 3 clinical trial for BiovaxID in patients with the indolent, or low-grade, form of B-cell follicular NHL. Based on its analysis of available unblinded clinical trial data from the BiovaxID Phase 3 trial, in June 2007, the independent Data Monitoring Committee (DMC) for BiovaxID recommended that Biovest conduct an interim analysis of the study’s efficacy endpoints and overall safety profile. In April 2008, the DMC reviewed the unblinded data from the study and recommended that the trial be halted and the data from the study be unblinded in August 2008 for submission to the Food and Drug Administration (FDA) and worldwide regulatory authorities. In July 2008, Biovest announced unblinded results of data then available from the Phase 3 trial indicating a statistically significant clinical benefit. Discussions are planned with the FDA as to accelerated approval process and the pathway to commercialization of BiovaxID.

In January 2008, the Company obtained the worldwide, exclusive license to Revimmune™ for the treatment and prevention of transplant rejection including rejection following a bone marrow transplant. As an initial indication, the Company intends to submit an Investigational New Drug (IND) application seeking FDA permission to enter a Phase 3 clinical trial of Revimmune usage in bone marrow transplants to treat and possibly cure sickle cell anemia, an inherited disease that is chronic and lifelong, leading to painful crises, organ failure, and strokes.

The Company also has developed an automated cell culture instrument, called AutovaxID™, to reduce the manpower and production space requirements and costs associated with the production of its BiovaxID vaccine. The Company believes that this instrument will facilitate its commercial production of BiovaxID, if approved. Further, the Company has formed a wholly-owned subsidiary, AutovaxID, Inc., to conduct the business which will commercially market this automated instrument.

The Company also manufactures instruments and disposables used in the hollow fiber production of cell culture products. The Company’s hollow fiber cell culture products and instruments are used by biopharmaceutical and biotech companies, medical schools, universities, research facilities, hospitals and public and private laboratories. The Company also produces mammalian and insect cells, monoclonal antibodies, recombinant and secreted proteins and other cell culture products using its unique capability, expertise and proprietary advancements in the cell production process known as hollow fiber perfusion.

The Company’s business consists of three primary business segments: development of its therapeutic anti-cancer vaccine, BiovaxID for follicular NHL; assembly and sale of instruments and consumables; and commercial production of cell culture products and services.

As of June 30, 2008, the Company is a 76% owned subsidiary of Accentia Biopharmaceuticals, Inc. (“Accentia”).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

2. Significant accounting policies:

Basis of presentation:

The accompanying unaudited condensed consolidated financial statements have been derived from unaudited interim financial information prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations, although the Company believes that the disclosures made are adequate so that the information presented is not misleading. The interim financial statements of the Company, in the opinion of management, include all normal and recurring adjustments necessary for a fair presentation of results as of the dates and for the periods covered by the interim financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended September 30, 2007 included in the Company’s 2007 Form 10-K, filed with the SEC on December 28, 2007. The accompanying condensed unaudited balance sheet at September 30, 2007 has been derived from the audited financial statements at that date, but does not include all information and footnotes required by GAAP for complete financial statements.

Operating results for the nine months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

Principles of Consolidation:

The condensed consolidated financial statements represent the consolidation of wholly-owned companies and interests in variable interest entities where the Company has a controlling financial interest or has been determined to be the primary beneficiary under Financial Accounting Standards Board (FASB) Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN 46R”).

The condensed consolidated financial statements include Biovest International, Inc., its wholly owned subsidiaries Biovax, Inc., and AutovaxID, Inc.; and certain variable interest entities of the Company, Biolender LLC, Biolender II LLC, Biovax Investment LLC, Telesis CDE Two LLC, AutovaxID Investment LLC, and St. Louis New Markets Tax Credit Fund II LLC (Notes 13 and 14).

All significant inter-company balances and transactions have been eliminated.

Loss per common share

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

2. Significant accounting policies (continued):

Recent accounting pronouncements:

In September 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157 (“FAS 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is a relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current valuation and accounting practices. For fiscal years beginning October 1, 2008, the Company will be required to implement FAS 157 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in the financial statements. Implementation of FAS 157 for other non-financial assets and liabilities has been deferred until the fiscal year beginning October 1, 2009. Earlier application is permitted provided that the reporting entity has not yet issued financial statements for that fiscal year. Management believes this Statement will have no material impact on the financial statements of the Company once adopted.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently assessing the adoption of FAS 159, and the effect, if any, on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The adoption of this standard is not expected to have a material effect on the Company’s results of operations or financial position.

In December 2007, the FASB issued FAS No. 160, Non-controlling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 . FAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Among other requirements, this statement requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. This will require a reclassification of non-controlling interests in variable interest entities on the Company’s consolidated balance sheet to equity and the elimination of non-controlling interest in losses from variable interest entities on the Company’s consolidated statement of operations once adopted for the Company’s fiscal year beginning October 1, 2009. Earlier adoption is prohibited.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). This statement requires companies to provide enhanced disclosures about (a) how and why they use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt the new disclosure requirements on or before the required effective date and thus will provide additional disclosures in its consolidated financial statements when adopted.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

2. Significant accounting policies (continued):

Recent accounting pronouncements (continued):

In May 2008, the FASB issued FASB Staff Position APB 14-1 (FSP APB 14-1), “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”. FSP APB 14-1 requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers’ nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is not permitted and retroactive application to all periods presented is required. Currently, the convertible debt the Company has issued does not fall within the scope of FSP APB 14-1 and thus the Company does not expect the adoption of APB 14-1 will have any impact on its consolidated financial statements.

In May 2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (“SEC”) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect SFAS No. 162 to have a material impact on the preparation of its consolidated financial statements.

3. Liquidity and management plans:

During the nine months ended June 30, 2008, the Company incurred a net loss of $11.5 million, of which approximately $2.4 million were non-cash losses resulting from the modification of various provisions of the Company’s debt with Laurus Master Fund, Ltd. (“Laurus”), and Pulaski Bank and Trust Company of St. Louis, MO (“Pulaski”), as well as losses on derivative liabilities. At June 30, 2008, the Company had an accumulated deficit of approximately $108.1 million and working capital deficit of approximately $28.4 million. The Company’s independent auditor’s report included a “going concern” uncertainty on the financial statements for the year ended September 30, 2007, citing significant losses and working capital deficits at that date, which raised substantial doubt about the Company’s ability to continue as a going concern.

Regulatory strategy and commercialization expenditures:

Under the Company’s current regulatory strategy, the Company has performed an interim analysis of the available clinical trial data prior to the completion of patient enrollment as provided in the clinical trial protocol. Based upon a recommendation from the independent Data Monitoring Committee (“DMC”) which monitors the safety and efficacy profile of the clinical trial and the Company’s analysis of the available clinical trial data, the Company plans to seek accelerated and conditional approval of BiovaxID with the FDA and its European counterpart, the EMEA, respectively, for the indication of follicular NHL. Pending the outcome of this anticipated application for accelerated and conditional approval, the Company has curtailed some of its ongoing clinical trial activities which had the effect of decreasing clinical trial expenses compared to that for prior periods. Accelerated or conditional approval would require the Company to complete the ongoing Phase 3 study either in its current configuration or as a different post-approval study protocol as a condition to continued marketing of BiovaxID. Accordingly, should the Company receive accelerated and/or conditional approval, clinical trial activities and related expenses may return to the levels experienced in periods prior to the application for conditional approval until the clinical trial is completed. The Company’s ability to timely access required financing will continue to be essential to support the ongoing Phase 3 clinical trial and ongoing commercialization efforts. The Company’s inability to obtain required funds or any substantial delay in obtaining required funds will have a material adverse effect on the ongoing clinical trial and commercialization efforts.

The Company began producing minimal revenues from the sale of AutovaxID instrumentation in March 2007. On June 8, 2007, the Company entered into a Non-Exclusive Distribution Agreement with VWR International, Inc. (“VWR”) to market and to distribute the AutovaxID instrument in North America. VWR commenced its marketing activities in September 2007 which to date has largely focused on introducing the AutovaxID to prospective customers and conducting product demonstrations. On April 17, 2007, the Company’s senior lender, Laurus, was issued a right to a minimum royalty stream on AutovaxID instrument sales as consideration for a forbearance on certain principal and interest payments due on the Company’s outstanding debt (Note 8).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

3. Liquidity and management plans (continued):

Issuance of Common Shares:

In the nine months ended June 30, 2008, the Company issued a total of 332,218 shares of its common stock in satisfaction of certain current and past due professional fees in the approximate amount of $420,000.

On March 31, 2008, the Company issued 400,000 shares of its common stock to Pulaski as consideration for extending the maturity date on the Company’s debt obligations.

On June 27, 2008, the Company issued 30,465 shares of its common stock to a director of the Company in payment for interest accrued on its convertible notes outstanding.

Advances to the Company by Accentia:

During three months ended June 30, 2008, the balance of the intercompany amounts due to Accentia remained relatively unchanged as cash payments made to Accentia approximated the charges for various shared resources and accrued interest on the principal balance outstanding. At June 30, 2008, the Company’s loan balance owed to Accentia was approximately $11.6 million which is evidenced by three secured promissory demand notes which accrue interest at the prime rate. On February 5, 2008, the terms of these notes were modified to allow Accentia the option (the “Conversion Option”) to convert part or all of the principal and interest due into shares of the Company’s common stock at a conversion price of $1.10 per share (the “Conversion Price”) subject to adjustment in the event of certain recapitalizations or in the event of the sale of our stock at prices below the Conversion Price (Note 9). On May 9, 2008, as provided for under the adjustment provisions of the Conversion Option, the conversion price was modified to allow Accentia to convert part or all of the principal and interest due into shares of the Company’s common stock at a conversion price of $0.50 per share. The Company granted piggyback and demand registration rights to Accentia for the shares underlying this Conversion Option.

While investments and loans from Accentia have been a primary source of financing for the Company since 2003, the Company has been informed by Accentia that provisions of certain of its loan and debenture financing agreements preclude Accentia from making any additional direct cash contributions to the Company.

Amendments to Pulaski Notes:

Effective as of December 31, 2007, the Company and Pulaski extended the maturity date of the outstanding notes dated January 17, 2007 and March 22, 2007, in the respective amounts of $1,000,000 and the $750,000 to June 30, 2008. On February 14, 2008, the Company reduced the outstanding aggregate loan amounts through a payment of $750,000 to Pulaski, $700,000 of which was applied toward principal, with the remaining $50,000 to be applied against future interest payments as they become due.

Effective as of June 30, 2008, the Company again extended the maturity of the outstanding notes with Pulaski to September 30, 2008. The terms of this extension require that (a) the Company reduce the aggregate principal amount of the notes through a payment of $50,000 to Pulaski, due by August 29, 2008, and (b) the Company issue to Pulaski 50,000 shares of the Company’s common stock as consideration for the extension fees due. The 50,000 common stock shares were issued to Pulaski on July 29, 2008.

Amendments to Valens Notes:

Effective as of May 30, 2008, the Company entered into an agreement with Laurus and its affiliates, Valens U.S. SPV I, LLC (“Valens US”) and Valens Offshore SPV II, Ltd. and Valens Offshore SPV II, Corp. (collectively, “Valens Offshore”) (collectively, the “Valens Funds”) whereby the Valens Funds agreed to extend the maturity date of their Secured Promissory Notes from the Company dated December 10, 2007 (the “Notes”) from their initial maturity date of June 10, 2008 to October 31, 2008 (the “Extension”). In consideration for the Extension, the Company entered into an amendment to the existing royalty agreements with the Valens Funds (the “Royalty Amendment”) whereby the royalty percentage due to the Valens Funds on sales of the Company’s biologic products including BiovaxID was increased from 9.0% to 15.5%. In connection with the closing of the Amendment Agreement, Accentia executed a Guaranty Side Letter with Laurus confirming that the portion of the Company’s existing indebtedness to Laurus which is guaranteed by Accentia shall be changed from 64% of all presently due and outstanding debts and liabilities of the Company to a fixed principal amount of $5.0 million together with all other obligations covered by and as defined under the Guaranty between Accentia and Laurus dated March 31, 2006.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

3. Liquidity and management plans (continued):

Sublicense Agreement with related party:

On January 16, 2008, the Company entered into a sublicense agreement (the “Sublicense Agreement”) with Revimmune, LLC (“Revimmune”) under which the Company was granted the exclusive worldwide rights to Revimmune, a patent-pending pharmaceutical treatment in late-stage development for the treatment of and prevention of transplant rejection including rejection following a bone marrow transplant.

Other material terms and conditions of the Sublicense Agreement are as follows:

Amendments to Royalty Agreements:

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

On February 5, 2008, the Company entered into an amendment with Accentia modifying the existing royalty agreement dated October 31, 2006 on sales of biologic products, including BiovaxID, to amend and clarify the calculation of royalty payments from any sublicense to specify that in all cases the royalty amounts will be calculated as a percentage of sales to customers/patients.

Effective as of May 30, 2008, the Company entered into an amendment to its existing Royalty Agreements with the Valens Funds (the “Royalty Amendment”) whereby the royalty percentage due to the Valens Funds on sales of the Company’s biologic products including BiovaxID was increased from 9.0% to 15.5%.

Amendment to Lease Agreement:

Effective as of February 1, 2008, the Company entered into an amendment to its existing lease for its Worcester, Massachusetts facilities whereby the Company surrendered a portion of those leased premises and the rent and common area expenses associated with the lease were decreased proportionately.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

3. Liquidity and management plans (continued):

Additional expected financing activity:

Management intends to attempt to meet its cash requirements through proceeds from its cell culture and instrument manufacturing activities, the use of cash on hand, vendor credit, short-term borrowings, debt and equity financings, and strategic transactions such as collaborations and licensing. The Company’s ability to continue present operations, pay its liabilities as they become due, and meet its obligations for vaccine development is dependent upon the Company’s ability to obtain significant external funding in the very short term. Additional sources of funding have not been established; however, additional financing is currently being sought by the Company from a number of sources, including the sale of equity or debt securities, strategic collaborations, recognized research funding programs, as well as domestic and/or foreign licensing of our vaccine. Management is currently in the process of exploring these various financing alternatives. There can be no assurance that the Company will be successful in securing such financing at acceptable terms, if at all. If adequate funds are not available from the foregoing sources in the near term, 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 that are non-essential to the ongoing development or future commercialization of BiovaxID and AutovaxID, 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 or all of its commercialization efforts.

4. Concentrations of credit risk and major customer information:

The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs ongoing credit evaluations of its customers. Two customers accounted for 43% of revenues for the nine months ended June 30, 2008, whereas these same two customers accounted for 49% of revenues for the nine months ended June 30, 2007. Two customers also accounted for 44% of trade accounts receivable as of June 30, 2008.

The Company derives a significant amount of revenue from export sales. The Company’s export sales were 45% of revenues for the nine months ended June 30, 2008, compared to 34% for the same period in fiscal 2007. For the nine months ended June 30, 2008 and 2007, sales to customers in the United Kingdom and Canada accounted for 41% and 26% of total revenue respectively.

5. Inventories:

Inventories consist of the following:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

6. Notes Payable:

Notes payable consist of the following:

Amendments to Pulaski Notes:

Effective as of December 31, 2007, the Company and Pulaski extended the maturity date of the outstanding notes dated January 17, 2007 and March 22, 2007, in the respective amounts of $1,000,000 and the $750,000 to June 30, 2008. On February 14, 2008, the Company reduced the outstanding aggregate loan amounts through a payment of $750,000 to Pulaski, $700,000 of which was applied toward principal, with the remaining $50,000 to be applied against future interest payments as they become due. The notes continue to be unsecured obligations of the Company, and continue to be guaranteed by certain affiliates of the Company and its parent. The Company issued to the guarantors, as additional consideration for the continuation of the guarantees, five year warrants to purchase an aggregate total of 1,862,460 shares of our common stock, par value $0.01 per share, at an exercise price of $1.10 per share (the “Warrants”). The guarantors have piggy-back registration rights for the shares underlying the Warrants. The Company continues to indemnify and hold harmless each guarantor should their guarantees be called by the Lender. In the event of default by the Company resulting in a payment to the Lender by the guarantors, the Company has agreed to compensate each affected guarantor by issuance of that number of shares of the Company’s restricted common stock determined by dividing 700% of the amount guaranteed by $1.10. On March 31, 2008, the Company issued 400,000 shares of its common stock to Pulaski in full payment of renewal/extension fees due in connection with these notes.

The Company applied the provisions of EITF 96-19, “Debtors Accounting for Modification or Exchange of Debt Instruments” to the Amendment. EITF 96-19 provides that substantial modifications of terms should be treated in the same manner as an extinguishment of debt and thus accounted for under the provisions of SFAS 125. The Company determined that the modification of terms to the notes to Pulaski in addition to the issuance of 400,000 shares of common stock valued at $1.10 per share constituted a substantial modification of terms and thus treated the extension as an extinguishment of debt. The Company incurred a $384,000 loss on extinguishment of debt as a result of this transaction which is included in other income (expense) in the accompanying condensed consolidated statements of operations for the nine months ended June 30, 2008.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007

(UNAUDITED)

6. Notes Payable (continued):

Amendments to Pulaski Notes (continued):

Effective as of June 30, 2008, the Company again extended the maturity of the outstanding notes with Pulaski to September 30, 2008. The terms of this extension require that (a) the Company reduce the aggregate principal amount of the notes through a payment of $50,000 to Pulaski, due by August 29, 2008, and (b) the Company issue to Pulaski 50,000 shares of the Company’s common stock as consideration for the extension fees due. The 50,000 common stock shares were issued to Pulaski on July 29, 2008. As this modification of terms did not constitute a substantial modification under the provisions of EITF 96-19, no extinguishment loss was recognized in the accompanying condensed consolidated statement of operations.

Amendments to Valens Notes:

Effective as of May 30, 2008, the Company entered into an agreement with Laurus and its affiliates, the Valens Funds whereby the Valens Funds agreed to extend the maturity date of their Secured Promissory Notes from the Company dated December 10, 2007 (the “Notes”) from their initial maturity date of June 10, 2008 to October 31, 2008 (the “Extension”). In consideration for the Extension, the Company entered into an amendment to the existing royalty agreements with the Valens Funds (the “Royalty Amendment”) whereby the royalty percentage due to the Valens Funds on sales of the Company’s biologic products including BiovaxID was increased from 9.0% to 15.5%. The Company determined the above modification was within the scope EITF 96-19, “Debtors Accounting for Modification or Exchange of Debt Instruments”. The Company concluded that the modification of terms did not constitute a substantial modification and thus no extinguishment of debt occurred. Accordingly, the Company continues to reflect the debt at the carrying value of the original instrument ($8.5 million) as of June 30, 2008. See Note 16 for further extension of maturity date of these notes.

7. Long-term debt:

Long-term debt consists of the following:

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7. Long-term debt (continued):

Future maturities of long-term debt are as follows:

Amendment to Laurus Loan:

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

The Company applied the provisions of EITF 96-19, “Debtors Accounting for Modification or Exchange of Debt Instruments” to the Amendment. EITF 96-19 provides that substantial modifications of terms should be treated in the same manner as an extinguishment of debt and thus accounted for under the provisions of SFAS 125. The Company determined that the modification of terms of the $7.8 million loan from Laurus in addition to the $1.8 million payment due upon maturity under the Amendment constituted a substantial modification of terms and thus treated the Amendment as an extinguishment of debt. The Company incurred a $1.4 million loss on extinguishment of debt as a result of this transaction which is included in other income (expense) in the accompanying condensed consolidated statement of operations for the nine months ended June 30, 2008.

8. Royalty liability:

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

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

Expected future royalty payments are as follows:

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9. Related Party Transactions:

Notes payable, related parties:

Notes payable, related parties consists of the following:

Notes payable, related parties includes amounts advanced under three secured promissory demand notes issued to Accentia, bearing interest at the prime rate. As of June 30, 2008, the total balance owed to Accentia under these notes was approximately $11.6 million. These notes are secured by all assets of the Company and are subordinate to the Company’s outstanding loans to Laurus and the Valens Funds. On February 5, 2008 the terms of these notes were modified to allow Accentia the option to convert part or all of the principal and interest due into shares of the Company’s common stock at a conversion price of $1.10 per share (the “Conversion Price”) subject to adjustment in the event of certain recapitalizations or in the event of the sale of our stock at prices below the Conversion Price. On May 9, 2008, as provided for under the adjustment provisions of the Conversion Option, the conversion price was modified to allow Accentia to convert part or all of the principal and interest due into shares of the Company’s common stock at a conversion price of $0.50 per share. The Company granted piggyback and demand registration rights to Accentia for the shares underlying this Conversion Option.

Management concluded that the February 5^th modification added a substantive conversion option to these notes and thus applied debt extinguishment accounting to the transaction resulting in a $4.9 million gain on modification, recorded as an increase in additional paid-in capital on the Company’s consolidated balance sheet as of June 30, 2008. The new debt instrument was recorded at a discount to the carrying value of the notes prior to modification and will be amortized over the expected repayment term of the notes, a three year period. The carrying value of these notes is $7.1 million, net of unamortized discount as of June 30, 2008. Related party interest expense of $0.9 million and $0.5 million was incurred on these notes for the nine months ended June 30, 2008 and 2007 respectively.

On September 11, 2007, the Company issued two unsecured promissory notes to two directors of the Company in the aggregate amount of $0.2 million. These loans bear interest at prime plus 2.0% (7.0% at June 30, 2008) and mature September 10, 2008. The notes can be prepaid at any time without penalty and are subordinated to the Company’s outstanding loans to Laurus and the Valens Funds. The Company issued five-year warrants to purchase 909,090 shares of the Company’s common stock at $1.10 per share in conjunction with these loans. In accordance with APB 14: “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,” proceeds were allocated to debt and stockholders’ equity based on the relative fair values of the debt and the warrants. The carrying value of these notes as of June 30, 2008 is $193,000, including accrued interest. The remaining discount of $21,000 to these notes payable will be accreted using the effective interest method through September 2008. Interest expense of approximately $65,000 was incurred on these notes during the nine months ended June 30, 2008.

On September 26, 2007, the Company issued an unsecured promissory note to a shareholder of Accentia in the amount of $46,000. This loan bears interest at prime plus 2.0% (7.0% at June 30, 2008) and is payable October 1, 2009. This note is subordinated to the Company’s outstanding loans to Laurus and the Valens Funds. The Company issued five-year warrants to purchase 25,099 shares of the Company’s common stock at $1.10 per share in conjunction with this loan. Proceeds from this note were allocated to debt and stockholders’ equity based on the relative fair values of the debt and the warrants. The carrying value of this note as of June 30, 2008, including accrued interests is $49,000. Interest expense of approximately $9,000 was incurred on this note during the nine months ended June 30, 2008.

On October 12, 2007, the Company issued an unsecured promissory note to a director of the Company in the amount of $300,000. This loan bears interest at prime plus 2.0% (7.0% at June 30, 2008) and is payable October 11, 2008. The Company issued warrants to purchase 2,727,270 shares of the Company’s common stock at $1.10 per share in conjunction with this loan. Proceeds from the loan were allocated to debt and stockholders’ equity based on the relative fair values of the debt and the warrants. The carrying value of this note as of June 30, 2008 is $235,000, including accrued interest. Interest expense of approximately $135,000 was incurred on this note during the nine months ended June 30, 2008.

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9. Related Party Transactions (continued):

Notes payable, related parties (continued):

On May 9, 2008, the Company entered into a financing transaction with one of the Company’s directors, whereby the Company issued a convertible promissory note in the amount of $1.0 million, bearing interest at 10% and with a maturity date of the earlier to occur of one year from the date of issuance, or, at the election of the lender, upon closing of a financing transaction resulting in net proceeds to the Company of at least $15 million. Interest only is payable monthly and may be paid by issuance of the Company’s restricted common stock, calculated at a price of $0.50 per share. At any time after issuance of the note the lender may elect to convert all or any portion of the outstanding principal and accrued interest on the note into common stock of the Company, at a conversion price equal to $0.50 per share. As part of this transaction the Company issued to the lender a warrant to purchase up to 2,000,000 shares of the Company’s common stock for a period of five years at an exercise price of $0.50 per share, with cashless exercise provisions. In addition, the Company entered into an option agreement with the lender whereby the lender may elect, at any time before the earlier to occur of i) notice of a signed termsheet for a financing of specified magnitude or ii) maturity of the note as defined therein, to increase his loan by an amount of up to the full original loan amount ($1.0 million) upon the same terms as contained in the original note, including issuance of additional warrants with the same expiration date, exercise price, and cashless exercise provisions.

Under the Emerging Issues Task Force (“EITF”) No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios , and EITF No. 00-27, Application of Issue 98-5 to Certain Convertible Instruments, the Company is required to value the warrants and beneficial conversion feature granted with this debt (“BCF”) separately from the note. EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, provides guidance for distinguishing between permanent equity, temporary equity and assets and liabilities. The warrants issued with the debt, as well as the option agreement with the lender, whereby the lender may elect to increase his loan by an additional $1.0 million meets the requirements of EITF No. 00-19 to be accounted for as an equity instrument. As such, this option has not been accounted for as a derivative (which would be marked to market each reporting period) and in the event the option is exercised, no gain or loss is recognized. The value assigned to the warrants ($0.25 million), the BCF ($0.36 million) and the option agreement ($0.39 million) was initially recorded as a discount to the face value of the note and an offsetting increase to additional paid-in capital. The debt discount ($1.0 million aggregate) is amortized to interest expense over the life of the note under the effective interest method. As of June 30, 2008 this note has a carrying value of $15,000, net of unamortized discount.

On June 12, 2008, the Company entered into a financing transaction with one of the Company’s directors, whereby the Company issued a convertible promissory note in the amount of $0.2 million, bearing interest at 10% and with a maturity date of the earlier to occur of one year from the date of issuance, or, upon the repayment of a short term loan provided by the Company to Accentia in the amount of $0.2 million. On June 25, 2008, having received repayment of its short term loan to Accentia in the amount of $0.2 million, the Company repaid the principal amount due under this note. Interest was payable monthly and was paid by issuance of the Company’s restricted common stock, calculated at a price of $0.50 per share. As part of this transaction the Company issued to the lender a warrant to purchase up to 400,000 shares of the Company’s common stock for a period of seven years at an exercise price of $0.50 per share, with cashless exercise provisions

Similar to the May 9^th financing above, the value of the warrants ($81,000) and beneficial conversion feature ($49,000) granted with this debt were required to be recorded as a discount to the face value of the note with an offsetting increase to additional paid-in capital under EITF No. 98-5 and EITF No. 00-27. As the note was repaid on June 25, 2008, the full discount amount of $130,000 has been amortized to interest expense in the accompanying condensed consolidated statement of operations for the nine months ended June 30, 2008.

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9. Related Party Transactions (continued):

Southwest Bank of St. Louis, an M&I Bank Note:

On April 9, 2008, the Company issued five year warrants to purchase 240,000 shares of the Company’s common stock at $1.10 per share to an officer of the Company for his continuing guaranty of the Company’s note payable to Southwest Bank of St. Louis, an M&I Bank (“Southwest Bank”) in the principal amount of $200,000.

Modification and termination of agreements:

In December 2006, the Company borrowed $3.1 million from Accentia to facilitate the purchase of Biolender II in the New Market Tax Credit Transaction. This borrowing was evidenced by the execution of an additional promissory demand note bearing interest at prime rate and $1.1 million due under this note was paid subsequent to the closing of the December New Market Tax Credit transactions and the remaining $2.0 million is included in the June 30, 2008 balance in Notes payable, related party. On October 31, 2006, the Company entered into a series of agreements with Accentia modifying certain material terms of the relationship between the two companies. The material terms of these modifications to the previously existing agreements are summarized as follows:

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9. Related Party Transactions (continued):

Modification and termination of agreements (continued):

10. Stock based compensation:

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of the Company’s stock and other factors estimated over the expected term of the options. The expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus the contract term. This method is used because the Company does not currently have adequate historical option exercise or forfeiture information as a basis to determine expected term. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term.

Common stock options outstanding and exercisable as of June 30, 2008, are as follows:

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10. Stock based compensation (continued):

Non-vested employee stock options:

Stock Warrants:

11. Derivative liabilities:

Derivative liabilities consist of the following at fair value:

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12. Segment information:

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

The Company’s facilities expenses and other assets are not distinguished among the identifiable segments. Revenue and cost of sales information about the Company’s segments are as follows:

13. New Market Tax Credit transactions:

April 2006 NMTC Transaction:

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

On March 31, 2006, in contemplation of Transaction I, Biovest closed a financing transaction with Laurus pursuant to which Laurus purchased from Biovest a secured promissory note in the principal amount of $7,799,000 (the “Laurus Note”). Accentia originally guaranteed 64% of any amounts outstanding under the note. On May 30, 2008, this guaranty was modified to reflect a fixed principal amount of $5.0 million. Under the terms of the Laurus Note, $7.5 million of the principal amount was deposited into a restricted bank account of Biovest (the “Restricted Account”) pursuant to a restricted account agreement between Biovest and Laurus. Accentia, Analytica International, Inc. (formerly The Analytica Group, Inc.) and Laurus also entered into an Amended and Restated Stock Pledge Agreement pledging Accentia’s shares of TEAMM Pharmaceuticals, Inc., Analytica International, Inc., Biovest, and Biolender, who was added as obligor by way of joinder, to secure the obligations owed to Laurus as a result of the Laurus Note.

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13. New Market Tax Credit transactions (continued):

April 2006 NMTC Transaction (continued):

In contemplation of Transaction I, Biovest and Accentia formed Biolender, as a Delaware limited liability company. On April 21, 2006, $2.5 million was released from the Restricted Account created under the Laurus Note. The release of these funds was contingent upon their use in Transaction I. These proceeds were used to purchase a 29.5% equity investment in Biolender for $2.5 million. Accentia used the proceeds of a $6.0 million intraday loan from First Bank to purchase the remaining 70.5% equity interest in Biolender. The $6.0 million loan from First Bank was fully guaranteed by two directors of Accentia. On April 27, 2006, the Company redeemed 10 million shares of its common stock owned of record by Accentia for a $6.0 million cash payment which equaled the market price of $0.60 per share. Accentia used the proceeds of the stock redemption to repay its intraday loan due First Bank. Subsequently, on October 31, 2006, the Company entered into a Purchase Agreement with Accentia whereby the Company purchased Accentia’s 70.5% ownership interest in Biolender. In consideration of the sale of this interest in Biolender, the Company issued to Accentia ten million shares of common stock, representing the negotiated value of the purchased interest (Note 9).

In contemplation of Transaction I, Biovax Investment, LLC (the “Fund”) was established. U.S. Bancorp invested $3.6 million for a 99.99% equity interest in the Fund. Biovax Investment Corp., the Fund manager, invested an additional $100 for the remaining 0.01% equity interest. On April 25, 2006, Biolender loaned the Fund $8.5 million pursuant to a 5.18%, annual rate, senior secured, convertible note receivable, due October 27, 2013. Interest on the note is payable as follows: (i) 0.64% interest per annum, non-compounding, shall be payable on the first day of each calendar month until October 27, 2013; and (ii) any remaining accrued and unpaid interest shall be payable in one installment on October 27, 2013. The note is convertible at the option of the fund into shares of the Company’s common stock near the maturity date.

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

The CDE is a Community Development Entity that is certified through the U.S. Treasury Department to make QLICI, and is managed and partially owned (0.01%) by Telesis CDE Corporation, a private financial institution. Telesis CDE Corporation paid $1,200 in consideration for its 0.01% interest in Telesis. The CDE, upon receipt of its equity funding, contemporaneously issued $11.5 million to Biovax for a 1.0% convertible promissory note payable, due October 27, 2013. The convertible promissory note is convertible into common stock at the option of the CDE within 5 days of the maturity date at a conversion price equaling the then trading market price of the common stock. The overall arrangement provides that in the event the CDE converts the note payable, the aforementioned note receivable is subject to immediate conversion at the same conversion price. The Company also issued to Telesis CDE Corporation warrants to purchase 1.2 million shares of the Company’s common stock over a period of nine-years at a fixed price of $1.30. These warrants are reflected as an equity financing cost in stockholders’ equity at a fair value of $517,000 computed using the Black-Scholes option pricing model. Accentia also issued warrants to Telesis CDE Corporation to purchase 0.2 million shares of Accentia’s common stock over a period of seven years at a fixed price of $9.00.

Biovax used the proceeds of the $11.5 million convertible promissory note as follows: $6.0 million was paid to Biovest pursuant to an Asset Purchase and Sale Agreement dated April 18, 2006 and described further below, $1.6 million was issued as a dividend to Biovest and $1.3 million was paid to Biovest for BiovaxID anti-cancer vaccines in various stages of production. The remaining $2.6 million was used to cover ongoing operational expenses.

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13. New Market Tax Credit transactions (continued):

April 2006 NMTC Transaction (continued):

The transaction was structured so that, upon maturity, Biovax will have paid approximately $12.4M in principal and interest payments to the CDE. The operating agreement of the CDE stipulates that in the event the QLICI is repaid in the combination of stock and cash, the stock received shall be distributed to the Fund. Furthermore, any distributable cash received by Telesis CDE II, LLC shall be distributed to the Fund in proportion to the Fund’s respective percentage interest in the CDE in an amount sufficient to fully pay the Fund’s note payable to Biolender. Upon maturity, the Fund will have paid approximately $11.9M in principal and interest payments to Biolender. At maturity, total equity of the Fund is approximated to be $100,000 resulting from the difference of $12.4M in principal and interest payments received less $11.9M in principal and interest paid less approximately $400,000 in estimated operating costs of the Fund over the 7.5 year term of the notes. Biolender and US Bancorp entered into a put option wherein US Bancorp will have the right to put its investment in the Fund to the Company near the maturity of the instruments at a price of $180,000. Management has concluded that the fair value of US Bancorp’s investment in the Fund at maturity of both notes (approximately $100,000) would be less than the $180,000 US Bancorp would receive upon exercise of the put option and thus it is management’s expectation that this option will be exercised. Thus, prior to maturity of both notes, it is anticipated that the Fund will be 99.99% owned by Biolender. The Company accounted for this option as a derivative liability that requires recognition at fair value. The Company utilized a probability-based, discounted cash flow approach to value the put. Accordingly, the valuation technique provided for the recognition of the full put amount ($180,000) at the present value of its cash flows, using market interest rates that would likely be considered by market participants trading similar instruments.

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

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13. New Market Tax Credit transactions (continued):

April 2006 NMTC Transaction (continued):

December 2006 NMTC Transaction

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

On December 8, 2006, Accentia loaned to the Company $3.1 million pursuant to a Secured Promissory Note (the “Accentia Note”). Under the terms of the Accentia Note, interest accrues at a rate equal to prime rate, and is convertible, at Accentia’s option, to shares of the Company’s common stock at a conversion price of $0.50 per share. Upon closing of Transaction II, the Company repaid Accentia $1.1 million. The remaining $2.0 million of principal and all accrued and unpaid interest is included in notes payable, related parties in the accompanying June 30, 2008 consolidated balance sheet, and is due upon 30 days advance written notice by Accentia.

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13. New Market Tax Credit transactions (continued):

December 2006 NMTC Transaction (continued)

In contemplation of Transaction II, Biovest formed Biolender II as a Delaware limited liability company. On December 8, 2006, $2.5 million was released from the Restricted Account created under the Laurus Note. The release of these funds was contingent upon their use in Transaction II. These funds, together with the amount loaned to Biovest under the Accentia Note funded the purchase of a 100% equity interest in Biolender II for the benefit of the Company. The Company’s entire equity interest of $5.6 million in Biolender II has been pledged to Laurus as collateral to secure the Laurus Note.

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

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

CDE II is a Community Development Entity (“CDE”) that is certified through the U.S. Treasury Department to make QLICI, and is managed and partially owned (0.01%) by St. Louis Development Corporation, a not-for-profit corporation organized in Missouri. St. Louis Development Corporation paid $1,000 in consideration for its 0.01% interest in CDE II. CDE II, upon receipt of its equity funding, contemporaneously issued a QLICI to AutovaxID, evidenced by a $7.7 million subordinated promissory note dated as of December 8, 2006 which matures on December 8, 2036. Pursuant to a call right, for a period of six months starting on December 8, 2013, the CDE will have the right to call for the repayment of the CDE II Loan in the amount of $5.7 million, in full satisfaction of the principal on the CDE II Loan. Interest on the outstanding principal amount of the CDE II Loan accrues at the rate of 5.82% per annum, non-compounding and is payable in arrears on an annual basis having commenced on January 2, 2007 and continuing until maturity. The CDE II Loan is guaranteed in full by the Company and also guaranteed up to an amount of $4.5 million by officers and directors of Accentia. The Company issued warrants to purchase 2.6 million shares of common stock to these officers and directors as compensation for their guarantees. The guarantees were treated in a manner similar to contributed service and their fair value of $1.4 million was charged to expense upon issuance. The Company also indemnified the guarantors from any claims of any kind to the extent that the guarantors are called upon to pledge funds, assets or collateral in connection with the guarantee being executed.

AutovaxID used the proceeds from the $7.7 million promissory note to pay the Company $6.1million pursuant to an Asset Purchase and License Agreement dated December 8, 2006 and described further below. The remaining $1.6 million was used to cover ongoing operational expenses of AutovaxID.

The transaction was structured so that, on June 9, 2014, AutovaxID will have paid approximately $9.1M in principal and interest payments to CDE II. The operating agreement of CDE II stipulates that any distributable cash received shall be distributed to Fund II in proportion to the respective percentage interest Fund II has in CDE II in an amount sufficient to fully pay the Fund II note payable to Biolender II. On June 9, 2014, Fund II will have paid approximately $9.0 million in principal and interest payments to Biolender II (assuming CDE II exercises its right to call the CDE II loan for $5.7 million on June 9, 2014). At maturity then, total equity of the Fund is approximated to be $100,000, resulting from the difference of $9.1 million in principal and interest payments received less $9.0M in principal and interest paid over the 7.5 year term of the notes.

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13. New Market Tax Credit transactions (continued):

December 2006 NMTC Transaction (continued)

Biolender II and US Bancorp entered into a put option wherein US Bancorp will have the right to put its investment in Fund II to the Company near the maturity of the instruments at a price of $120,000. Management has concluded that the fair value of US Bancorp’s investment in Fund II at maturity of both notes (approximately $100,000) would be less than the $120,000 US Bancorp would receive upon exercise of the put option and thus it is management’s expectation that this option will be exercised. Thus, prior to maturity of both notes, it is anticipated that the Fund will be 100% owned by Biolender II. The Company accounted for this option as a derivative liability that requires recognition at fair value. The Company utilized a probability-based, discounted cash flow approach to value the put. Accordingly, the valuation technique provided for the recognition of the full put amount ($120,000) at the present value of its cash flows, using market interest rates that would likely be considered by market participants trading similar instruments.

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

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13. New Market Tax Credit transactions (continued):

December 2006 NMTC Transaction (continued)

14. Variable Interest Entities:

Accounting for the NMTC financing arrangement:

On April 25, 2006 and on December 8, 2006, the Company closed two financing transactions that were structured in an effort to obtain certain perceived advantages and enhancements from the NMTC regulations adopted under the auspices of the United States Department of the Treasury in 2002 to provide incentive for investing in businesses located in “qualifying census tracts,” or areas with a median income below the poverty line. The Company evaluated the structure of the NMTC financing arrangements and entities so involved under the context of FIN46(R). FIN46(R) provides a framework for determining whether certain entities should be consolidated (irrespective of equity ownership) based upon a variable interests model. This model determines the control and consolidation based upon potential variability in gains and losses of the entity being evaluated for consolidation. Generally, a variable interest holder that absorbs a majority of the entity’s expected losses, if they occur, receives a majority of the entity’s expected residual return, if they occur, or both is identified as the primary beneficiary for consolidation purposes.

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14. Variable Interest Entities (continued):

Accounting for the NMTC financing arrangement (continued):

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

New Market Tax Credit Transaction I:

New Market Tax Credit Transaction II:

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

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14. Variable Interest Entities (continued):

Accounting for the NMTC financing arrangement (continued):

Assets of $20.2 million and liabilities of $15.6 million of the variable interest entities identified above, are limited to the instruments pertaining to the NMTC financing arrangements. In accordance with consolidation principles, these assets and liabilities are eliminated in consolidation leaving the non-controlling interests of Biolender, Telesis CDE Two, LLC, Biovax Investment, LLC, Biolender II, AutovaxID Investment, LLC, and St. Louis NMTC Fund II, LLC, reflected on the Company’s June 30, 2008 consolidated balance sheet as non-controlling interests in variable interest entities.

The Company’s non-controlling interest in losses from variable interest entities on it consolidated statement of operations for the nine months ended June 30, 2008 consists of the following:

15. Commitments and Contingencies:

Legal proceedings:

The Company is involved in various legal proceedings, including the proceedings specifically discussed below. Management of the Company believes that any liability of the Company that may arise as a result of these proceedings will not have a material adverse effect on the financial condition of the Company and its subsidiaries taken as a whole, 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 .

Subsequent to the period covered by this Report, on August 4, 2008, the Company has been served with a summons and complaint filed in California Superior Court on behalf of Clinstar LLC for breach of contract for non-payment of certain fees for clinical trial studies and pass-through expenses in the amount of $385,000. The Company intends to seek to dismiss this litigation and plans to defend these claims vigorously.

Facility leases:

The Company leases equipment and office and manufacturing space pursuant to several non-cancelable operating leases. The Company leases approximately 33,000 square feet in Minneapolis, Minnesota, which is used for offices, a laboratory, manufacturing, warehousing areas to support the production of perfusion cell culture equipment and contract cell culture services. This facility Lease agreement has expired and we continue to occupy this facility on a month to month basis.

Effective as of February 1, 2008, the Company entered into an amendment to its existing lease for its Worcester, Massachusetts facilities whereby the Company surrendered a portion of those leased premises and the rent and common area expenses associated with the lease were decreased proportionately. The leased space now approximates 14,000 square feet and calls for base rent payments of approximately $0.6 million annually. The lease term extends through February 28, 2010.

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15. Commitments and Contingencies (continued):

Facility leases (continued):

In connection with the NMTC transaction on December 8, 2006, the Company entered into a lease for a 24,000 square foot facility in St. Louis, Missouri, for the sole purpose of assembling and distributing the AutovaxID instrument. The lease, which has a base term of approximately 3 years, calls for base rent payments of approximately $0.1 million annually, and provides a $12,000 allowance for tenant improvements.

Cooperative Research and Development Agreement:

In September 2001, the Company entered into a definitive Cooperative Research and Development Agreement (“CRADA”) with the National Cancer Institute (“NCI”) for the development and ultimate commercialization of patient-specific vaccines for the treatment of non-Hodgkin’s low-grade follicular lymphoma. The terms of the CRADA, as amended, included, among other things, a requirement to pay $0.5 million quarterly to NCI for expenses incurred in connection with the ongoing Phase 3 clinical trials. Since the transfer to Biovest of the investigational new drug application for development of this vaccine, which occurred in April 2004, these payments to NCI have been reduced to a small fraction of this original obligation (approximately $0.2 million per year). On September 25, 2006, the Company provided written notice to the NCI in accordance with the terms of the CRADA to terminate the CRADA at the end of the sixty day notice period. Under the terms of the CRADA, the Company is obligated to continue to provide vaccine to the NCI at no charge for purposes of the NCI’s studies that are within the scope of the CRADA if the Company were to abandon work on the vaccine. As the Company is actively developing the vaccine for commercialization and intends to do so to its completion, no estimated costs have been accrued as of June 30, 2008.

Guarantee Indemnifications:

Under the terms of the January and March Pulaski notes payable, several board members and affiliates issued personal guarantees. The Company agreed to indemnify and hold harmless each guarantor should their guarantees be called by the Lender by agreeing to compensate each affected guarantor by an issuance of restricted common stock equal to 700% of the amount of their guarantee. The stock will be issued using a pre-determined value of $1.10 per share. The maximum amount to be issued by the Company in this regard is 20,045,455 shares of unregistered common stock.

Under the terms of the Southwest Bank note payable issued June 26, 2007, an officer of the Company issued a personal guarantee. The Company agreed to indemnify and hold harmless the guarantor should the guarantee be called by Southwest Bank by agreeing to reimburse the guarantor for any liabilities incurred associated with enforcement of the guarantee.

Royalty agreements:

Pursuant to the royalty agreement dated October 31, 2006, as amended, the Company is required to pay to Accentia a 19.5% royalty on net sales from biologics products.

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

On October 30, 2007, December 10, 2007, and again on May 30, 2008, the Company completed financing transactions with the Valens Funds, both of which are subsidiary companies of Laurus. Pursuant to these transactions, the Valens Funds were granted an aggregate 15.5% royalty interest in the worldwide net commercial sales of the Company’s biologic products.

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15. Commitments and Contingencies (continued):

Stanford University agreement

In September 2004, the Company entered into an agreement with Stanford University allowing worldwide rights to use two proprietary hybridoma cell lines that are used in the production of BiovaxID. Under the agreement with Stanford, the Company is obligated to pay an annual maintenance fee of $10,000. The agreement also provides that the Company will pay Stanford $100,000 within one year following FDA approval of BiovaxID or five years following the agreement date (whichever occurs first), and following approval the Company is required to pay Stanford a running royalty of the higher of $50.00 per patient or 0.05% of revenues received by the Company for each BiovaxID patient treated using this cell line. This running royalty will be creditable against the yearly maintenance fee. Our agreement with Stanford obligates us to diligently develop, manufacture, market, and sell BiovaxID and to provide progress reports to Stanford regarding these activities. We can terminate this agreement at any time upon 30 days’ prior written notice, and Stanford can terminate the agreement upon a breach of the agreement by us that remains uncured for 30 days after written notice of the breach from Stanford.

Distribution agreement

On June 1, 2007, the Company entered into a non-exclusive distribution agreement with VWR, to distribute the AutovaxID automated cell culture device in North America. Under the terms of this agreement, the Company is obligated to pay to VWR 25% of net sales revenue generated from the sales and marketing efforts of VWR on AutovaxID cell culture systems and disposable cultureware used in conjunction with the AutovaxID system. The initial term of this agreement is for 24 months and can be terminated at any time by either party upon 90 days’ prior written notice.

Sublicense agreement with related party:

On January 16, 2008, the Company entered into a sublicense agreement (the “Sublicense Agreement”) with Revimmune under which the Company was granted the exclusive worldwide rights to Revimmune™, a patent-pending pharmaceutical treatment in late-stage development for the treatment of and prevention of transplant rejection including rejection following a bone marrow transplant.

Other material terms and conditions of the Sublicense Agreement are as follows: