Summary of ACCENTIA BIOPHARMACEUTICALS INC

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

When you read this section of this Quarterly Report on Form 10-Q, it is important that you also read the condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. 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 "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 and other risks and uncertainties discussed in our other filings with the Securities and Exchange Commission.

Overview

Accentia is a biotechnology company focused on discovering, developing and commercializing innovative therapies that address the unmet medical needs of patients utilizing therapeutic clinical products including personalized immunotherapies designed to treat autoimmune related diseases and cancer. We were incorporated in the State of Florida in 2002.

Cyrevia™ is a potential comprehensive system of care for the treatment of various autoimmune diseases. Cyrevia seeks to eliminate virtually all circulating white blood cells, including those driving autoimmunity, while seeking to spare the patient's stem cells. The therapeutic theory of Cyrevia is that as the patient's eliminated white blood cells are replenished with new white blood cells derived from these stem cells, the patient's immune system becomes effectively replaced or "rebooted". Cyrevia's active ingredient is cyclophosphamide. We are repurposing cyclophosphamide and administering it as part of our integrated risk-management system designed to assure consistency in use and to minimize the risks of treatment. Cyclophosphamide is currently U.S. Food and Drug Administration ("FDA") approved to treat disorders other than autoimmune disease, including various forms of cancer.

BiovaxID™ is being developed by our majority-owned subsidiary, Biovest International, Inc. ("Biovest"), as an active immunotherapy, personalized therapeutic cancer vaccine for the treatment of non-Hodgkin's lymphoma ("NHL"), a B-cell cancer, specifically, follicular lymphoma ("FL") and mantle cell lymphoma ("MCL"), and potentially other B-cell cancers. Both FL and MCL are generally considered to be incurable with currently approved therapies. These generally fatal diseases arise from the lymphoid tissue and are characterized by an uncontrolled proliferation and spread throughout the body of mature B-cells, which are a type of white blood cell. Three clinical trials conducted under Biovest's investigational new drug application ("IND") have studied BiovaxID in NHL. These studies include a Phase 2 clinical trial and a Phase 3 clinical trial in patients with FL, as well as a Phase 2 clinical trial in patients with MCL. BiovaxID has demonstrated statistically significant Phase 3 clinical benefit by prolonging disease-free survival in FL patients treated with BiovaxID. Biovest believes that these clinical trials demonstrate the safety and efficacy of BiovaxID.

Based on scientific advice meetings conducted by Biovest with multiple European Union ("EU")-Member national medicines agencies, Biovest filed its formal notice of intent to file a marketing authorization application ("MAA") with the European Medicines Agency ("EMA"), which begins the EU marketing approval application process. Additionally, based on a scientific advice meeting conducted with Health Canada, Biovest has announced plans to file a new drug submission application ("NDS") seeking regulatory approval in Canada. Biovest could receive a decision regarding EU marketing and Canadian regulatory approval for BiovaxID within 12 months after the submission and acceptance of our MAA and NDS, assuming that the rigorous review process advances forward in a timely and positive manner and no substantial regulatory issues or problems are encountered. Biovest also conducted a formal guidance meeting with the FDA in order to define the path for Biovest's filing of a biologics licensing application ("BLA") for BiovaxID's U.S. regulatory/marketing approval. Further in its guidance, the FDA required that Biovest conduct a second Phase 3 clinical trial to complete the clinical data gained through Biovest's first Phase 3 clinical trial and Biovest's BiovaxID development program to support the filing of its BLA for BiovaxID. Biovest is preparing, subject to required funding, to initiate this second Phase 3 clinical trial to advance BiovaxID toward the U.S. market.

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To support Biovest's planned commercialization of BiovaxID and to support the products of personalized medicine and particularly, patient specific oncology products, Biovest developed and commercialized a fully automated, reusable instrument that employees a fully disposable, closed-system cell-growth chamber incorporating a hollow fiber cell-growth cartridge called AutovaxID®. Since it is fully enclosed, computer controlled and automated, AutovaxID requires limited supervision and manpower to operate compared to manual instruments. AutovaxID is suitable for growing antibody-secreting cell lines, including hybridomas and Chinese hamster ovary ("CHO") cells, which are among the leading kinds of cell lines used for commercial therapeutic protein manufacture. AutovaxID has a small footprint and supports scalable production. Biovest plans to utilize the AutovaxID technology to streamline the commercial manufacture of BiovaxID. Biovest believes that AutovaxID is the first cell culture system that enables production of personalized cell-based treatments economically. AutovaxID uses a disposable production unit which provides for robust and dependable manufacturing while complying with the industry current good manufacturing practices ("cGMP") standards. Biovest is collaborating with the U.S. Department of Defense ("DoD") and others to further develop AutovaxID and its related hollow fiber systems and to explore potential production of additional vaccines, including vaccines for viral indications such as influenza and other contagious diseases.

Biovest also manufactures instruments and disposables used in the hollow fiber production of cell culture products. Biovest manufactures mammalian cell culture products such as whole cells, recombinant and secreted proteins, and monoclonal antibodies for third parties, primarily researchers. Biovest has produced over 7,000 cell based products for an estimated 2,500 researchers around the world. Biovest considers its vast experience in manufacturing small batches of different cell based products, together with Biovest's expertise in designing and manufacturing instruments for personalized medicines as important competencies supporting its development of patient specific immunotherapies.

Corporate Overview

In April 2002, we commenced business with the acquisition of Analytica International, Inc. ("Analytica"). Analytica conducted a global research and strategy consulting business that provided services to the pharmaceutical and biotechnology industries. We acquired Analytica in a merger transaction for $3.7 million cash, $1.2 million of convertible promissory notes, and the issuance of 8.1 million shares of our Series B preferred stock. Analytica was founded in 1997 and has offices in New York and Germany. On December 15, 2011, we closed on the sale of substantially all of the assets and business of Analytica to a third-party, for a combination of fixed and contingent payments aggregating up to $10 million. The purchase agreement included the name "Analytica International, Inc." Accordingly, we changed the name of our subsidiary from Analytica International, Inc. to Accentia Biotech, Inc.

In June 2003, we acquired an 81% interest in Biovest pursuant to an investment agreement for an initial investment of $20 million. Biovest's business consists of three primary business segments: the development of BiovaxID™ for B-cell blood cancers; the manufacture and sale of AutovaxID® and other instruments and disposables; and the commercial sale and production of cell culture products and services. As of December 31, 2012, we owned approximately 59% of Biovest's outstanding common stock with the minority interest being held by approximately 400 shareholders of record. Following our investment, Biovest continued to be a reporting company under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Biovest files periodic and other reports with the Securities and Exchange Commission ("SEC").

In November 2010, our Company and Biovest completed reorganizations and formally exited Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11") as fully restructured companies. Through the provisions of our respective bankruptcy plans (as amended) (the "Plan" and the "Biovest Plan", respectively), both of which were effective on November 17, 2010 (the "Effective Date"), our Company and Biovest restructured our debt into a combination of new debt and equity. On March 19, 2012, the Bankruptcy Court entered a Final Decree closing Biovest's Chapter 11 proceedings. Notwithstanding the effectiveness of the Plan, the Bankruptcy Court retains jurisdiction to adjudicate any remaining issues regarding, inter alia, the validity, amount, and method of payment of claims filed in connection with our Chapter 11 proceeding. Accordingly, we anticipate that there may be ongoing proceedings before the Bankruptcy Court to resolve any filed objections or disputes as to claims filed in our Chapter 11 proceeding.

On November 17, 2012, an aggregate of approximately $14.1 million in principal became due under our Debentures (Class 9) (collectively, the "Matured Obligations"). Because we were unable to pay the amount due on November 17, 2012, an event of default occurred. As a result of this event of default, we have accrued the interest on the Matured Obligations at a default rate of 18% and the additional default payment of 30% on the outstanding balance due. We have not been notified of an event of default by any of the holders of the Matured Obligations.

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Also, on November 17, 2012, an aggregate of approximately $27.7 million in principal, became due under the Biovest Corps Real Note, Biovest Laurus/Valens Term A Notes, and the Exchange Notes issued in Biovest's Exit Financing (collectively, the "Biovest Matured Obligations"). Because Biovest was unable to pay the amount due on November 17, 2012, an event of default occurred. On December 19, 2012, a majority of the holders of the outstanding Exchange Notes commenced a breach of contract action (the "Whitebox Litigation") to secure monetary judgment(s) against Biovest for the outstanding defaulted principal and interest owed to them in the aggregate amount of approximately $1.2 million, in the State of Minnesota. In response, Biovest filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan. Biovest has not been notified of an event of default by any other holder(s) of the outstanding Exchange Notes. As a result of this event of default, Biovest has accrued interest on the Exchange Notes at a default rate of 15% per annum.

Pursuant to cross-default provisions contained in Biovest's Laurus/Valens Term B Notes and Minnesota Promissory Notes, in the approximate aggregate amount of $4.5 million, the holders may also declare those notes to be in default. Biovest has not been notified of an event of default by any of the holders of the notes.

On November 17, 2012, Biovest, Corps Real and Laurus/Valens entered into a standstill agreement, whereby (i) the maturity dates of the Biovest Corps Real Note and Biovest's the Term A Notes were extended from November 17, 2012 to January 31, 2013 and (ii) Corps Real and Laurus/Valens granted Biovest a forbearance until January 31, 2013 from exercising their rights and/or remedies available to them under the Biovest Corps Real Note, Biovest's Term A Notes and Biovest's Term B Notes. Although the standstill agreement has expired, Biovest, Corps Real and Laurus/Valens are continuing to negotiate the potential restructuring of the Biovest Corps Real Note, Biovest's Term A Notes and Biovest's Term B Notes. Upon notification of an event of default by Corps Real, Corps Real will have the right to foreclose upon its first priority security interest in all of Biovest's assets. Upon notification of an event of default by Laurus/Valens, Laurus/Valens (a) will have right to foreclose upon their lien on all of Biovest's assets (which is subordinate only to the security interest of Corps Real) and (b) may appoint one-third of the total membership of Biovest's Board of Directors. Biovest has not been notified of an event of default by either Corps Real and/or Laurus/Valens.

The outcome of the continuing negotiations relating to the restructuring of the Biovest Matured Obligations, which may include the remainder of Biovest's outstanding debt instruments, may negatively affect our ownership interest in Biovest and cause our potential deconsolidation/loss of control in Biovest.

Results of Operations

Three Months Ended December 31, 2012 Compared to the Three Months Ended December 31, 2011

Consolidated Results of Operations

Revenues. Biovest's revenues for the three months ended December 31, 2012 were $0.5 million, compared to revenues of $1.1 million for the three months ended December 31, 2011. Included in product revenue in the prior fiscal year is $0.1 million resulting from a shared agreement involving the data from Biovest's Phase 3 clinical trial for BiovaxID®, while current year results do not contain comparable revenue. Instrument sales for the three month period ended December 31, 2012 were approximately $0.4 million representing a decrease of $0.34 million over the same quarter in the prior fiscal year. $0.2 million of this decrease is a result of fewer unit sales of instruments in the current year compared with the prior year, with the remaining decrease a result of fewer unit sales of cultureware, tubing sets and other disposable products and supplies for use with our instrument product line compared with the prior year. Service revenues from contract manufacturing activities for the current year were $0.14 million representing a decrease of $0.08 million compared to the prior year.

Gross Margin. The overall gross deficit as a percentage of sales for the three months ended December 31, 2012 was (6%) as compared to gross margin of 40% for the three months ended December 31, 2011. A relatively high percentage of Biovest's costs are of a fixed nature. This, combined with the reduction in Biovest's service revenue and an overall decrease in product unit sales, resulted in Biovest's total revenues falling short of covering fixed costs contributing to the gross deficit for the current quarter.

Operating Expenses. Research and development expenses have decreased by $0.06 million for the three months ended December 31, 2012 when compared to the three months ended December 31, 2011. This small change is attributable to a decrease in Biovest's laboratory supplies purchased and used in the continued analyses and validation of Biovest's vaccine manufacturing process at Biovest's Minneapolis (Coon Rapids), Minnesota facility.

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Interest Expense. Interest expense for the three months ended December 31, 2012 increased approximately $5.6 million compared to the three months ended December 31, 2011. The increase was due primarily to $4.2 million expensed as interest relating to the increase in principal due to the default on the Class 9 debentures equal to 30% of the outstanding indebtedness at the time of default. In addition, interest is being accrued at 18% on the $18.3 million balance. Prior to the default, there was no interest accruing on the Class 9 debentures.

Gain on Reorganization. Biovest recognized a gain of $0.22 million for the three months ended December 31, 2011, as a result of the settlement of prepetition claims through our Chapter 11 proceedings.

Liquidity

Sources of Liquidity

Our goal is to meet our cash requirements through proceeds from Biovest's instruments and disposables and cell culture products and services manufacturing activities, the use of cash on hand, trade vendor credit, short-term borrowings, debt and equity financings, the modification of existing cash commitments, and strategic transactions such as collaborations and licensing. Our ability to continue present operations, to continue Biovest's detailed analyses of BiovaxID's clinical trial results, to meet our debt obligations as they mature (discussed below), and to pursue ongoing development and commercialization of Cyrevia™, BiovaxID™, AutovaxID® and SinuNasal™ including potentially seeking regulatory/marketing approval, is dependent upon our ability to obtain significant external funding in the immediate term, which raises substantial doubt about our ability to continue as a going concern. Cash and cash equivalents, at December 31, 2012, were approximately $0.5 million. Additional sources of funding have not been established; however, additional financing is currently being sought by us 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 product candidates. There can be no assurance that we 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 immediate term, or if we determine it to otherwise be in our best interest, we may consider additional strategic financing options, including sales of assets, 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 or all of our commercialization efforts.

Matured Obligations

Also, on November 17, 2012, an aggregate of approximately $27.7 million in principal, became due under the Biovest Corps Real Note, Biovest Laurus/Valens Term A Notes, and the Exchange Notes issued in Biovest's Exit Financing (collectively, the "Biovest Matured Obligations"). Because Biovest was unable to pay the amount due on November 17, 2012, an event of default occurred. On December 19, 2012, Whitebox Credit Arbitrage Partners, LP, Whitebox Special Opportunities Fund Series B Partners, LP, Pandora Select Partners, LP, Whitebox Multi-Strategy Partners, LP, Whitebox Concentrated Convertible Arbitrage Partners, LP, (collectively, the "Whitebox Entities"), a majority of the holders of the outstanding Exchange Notes commenced a breach of contract action (the "Whitebox Litigation") to secure monetary judgment(s) against Biovest for the outstanding defaulted principal and interest owed to them in the aggregate amount of approximately $1.2 million, in the State of Minnesota. In response, Biovest filed a Motion to Dismiss, for the reason that the venue in which the Whitebox Litigation was filed was improper. Pursuant to the terms of the Exchange Notes, the proper venue is New York City, in the Borough of Manhattan. Biovest has not been notified of an event of default by any other holder(s) of the outstanding Exchange Notes. As a result of this event of default, Biovest has accrued interest on the Exchange Notes at a default rate of 15% per annum.

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Our liquid assets and cash flow are not sufficient to fully repay the principal owed under our outstanding debt instruments. Further, we cannot assure its shareholders that the Company can extend or restructure the Matured Obligations and/or the Biovest Matured Obligations. We have not established access to additional capital or debt to repay the Matured Obligations and/or the Biovest Matured Obligations. Further, we cannot assure our shareholders that we will be able to obtain needed funding to repay or restructure the Matured Obligations and/or the Biovest Matured Obligations.

If, as or when required, we are unable to repay, refinance or restructure its indebtedness under our secured or unsecured debt instruments, or amend the covenants contained therein, the lenders and/or holders under such secured or unsecured debt instruments could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings or other actions against our assets. Under such circumstances, we could be forced into bankruptcy or liquidation. In addition, any event of default or declaration of acceleration under one of our debt instruments could also result in an event of default under one or more of our other debt instruments. We may have to seek protection under the U.S. Bankruptcy Code from the Matured Obligations, the Biovest Matured Obligations, and/or our other debt instruments. This would have a material adverse impact on our liquidity, financial position and results of operations.

Pabeti Note II:

On December 20, 2012, we issued a secured promissory note to Pabeti, Inc., the principal amount of up to $0.125 million (the "Pabeti Note II"). The Pabeti Note II can only be used to sustain our business operations. The Pabeti Note II accrues interest at the rate of 16% per annum and matures on December 20, 2013. The Pabeti Note is secured by a security interest in all of the Company's assets and 6,666,666 shares of Biovest common stock owned by us. The principal balance of the Pabeti Note II, at December 31, 2012, was $0.125 million.

Biovest Corps Real LOC:

Effective December 3, 2012, Biovest issued an additional secured promissory note to Corps Real, LLC, which provides Biovest with a revolving line of credit in the principal amount of up to $1.5 million (the "Biovest Corps Real LOC"). The advances under the Biovest Corps Real LOC can only be used to sustain Biovest's business operations. The Biovest Corps Real LOC accrues interest at the rate of 16% per annum and matures on December 3, 2013. The Biovest Corps Real LOC is secured by a first priority lien of all Biovest's assets. Pursuant to the security agreement and the amended and restated subordination agreement under the Biovest Corps Real LOC, the Laurus/Valens Term A Notes and Term B Notes are now subordinate in right of payment and priority to the payment in full of the Biovest Corps Real LOC. As of December 31, 2012, Corps Real had advanced approximately $0.89 million under the Biovest Corps Real LOC.

Outstanding Accentia Indebtedness as of December 31, 2012

                                                                              Total
                                                                            Aggregate
                            Outstanding       Interest                      Number of
                             Principal          Rate         Maturity       Warrants        Exercise       Expiration
                            (in 000's)       (per annum)       Date          Issued          Price            Date
Pabeti Note                $       1,500        10.0%       06/01/2015       3,000,000     $     0.28       06/01/2020
Pabeti Note II             $         125        16.0%       12/20/2013               -              -                -
Accentia Corps Real Note   $       4,000        5.0%        06/13/2016       5,882,353     $     0.47       06/13/2021
                                                                                 and
                                                                             5,500,000     $     0.14       10/09/2020
Laurus/Valens Term Notes   $       5,006        8.5%        05/17/2013               -              -                -
                                                                and
                                                            11/17/2013
Ryll Note                  $         561        6.0%        02/17/2013               -              -                -
McKesson Note              $       4,343        5.0%        03/17/2014               -              -                -
Debentures (Class 5)       $         225        8.5%        05/17/2013       2,508,960     $     1.50       11/17/2013
Debentures (Class 6)       $       6,794        8.5%        11/17/2013       2,979,496     $     1.50       11/17/2013
Debentures (Class 9)       $      18,277        18.0%        On demand       3,154,612     $     1.50       11/17/2013
Notes (Class 13)           $           -        0.0%       Paid in full      1,072,840     $     1.50       11/17/2013
March 2014 Distributions   $       1,692        5.0%        03/17/2014               -              -                -

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