United
States


Securities
And Exchange Commission


Washington,
DC 20549





FORM
10-K


(Mark
One)


[×]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For
the fiscal year ended December 31, 2008; OR





[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934


For
the transition period from __________ to _______________





Commission
file number: 0-9410





Provectus
Pharmaceuticals, Inc.


(Exact
Name of Registrant as Specified)





Nevada
            90-0031917(State or Other Jurisdiction of
      Incorporation or Organization)
            (I.R.S.
      Employer Identification Number)7327
      Oak Ridge Highway, Suite A, Knoxville, Tennessee
            37931(Address
      of Principal Executive Offices)
            (Zip
      Code)





866-594-5999


(Issuer's
Telephone Number, Including Area Code)





Securities
registered under Section 12(b) of the Exchange Act:  None


(Title of
Class)





Securities
registered under Section 12(g) of the Exchange Act:


Common shares, par value
$.001 per share


(Title
of Class)





Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.  Yes [ ] No [X]





Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.  Yes [ ] No [X]





Indicate by check mark whether the
registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act 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 if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not
contained  herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]





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 the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check one):





Large
accelerated filer [
]                                             Accelerate
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
Act).


Yes
[_] No [X]





The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2008 was $26.7 million
(computed on the basis of $0.90 per share).  The number of shares
outstanding of the issuer's stock, $0.001 par value per share, as of March 17,
2009 was 53,384,188.





Documents
incorporated by reference in Part III hereof:


Proxy Statement
for 2009 Annual Meeting of Stockholders.














Provectus
Pharmaceuticals, Inc.


Annual
Report on Form 10-K





Table of
Contents


PagePart
      IItem
      1.    Description of Business
            1Item
      1A. Risk Factors
            14Item
      2.    Properties
            19Item
      3.    Legal Proceedings
            19Item
      4.    Submission of Matters to a Vote of Security
      Holders
            19Part
      II
            20Item
      5.    Market for Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            20Item
      7.    Management's Discussion and Analysis of
      Financial Condition and Results of Operations
            21Item
      8.    Financial Statements.
            25Forward-Looking Statements
            25Item
      9.    Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
            25Item
      9A(T).Controls and Procedures
            25Item
      9B.   Other Information
            26Part
      III
            27Item
      10.   Directors, Executive Officers and Corporate
      Governance
            27Item
      11.   Executive Compensation
            27Item
      12.   Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            27Item
      13.   Certain Relationships and Related Transactions, and
      Director Independence
            27Item
      14.   Principal Accountant Fees and
Services
            27Item
      15.   Exhibits and Financial Statement
      Schedules
            27Signatures
            28Financial
      Statements
            29Exhibit
      Index
            58





PART
I


Item 1.  Description of
Business.





History





Provectus Pharmaceuticals,
Inc. is currently a development-stage pharmaceutical Company, formerly known as
"Provectus Pharmaceutical, Inc." and "SPM Group, Inc.," was incorporated under
Colorado law on May 1, 1978.  SPM Group ceased operations in 1991, and
became a development-stage company effective January 1, 1992, with the new
corporate purpose of seeking out acquisitions of properties, businesses, or
merger candidates, without limitation as to the nature of the business
operations or geographic location of the acquisition candidate.





On April 1, 2002, SPM
Group changed its name to "Provectus  Pharmaceutical, Inc."
and  reincorporated  in  Nevada  in  preparation  for
a  transaction  with Provectus
Pharmaceuticals,  Inc., a privately-held Tennessee
corporation,  which we refer to as "PPI." On April 23, 2002, an
Agreement and Plan of Reorganization between Provectus Pharmaceutical and PPI
was approved by the written consent of a majority of the outstanding shares of
Provectus Pharmaceutical.  As a result,
holders  of  6,680,000  shares  of  common  stock  of  Provectus  Pharmaceutical
exchanged their shares for all of the issued
and  outstanding  shares of PPI. As part of the acquisition,
Provectus Pharmaceutical changed its name to "Provectus Pharmaceuticals, Inc."
and PPI became a wholly-owned subsidiary of Provectus. For accounting purposes,
we treated this transaction as a recapitalization of PPI.





On November 19, 2002, we
acquired Valley Pharmaceuticals, Inc., a privately-held Tennessee corporation
formerly known as Photogen, Inc., by merging our subsidiary PPI with and into
Valley and naming the surviving corporation "Xantech Pharmaceuticals, Inc."
Valley had minimal operations and had no revenues prior to the transaction with
us.  By acquiring Valley, we acquired our most important intellectual
property, including issued U.S. patents and patentable inventions, with which we
intend to develop:





·
            prescription
      drugs, medical and other devices (including laser devices) and
      over-the-counter pharmaceutical products in the fields of dermatology and
      oncology; and





·
            technologies
      for the preparation of human and animal vaccines, diagnosis of infectious
      diseases and enhanced production of genetically engineered
      drugs.





Prior to the acquisition of Valley we
were considered to be, and continue to be, in the development stage and have not
generated any revenues from the assets we acquired.





On December 5, 2002, we acquired the
assets of Pure-ific  L.L.C., a Utah limited liability company, and
created a wholly-owned  subsidiary, Pure-ific Corporation, to operate
that business. We acquired the product formulations for Pure-ific personal
sanitizing sprays, along with the "Pure-ific" trademarks.





Overview





Provectus, and its seven wholly-owned
subsidiaries:





·  Xantech
Pharmaceuticals, Inc.;





·  Pure-ific
Corporation;





·  Provectus
Biotech, Inc.;





·  Provectus
Devicetech, Inc.;





·  Provectus
Imaging, Inc.;





·  IP Tech,
Inc.; and





·  Provectus
Pharmatech, Inc.,





1


which we
refer to as our subsidiaries, develop, license, market and plan to sell products
in three sectors of the healthcare industry:





·
            Over-the-counter
      products, which we refer to in this report as “OTC
    products;”





·
            Prescription
      drugs; and





·
            Medical
      device systems.





Provectus has
designated all of its subsidiaries as non-core except for Provectus Pharmatech,
Inc., which owns the patented technologies for its prescription drug product
candidates for the treatment of cancer and serious skin diseases.  The
non-core subsidiaries own patented technologies for a range of other products
that are intended to be further developed and licensed.  The potential
further development and licensure would likely be facilitated via the Company
selling a majority stake of the underlying assets of each non-core
subsidiary.  This transaction would likely be accomplished through a
non-core spin-out process which would enable each non-core subsidiary to become
a separately traded public company.  Each new public entity can then
raise funds without diluting the shareholders of the Company.




We
manage Provectus and our subsidiaries on an integrated basis and when we refer
to “we” or “us” or “the Company” in this Prospectus, we refer to all eight
corporations considered as a single unit. Our principal executive offices are
located at 7327 Oak Ridge Highway, Suite A, Knoxville, Tennessee 37931,
telephone (866) 594-5999.




Through discovery and use
of state-of-the-art scientific and medical technologies, the founders of our
pharmaceutical business have developed a portfolio of patented, patentable, and
proprietary technologies that support multiple products in the prescription
drug, medical device and OTC products categories.  These patented
technologies are for:





·
            treatment
      of cancer and serious skin
diseases,





·
            novel
      therapeutic medical devices,





·
            enhancing
      contrast in medical imaging,





·
            improving
      signal processing during biomedical imaging,
and





·
            enhancing
      production of biotechnology
products.





Our prescription drug products
encompass the areas of dermatology and oncology and involve several types of
small molecule-based drugs. Our medical device systems include therapeutic and
cosmetic lasers, while our OTC products address markets primarily involving
skincare applications. Because our prescription drug candidates and medical
device systems are in the early stages of development, they are not yet on the
market and there is no assurance that they will advance to the point of
commercialization.





Our first commercially available
products are directed into the OTC market, as these products pose minimal or no
regulatory compliance barriers to market introduction. For example, the active
pharmaceutical ingredient (API) in our ethical products is already approved for
other medical uses by the FDA and has a long history of safety for use in
humans. This use of known APIs for novel uses and in novel formulations
minimizes potential adverse concerns from the FDA, since considerable safety
data on the API is available (either in the public domain or via licenses or
other agreements with third parties holding such information). In similar
fashion, our OTC products are based on established APIs and, when possible,
utilize formulations (such as aerosol or cream formulations) that have an
established precedent (for more information on compliance issues, see “Federal
Regulation of Therapeutic Products,” below). In this fashion, we believe that we
can diminish the risk of regulatory bars to the introduction of safe,
consumer-friendly products and minimize the time required to begin generating
revenues from product sales. At the same time, we continue to develop
higher-margin prescription pharmaceuticals and medical devices, which have
longer development and regulatory approval cycles.





2


Over-the-Counter
Pharmaceuticals





Our OTC products are designed to be
safer and more specific than competing products. Our technologies offer
practical solutions for a number of intractable maladies, using ingredients that
have limited or no side effects compared with existing products. To develop our
OTC products, we typically use compounds with potent antibacterial and
antifungal activity as building blocks and combine these building blocks with
anti-inflammatory and moisture-absorbing agents. Products with these properties
can be used for treatment of a large number of skin afflictions,
including:





·
            hand
      irritation associated with use of disposable
  gloves,





·
            eczema,
      and





·
            mild
      to moderate acne.





Where
appropriate, we have filed or will file patent applications and will seek other
intellectual property protection to protect our unique formulations for relevant
applications.





GloveAid





Personnel in many occupations and
industries now use disposable gloves daily in the performance of their jobs,
including:





·
            Airport
      security personnel;





·
            Food
      handling and preparation personnel;





·
            Health
      care workers such as hospital and blood bank personnel;
  and





·
            Laboratory
      researchers;





·
            Police,
      fire and emergency response
personnel;





·
            Postal
      and package delivery handlers and sorters;
and





·
            Sanitation
      workers.











Pure-ific











3


Acne





A number of dermatological conditions,
including acne and other blemishes result from a superficial infection which
triggers an overwhelming immune response. We anticipate developing OTC products
similar to the GloveAid line for the treatment of mild to moderate cases of acne
and other blemishes. Wherever possible, we intend to formulate these products to
minimize or avoid significant regulatory bars that might adversely impact the
time to market.





Prescription
Drugs





We are developing a number of
prescription drugs which we expect will provide minimally invasive treatment of
chronic severe skin afflictions such as psoriasis, eczema, and acne; and several
life-threatening cancers such as those of the liver, breast and prostate. We
believe that our products will be safer and more specific than currently
existing products. Use of topical or other direct delivery formulations allows
these potent products to be conveniently and effectively delivered only to
diseased tissues, thereby enhancing both safety and effectiveness. The ease of
use and superior performance of these products may eventually lead to extension
into OTC applications currently serviced by less safe, more expensive
alternatives. All of these products are in either the pre-clinical or clinical
trial stage.





Dermatology





Our most advanced prescription drug
candidate for treatment of topical diseases on the skin is PH-10, a topical gel.
Rose Bengal, the active ingredient in PH-10, is “photoactive” in that it reacts
to light of certain wavelengths thereby increasing its therapeutic effects.
PH-10 also concentrates in diseased or damaged tissue but quickly dissipates
from healthy tissue. By developing a “photodynamic” treatment regimen (one which
combines a photoactive substance with activation by a source emitting a
particular wavelength of light) around these two properties of PH-10, we can
deliver a higher therapeutic effect at lower dosages of active ingredient, thus
minimizing potential side effects including damage to nearby healthy tissues.
PH-10 is especially responsive to green light, which is strongly absorbed by the
skin and thus only penetrates the body to a depth of about three to five
millimeters. For this reason, we have developed PH-10, combined with green-light
activation, for topical use in surface applications where serious damage could
result if medicinal effects were to occur in deeper tissues.





Acute psoriasis.
Psoriasis is a common chronic disorder of the skin characterized by dry scaling
patches, called “plaques,” for which current treatments are few and those that
are available have potentially serious side effects. According to Roenigk and
Maibach (Psoriasis, Third Edition, 1998), there are approximately five million
people in the United States who suffer from psoriasis, with an estimated 160,000
to 250,000 new psoriasis cases each year. There is no known cure for the disease
at this time. According to the National Psoriasis Foundation, the majority of
psoriasis sufferers, those with mild to moderate cases, are treated with topical
steroids that can have unpleasant side effects. None of the other treatments for
moderate cases of psoriasis have proven completely effective. The 25-30% of
psoriasis patients who suffer from more severe cases generally are treated with
more intensive drug therapies or PUVA, a light-based therapy that combines the
drug Psoralen with exposure to ultraviolet A light. While PUVA is one of the
more effective treatments, it increases a patient’s risk of skin
cancer.





We believe that PH-10 activated with
green light offers a superior treatment for acute psoriasis because it
selectively treats diseased tissue with negligible potential for side effects in
healthy tissue; moreover, the therapy has shown promise in comprehensive Phase 1
clinical trials. The objective of a Phase 1 clinical trial is to determine if
there are safety concerns with the therapy. In these studies, involving more
than 50 test subjects, PH-10 was applied topically to psoriatic plaques and then
illuminated with green light. In our first study, a single-dose treatment
yielded an average reduction in plaque thickness of 59% after 30 days, with
further response noted at the final follow-up examination 90 days later.
Further, no pain, significant side effects, or evidence of “rebound” (increased
severity of a psoriatic plaque after the initial reduction in thickness) were
observed in any treated areas. This degree of positive therapeutic response is
comparable to that achieved with potent steroids and other anti-inflammatory
agents, but without the serious side effects associated with such agents. We are
continuing the required Food and Drug Administration reporting to support the
active “Investigational New Drug” application for PH-10’s Phase 2 clinical
trials on psoriasis.  We were originally allowed by the Food and Drug
Administration to study the use of our drug PH-10 for psoriasis in clinical
trials and we are now also allowed to study the use of our drug PH-10 for atopic
dermatitis in clinical trials. The required reporting includes the publication
of results regarding the multiple treatment scenario of the active ingredient in
PH-10. The objective of our initial and expected Phase 2 studies is to assess
the potential for remission of the disease using a regimen of treatments that we
are seeking to optimize.  We have also initiated a Phase 2 study to
treat atopic dermatitis with PH-10.  This study is designed to further
clarify the optimal amount of treatments on a weekly basis.





4


Actinic Keratosis.
According to Schwartz and Stoll (Fitzpatrick’s Dermatology in General Medicine,
1999), actinic keratosis, or “AK” (also called solar keratosis or senile
keratosis), is the most common pre-cancerous skin lesion among fair-skinned
people and is estimated to occur in over 50% of elderly fair-skinned persons
living in sunny climates. These experts note that nearly half of the
approximately five million cases of skin cancer in the U.S. may have begun as
AK. The standard treatments for AK (primarily comprising excision, cryotherapy,
and ablation with topical 5-fluorouracil) are often painful and frequently yield
unacceptable cosmetic outcomes due to scarring. Building on our experience with
psoriasis, we are assessing the use of PH-10 with green-light activation as a
possible improvement in treatment of early and more advanced stages of AK. We
completed an initial Phase 1 clinical trial of the therapy for this indication
in 2001. This study, involving 24 subjects, examined the safety profile of a
single treatment using topical PH-10 with green light photoactivation and no
significant safety concerns were identified. We have decided to prioritize
further clinical development of PH-10 for treatment of psoriasis and eczema
rather than AK at this time since the market is much larger for psoriasis and
eczema.





Severe Acne.
According to Berson et al. (Cutis. 72 (2003) 5-13), acne vulgaris affects
approximately 17 million individuals in the U.S., causing pain, disfigurement,
and social isolation. Moderate to severe forms of the disease have proven
responsive to several photodynamic regimens, and we anticipate that PH-10 can be
used as an advanced treatment for this disease. Pre-clinical studies show that
the active ingredient in PH-10 readily kills bacteria associated with acne. This
finding, coupled with our clinical experience in psoriasis and actinic
keratosis, suggests that therapy with PH-10 will exhibit no significant side
effects and will afford improved performance relative to other therapeutic
alternatives. If correct, this would be a major advance over currently available
products for severe acne.





As noted above, we are researching
multiple uses for PH-10 with green-light activation. Multiple-indication use by
a common pool of physicians - dermatologists, in this case - should reduce
market resistance to this new therapy.





Oncology





Oncology is another major market where
our planned products may afford competitive advantage compared to currently
available options. We are developing PV-10, a sterile injectible form of Rose
Bengal, for direct injection into tumors. Because PV-10 is retained in diseased
or damaged tissue but quickly dissipates from healthy tissue, we believe we can
develop therapies that confine treatment to cancerous tissue and reduce
collateral impact on healthy tissue. During 2003 and 2004, we worked toward
completion of the extensive scientific and medical materials necessary for
filing an “Investigational New Drug” (IND) application for PV-10 in anticipation
of beginning Phase 1 clinical trials for various solid tumors. This IND was
filed and allowed by the FDA in 2004 setting the stage for two Phase 1 clinical
trials; namely, treating metastatic melanoma and recurrent breast carcinoma. We
started both of these Phase 1 clinical trials in 2005 and completed the initial
Phase 1 objectives for both in 2006.  We completed the expanded Phase
1 objectives for the metastatic melanoma study in 2007, and then commenced a
Phase 2 study which was significantly completed in 2008 and is expected to be
fully enrolled in the first half of 2009.





Liver Cancer. The
current standard of care for liver cancer is ablative therapy (which seeks to
reduce a tumor by poisoning, freezing, heating, or irradiating it) using either
a localized injection of ethanol (alcohol), cryosurgery, radiofrequency
ablation, or ionizing radiation such as X-rays. Where effective, these therapies
have many side effects and selecting therapies with fewer side effects tends to
reduce overall effectiveness. Combined, ablative therapies have a five-year
survival rate of 33% - meaning that only 33% of those liver cancer patients
whose cancers are treated using these therapies survive for five years after
their initial diagnoses. In pre-clinical studies we have found that direct
injection of PV-10 into liver tumors quickly ablates treated tumors, and can
trigger an anti-tumor immune response leading to eradication of residual tumor
tissue and distant tumors. Because of the natural regenerative properties of the
liver and the highly localized nature of the treatment, this approach appears to
produce no significant side effects. Based on these encouraging preclinical
results, we are assessing strategies for initiation of clinical trials of PV-10
for treatment of liver cancer.





5


Breast Cancer. Breast
cancer afflicts over 200,000 U.S. citizens annually, leading to over 40,000
deaths per year. Surgical resection, chemotherapy, radiation therapy, and
immunotherapy comprise the standard treatments for the majority of cases,
resulting in serious side effects that in many cases are permanent. Moreover,
current treatments are relatively ineffective against metastases, which in many
cases are the eventual cause of patient mortality. Pre-clinical studies using
human breast tumors implanted in mice have shown that direct injection of PV-10
into these tumors ablates the tumors, and, as in the case of liver tumors, may
elicit an anti-tumor immune response that eradicates distant metastases. Since
fine-needle biopsy is a routine procedure for diagnosis of breast cancer, and
since the needle used to conduct the biopsy also could be used to direct an
injection of PV-10 into the tumor, localized destruction of suspected tumors
through direct injection of PV-10 clearly has the potential of becoming a
primary treatment. We are evaluating options for expanding clinical studies of
direct injection of PV-10 into breast tumors and have completed the expanded
Phase 1 clinical studies of our indication for PV-10 in recurrent breast
carcinoma in 2008.





Prostate Cancer.
Cancer of the prostate afflicts approximately 190,000 U.S. men annually, leading
to over 30,000 deaths a year. As with breast cancer, surgical resection,
chemotherapy, radiation therapy, and immunotherapy comprise the standard
treatments for the majority of cases, and can result in serious, permanent side
effects. We believe that direct injection of PV-10 into prostate tumors may
selectively ablate such tumors, and, as in the case of liver and breast tumors,
may also elicit an anti-tumor immune response capable of eradicating distant
metastases. Since trans-urethral ultrasound, guided fine-needle biopsy and
immunotherapy, along with brachytherapy implantation, are becoming routine
procedures for diagnosis and treatment of these cancers, we believe that
localized destruction of suspected tumors through direct injection of PV-10 can
become a primary treatment. We are evaluating options for initiating clinical
studies of direct injection of PV-10 into prostate tumors, and expect to
formulate final plans based on results from clinical studies of our indications
for PV-10 in the treatment of liver and breast cancer.





Metastatic Melanoma.
Melanoma is expected to strike 60,000 people in the U.S. this year, leading to
8,100 deaths. The incidence of melanoma in Australia, where our expanded Phase 2
clinical study is currently underway, is up to five times that of the U.S. There
have been no significant advances in the treatment of melanoma for approximately
30 years. We are continuing Phase 2 clinical studies in both Australia and the
U.S. of direct injection of PV-10 into melanoma lesions which was significantly
completed in 2008 and is expected to be fully enrolled in the first half of
2009.  This Phase 2 study was commenced after we completed the
expanded Phase 1 clinical studies of our indication for PV-10 in Stage 3 and
Stage 4 metastatic melanoma.





Medical
Devices





We have medical device technologies to
address two major markets:





·
            cosmetic
      treatments, such as reduction of wrinkles and elimination of spider veins
      and other cosmetic blemishes; and





·
            therapeutic
      uses, including photoactivation of PH-10 other prescription drugs and
      non-surgical destruction of certain skin
  cancers.





We expect to further develop medical
devices through partnerships with, or selling our assets to, third-party device
manufacturers or, if appropriate opportunities arise, through acquisition of one
or more device manufacturers.





Photoactivation. Our
clinical tests of PH-10 for dermatology have, up to the present, utilized a
number of commercially available lasers for activation of the drug. This
approach has several advantages, including the leveraging of an extensive base
of installed devices present throughout the pool of potential physician-adopters
for PH-10.  Access to such a base could play an integral role in early
market capture. However, since the use of such lasers, which were designed for
occasional use in other types of dermatological treatment, is potentially too
cumbersome and costly for routine treatment of the large population of patients
with psoriasis, we have begun investigating potential use of other types of
photoactivation hardware, such as light booths. The use of such booths is
consistent with current care standards in the dermatology field, and may provide
a cost-effective means for addressing the needs of patients and physicians
alike. We anticipate that such photoactivation hardware would be developed,
manufactured, and supported in conjunction with one or more third-party device
manufacturer.





Melanoma. A high
priority in our medical devices field is the development of a laser-based
product for treatment of melanoma. We have conducted extensive research on
ocular melanoma at the Massachusetts Eye and Ear Infirmary (a teaching affiliate
of Harvard Medical School) using a new laser treatment that may offer
significant advantage over current treatment options. A single quick
non-invasive treatment of ocular melanoma tumors in a rabbit model resulted in
elimination of over 90% of tumors, and may afford significant advantage over
invasive alternatives, such as surgical excision, enucleation, or radiotherapy
implantation. Ocular melanoma is rare, with approximately 2,000 new cases
annually in the U.S. However, we believe that our extremely successful results
could be extrapolated to treatment of primary melanomas of the skin, which have
an incidence of over 60,000 new cases annually in the U.S. and a 6% five-year
survival rate after metastasis of the tumor. We have performed similar laser
treatments on large (averaging approximately 3 millimeters thick) cutaneous
melanoma tumors implanted in mice, and have been able to eradicate over 90% of
these pigmented skin tumors with a single treatment. Moreover, we have shown
that this treatment stimulates an anti-tumor immune response that may lead to
improved outcome at both the treatment site and at sites of distant metastasis.
From these results, we believe that a device for laser treatment of primary
melanomas of the skin and eye is nearly ready for human studies. We anticipate
partnering with, or selling our assets to, a medical device manufacturer to
bring it to market in reliance on a 510(k) notification. For more information
about the 510(k) notification process, see “Federal Regulation of Therapeutic
Products” below.





6


Research
and Development





We continue to actively develop
projects that are product-directed and are attempting to conserve available
capital and achieve full capitalization of our company through equity and
convertible debt offerings, generation of product revenues, and other means. All
ongoing research and development activities are directed toward maximizing
shareholder value and advancing our corporate objectives in conjunction with our
OTC product licensure, our current product development and maintaining our
intellectual property portfolio.





Research and development costs totaling
$4,425,616 for 2008 included depreciation expense of $9,256, consulting and
contract labor of $1,256,032, lab supplies and pharmaceutical preparations of
$116,762, insurance of $108,905, legal of $297,363, payroll of $2,561,845, and
rent and utilities of $75,453.  Research and development costs
totaling $4,404,958 for 2007 included depreciation expense of $9,256, consulting
and contract labor of $661,655, lab supplies and pharmaceutical preparations of
$400,687, insurance of $124,244, legal of $297,846, payroll of $2,846,890, and
rent and utilities of $64,380.





Production





We have determined that the most
efficient use of our capital in further developing our OTC products is to
license the products which the Company has been discussing with interested
groups and the Company also intends to sell a majority stake of the underlying
assets via a non-core spin-out transaction.





Sales





Our first commercially available
products are directed into the OTC market, as these products pose minimal or no
regulatory compliance barriers to market introduction. In this fashion, we
believe that we can diminish the risk of regulatory bars to the introduction of
products and minimize the time required to begin generating revenues from
product sales. At the same time, we continue to develop higher-margin
prescription pharmaceuticals and medical devices, which have longer development
and regulatory approval cycles.





We have commenced limited sales of
Pure-ific, our antibacterial hand spray. We sold small amounts of this product
during 2004, 2005 and 2006.  We discontinued our proof-of-concept
program in November 2006 and have, therefore, ceased selling our OTC
products.  We will continue to seek additional markets for our
products through existing distributorships that market and distribute medical
products, ethical pharmaceuticals, and OTC products for the professional and
consumer marketplaces through licensure, partnership and asset sale
arrangements, and through potential merger and acquisition
candidates.





In addition to developing and selling
products ourselves on a limited basis, we are negotiating actively with a number
of potential licensees for several of our intellectual properties, including
patents and related technologies. To date, we have not yet entered into any
licensing agreements; however, we anticipate consummating one or more such
licenses in the future.





7


Intellectual
Property





Patents





We hold a number of U.S. patents
covering the technologies we have developed and are continuing to develop for
the production of prescription drugs, medical devices and OTC pharmaceuticals,
including those identified in the following table:








U.S.
      Patent No
              Title
              Issue
      Date
              Expiration
      Date5,829,448
              Method
      for improved selectivity in activation of molecular agents
              November
      3, 1998
              October
      30, 20165,832,931
              Method
      for improved selectivity in photo-activation and detection of diagnostic
      agents
              November
      10, 1998
              October
      30, 20165,998,597
              Method
      for improved selectivity in activation of molecular agents
              December
      7, 1999
              October
      30, 20166,042,603
              Method
      for improved selectivity in photo-activation of molecular
      agents
              March
      28, 2000
              October
      30, 20166,331,286
              Methods
      for high energy phototherapeutics
              December
      18, 2001
              December
      21, 20186,451,597
              Method
      for enhanced protein stabilization and for production of cell lines useful
      production of such stabilized proteins
              September
      17, 2002
              April
      6, 20206,468,777
              Method
      for enhanced protein stabilization and for production of cell lines useful
      production of such stabilized proteins
              October
      22, 2002
              April
      6, 20206,493,570
              Method
      for improved imaging and photodynamic therapy
              December
      10, 2002
              December
      10, 20196,495,360
              Method
      for enhanced protein stabilization for production of cell lines useful
      production of such stabilized proteins
              December
      17, 2002
              April
      6, 20206,519,076
              Methods
      and apparatus for optical imaging
              February
      11, 2003
              October
      30, 20166,525,862
              Methods
      and apparatus for optical imaging
              February
      25, 2003
              October
      30, 20166,541,223
              Method
      for enhanced protein stabilization and for production of cell lines useful
      production of such stabilized proteins
              April
      1, 2003
              April
      6, 20206,986,740
              Ultrasound
      contrast using halogenated xanthenes
              January
      17, 2006
              September
      9, 20236,991,776
              Improved
      intracorporeal medicaments for high energy phototherapeutic treatment of
      disease
              January
      31, 2006
              May
      5, 20237,036,516
              Treatment
      of pigmented tissues using optical energy
              May
      2, 2006
              January
      28, 20207,201,914
              Combination
      antiperspirant and antimicrobial compositions
              April
      10, 2007
              May
      15, 20247,338,652
              Diagnostic
      Agents for Positron Emission Imaging
              March
      4, 2008
              September
      25, 20257,346,387
              Improved
      Selectivity in Photo-Activation and Detection of Molecular Diagnostic
      Agents
              March
      18, 2008
              October
      30, 20167,353,829
              Improved
      Methods and Apparatus For Multi-Photon Photo-Activation of Therapeutic
      Agents
              April
      8, 2008
              April
      23, 20207,384,623
              A
      Radiosensitizer Agent comprising Tetrabromoerythrosin
              June
      10, 2008
              August
      25, 20197,390,668
              Intracorporeal
      photodynamic medicaments for photodynamic treatment containing a
      halogenated xanthene or derivative
              June
      24, 2008
              March
      6, 20217,402,299
              Intracorporeal
      photodynamic medicaments for photodynamic treatment containing a
      halogenated xanthene or derivative
              July
      22, 2008
              October
      2, 20257,427,389
              Diagnostic
      Agents for Positron Emission Imaging
              September
      23, 2008
              July
      7, 2026


We continue to pursue patent
applications on numerous other developments we believe to be patentable. We
consider our issued patents, our pending patent applications and any patentable
inventions which we may develop to be extremely valuable assets of our
business.





Trademarks





We own the following trademarks used in
this document:  GloveAid(TM) and Pure-ific(TM) (including
Pure-ific(TM) and Pure-ific(TM) Kids). We also own the registered trademark
PulseView®. Trademark rights are perpetual provided that we continue to keep the
mark in use. We consider these marks, and the associated name recognition, to be
valuable to our business.





8


Material
Transfer Agreement





We have entered into a “Material
Transfer Agreement” dated as of July 31, 2003 with Schering-Plough Animal Health
Corporation, which we refer to as “SPAH”, the animal-health subsidiary of
Schering-Plough Corporation, a major international pharmaceutical company which
is still in effect.  Under the Material Transfer Agreement, we will
provide SPAH with access to some of our patented technologies to permit SPAH to
evaluate those technologies for use in animal-health applications. If SPAH
determines that it can commercialize our technologies, then the Material
Transfer Agreement obligates us and SPAH to enter into a license agreement
providing for us to license those technologies to SPAH in exchange for progress
payments upon the achievement of goals. The Material Transfer Agreement covers
four U.S. patents that cover biological material manufacturing technologies
(i.e., biotech related). The Material Transfer Agreement continues indefinitely,
unless SPAH terminates it by giving us notice or determines that it does not
wish to secure from us a license for our technologies. The Material Transfer
Agreement can also be terminated by either of us in the event the other party
breaches the agreement and does not cure the breach within 30 days of notice
from the other party. We cannot assure you that SPAH will determine that it can
commercialize our technologies or that the goals required for us to obtain
progress payments from SPAH will be achieved.





Competition





In general, the pharmaceutical industry
is intensely competitive, characterized by rapid advances in products and
technology. A number of companies have developed and continue to develop
products that address the areas we have targeted. Some of these companies are
major pharmaceutical companies that are international in scope and very large in
size, while others are niche players that may be less familiar but have been
successful in one or more areas we are targeting. Existing or future
pharmaceutical, device, or other competitors may develop products that
accomplish similar functions to our technologies in ways that are less
expensive, receive faster regulatory approval, or receive greater market
acceptance than our products. Many of our competitors have been in existence for
considerably longer than we have, have greater capital resources, broader
internal structure for research, development, manufacturing and marketing, and
are in many ways further along in their respective product cycles.





At present, our most direct competitors
are smaller companies that are exploiting niches similar to ours. In the field
of photodynamic therapy, one competitor, QLT, Inc., has received FDA approval
for use of its agent Photofrin® for treatment of several niche cancer
indications, and has a second product, Visudyne®, approved for treatment of
certain forms of macular degeneration. Another competitor in this field, Dusa
Pharmaceuticals, Inc. received FDA approval of its photodynamic product Levulan®
Kerastik® for treatment of actinic keratosis. We believe that QLT and Dusa,
among other competitors, have established a working commercial model in
dermatology and oncology, and that we can benefit from this model by offering
products that, when compared to our competitors’ products, afford superior
safety and performance, greatly reduced side effects, improved ease of use, and
lower cost compared to those of our competitors.





While it is possible that eventually we
may compete directly with major pharmaceutical companies, we believe it is more
likely that we will enter into joint development, marketing, or other licensure
arrangements with such competitors. Eventually, we believe that we will be
acquired.





We also have a number of market areas
in common with traditional skincare cosmetics companies, but in contrast to
these companies, our products are based on unique, proprietary formulations and
approaches. For example, we are unaware of any products in our targeted OTC
skincare markets that are similar to our Pure-ific products. Further,
proprietary protection of our products may help limit or prevent market erosion
until our patents expire.





Federal
Regulation of Therapeutic Products





All of the prescription drugs and
medical devices we currently contemplate developing will require approval by the
FDA prior to sales within the United States and by comparable foreign agencies
prior to sales outside the United States. The FDA and comparable regulatory
agencies impose substantial requirements on the manufacturing and marketing of
pharmaceutical products and medical devices. These agencies and other entities
extensively regulate, among other things, research and development activities
and the






9


testing,
manufacturing, quality control, safety, effectiveness, labeling, storage, record
keeping, approval, advertising and promotion of our proposed products. While we
attempt to minimize and avoid significant regulatory bars when formulating our
products, some degree of regulation from these regulatory agencies is
unavoidable. Some of the things we do to attempt to minimize and avoid
significant regulatory bars include the following:





·
            Using
      chemicals and combinations already allowed by the
  FDA;





·
            Carefully
      making product performance claims to avoid the need for regulatory
      approval;





·
            Using
      drugs that have been previously approved by the FDA and that have a long
      history of safe use;





·
            Using
      chemical compounds with known safety profiles;
  and





·
            In
      many cases, developing OTC products which face less regulation than
      prescription pharmaceutical
products.





The regulatory process required by the
FDA, through which our drug or device products must pass successfully before
they may be marketed in the U.S., generally involves the following:





·
            Preclinical
      laboratory and animal testing;





·
            Submission
      of an application that must become effective before clinical trials may
      begin;





·
            Adequate
      and well-controlled human clinical trials to establish the safety and
      efficacy of the product for its intended indication;
  and





·
            FDA
      approval of the application to market a given product for a given
      indication.





For pharmaceutical products,
preclinical tests include laboratory evaluation of the product, its chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of the product. Where appropriate (for example, for human
disease indications for which there exist inadequate animal models), we will
attempt to obtain preliminary data concerning safety and efficacy of proposed
products using carefully designed human pilot studies. We will require sponsored
work to be conducted in compliance with pertinent local and international
regulatory requirements, including those providing for Institutional Review
Board approval, national governing agency approval and patient informed consent,
using protocols consistent with ethical principles stated in the Declaration of
Helsinki and other internationally recognized standards. We expect any pilot
studies to be conducted outside the United States; but if any are conducted in
the United States, they will comply with applicable FDA regulations. Data
obtained through pilot studies will allow us to make more informed decisions
concerning possible expansion into traditional FDA-regulated clinical
trials.





If the FDA is satisfied with the
results and data from preclinical tests, it will authorize human clinical
trials. Human clinical trials typically are conducted in three sequential phases
which may overlap. Each of the three phases involves testing and study of
specific aspects of the effects of the pharmaceutical on human subjects,
including testing for safety, dosage tolerance, side effects, absorption,
metabolism, distribution, excretion and clinical efficacy.





Phase 1 clinical trials include the
initial introduction of an investigational new drug into humans. These studies
are closely monitored and may be conducted in patients, but are usually
conducted in healthy volunteer subjects. These studies are designed to determine
the metabolic and pharmacologic actions of the drug in humans, the side effects
associated with increasing doses, and, if possible, to gain early evidence on
effectiveness. While the FDA can cause us to end clinical trials at any phase
due to safety concerns, Phase 1 clinical trials are primarily concerned with
safety issues. We also attempt to obtain sufficient information about the drug’s
pharmacokinetics and pharmacological effects during Phase 1 clinical trial to
permit the design of well-controlled, scientifically valid, Phase 2
studies.





Phase 1 studies also evaluate drug
metabolism, structure-activity relationships, and the mechanism of action in
humans. These studies also determine which investigational drugs are used as
research tools to explore biological phenomena or disease processes. The total
number of subjects included in Phase 1 studies varies with the drug, but is
generally in the range of twenty to eighty.





10


Phase 2 clinical trials include the
early controlled clinical studies conducted to obtain some preliminary data on
the effectiveness of the drug for a particular indication or indications in
patients with the disease or condition. This phase of testing also helps
determine the common short-term side effects and risks associated with the drug.
Phase 2 studies are typically well-controlled, closely monitored, and conducted
in a relatively small number of patients, usually involving several hundred
people.





Phase 3 studies are expanded controlled
and uncontrolled trials. They are performed after preliminary evidence
suggesting effectiveness of the drug has been obtained in Phase 2, and are
intended to gather the additional information about effectiveness and safety
that is needed to evaluate the overall benefit-risk relationship of the drug.
Phase 3 studies also provide an adequate basis for extrapolating the results to
the general population and transmitting that information in the physician
labeling. Phase 3 studies usually include several hundred to several thousand
people.





Applicable medical devices can be
cleared for commercial distribution through a notification to the FDA under
Section 510(k) of the applicable statute. The 510(k) notification must
demonstrate to the FDA that the device is as safe and effective and
substantially equivalent to a legally marketed or classified device that is
currently in interstate commerce. Such devices may not require detailed testing.
Certain high-risk devices that sustain human life, are of substantial importance
in preventing impairment of human health, or that present a potential
unreasonable risk of illness or injury, are subject to a more comprehensive FDA
approval process initiated by filing a premarket approval, also known as a
“PMA,” application (for devices) or accelerated approval (for
drugs).





We have established a core clinical
development team and have been working with outside FDA consultants to assist us
in developing product-specific development and approval strategies, preparing
the required submittals, guiding us through the regulatory process, and
providing input to the design and site selection of human clinical studies.
Historically, obtaining FDA approval for photodynamic therapies has been a
challenge. Wherever possible, we intend to utilize lasers or other activating
systems that have been previously approved by the FDA to mitigate the risk that
our therapies will not be approved by the FDA. The FDA has considerable
experience with lasers by virtue of having reviewed and acted upon many 510(k)
and premarket approval filings submitted to it for various photodynamic and
non-photodynamic therapy laser applications, including a large number of
cosmetic laser treatment systems used by dermatologists.





The testing and approval process
requires substantial time, effort, and financial resources, and we may not
obtain FDA approval on a timely basis, if at all. Success in preclinical or
early-stage clinical trials does not assure success in later-stage clinical
trials. The FDA or the research institution sponsoring the trials may suspend
clinical trials or may not permit trials to advance from one phase to another at
any time on various grounds, including a finding that the subjects or patients
are being exposed to an unacceptable health risk. Once issued, the FDA may
withdraw a product approval if we do not comply with pertinent regulatory
requirements and standards or if problems occur after the product reaches the
market. If the FDA grants approval of a product, the approval may impose
limitations, including limits on the indicated uses for which we may market a
product. In addition, the FDA may require additional testing and surveillance
programs to monitor the safety and/or effectiveness of approved products that
have been commercialized, and the agency has the power to prevent or limit
further marketing of a product based on the results of these post-marketing
programs. Further, later discovery of previously unknown problems with a product
may result in restrictions on the product, including its withdrawal from the
market.





Marketing our products abroad will
require similar regulatory approvals by equivalent national authorities and is
subject to similar risks. To expedite development, we may pursue some or all of
our initial clinical testing and approval activities outside the United States,
and in particular in those nations where our products may have substantial
medical and commercial relevance. In some such cases, any resulting products may
be brought to the U.S. after substantial offshore experience is gained.
Accordingly, we intend to pursue any such development in a manner consistent
with U.S. standards so that the resultant development data is maximally
applicable for potential FDA approval.





OTC products are subject to regulation
by the FDA and similar regulatory agencies but the regulations relating to these
products are much less stringent than those relating to prescription drugs and
medical devices. The types of OTC products developed and sold by us only require
that we follow cosmetic rules relating to labeling and the claims that we make
about our product. The process for obtaining approval of prescription drugs with
the FDA does not apply to the OTC products which we sell. The FDA can, however,
require us to stop selling our product if we fail to comply with the rules
applicable to our OTC products.





11


Employees





We
currently employ four persons, all of whom are full-time
employees.  We currently engage four consultants.





Personnel





Our executive officers and directors
are:





H. Craig Dees, Ph.D., 57, has served as
our Chief Executive Officer and as a member of our board of directors since we
acquired PPI, a privately held Tennessee corporation on April 23, 2002. Before
joining us, from 1997 to 2002 he served as senior member of the management team
of Photogen Technologies, Inc., including serving as a member of the board of
directors of Photogen from 1997 to 2000. Prior to joining Photogen, Dr. Dees
served as a Group Leader at the Oak Ridge National Laboratory and as a senior
member of the management teams of LipoGen Inc., a medical diagnostic company
which used genetic engineering technologies to manufacture and distribute
diagnostic assay kits for auto-immune diseases, and TechAmerica Group Inc., now
a part of Boehringer Ingelheim Vetmedica, Inc., the U.S. animal health
subsidiary of Boehringer Ingelhem GmbH, an international chemical and
pharmaceutical company headquartered in Germany. He earned a Ph.D. in Molecular
Virology from the University of Wisconsin–Madison in 1984.





Timothy C. Scott, Ph.D., 51, has served
as our President and as a member of our board of directors since we acquired PPI
on April 23, 2002. Prior to joining us, Dr. Scott was a senior member of the
Photogen management team from 1997 to 2002, including serving as Photogen’s
Chief Operating Officer from 1999 to 2002, as a director of Photogen from 1997
to 2000, and as interim CEO for a period in 2000. Before joining Photogen, he
served as senior management of Genase LLC, a developer of enzymes for fabric
treatment and held senior research and management positions at Oak Ridge
National Laboratory. Dr. Scott earned a Ph.D. in Chemical Engineering from the
University of Wisconsin–Madison in 1985.





Eric A. Wachter, Ph.D., 46, has served
as our Executive Vice President – Pharmaceuticals and as a member of our board
of directors since we acquired PPI on April 23, 2002. Prior to joining us, from
1997 to 2002 he was a senior member of the management team of Photogen,
including serving as Secretary and a director of Photogen since 1997 and as Vice
President and Secretary and a director of Photogen since 1999. Prior to joining
Photogen, Dr. Wachter served as a senior research staff member with Oak Ridge
National Laboratory. He earned a Ph.D. in Chemistry from the University of
Wisconsin–Madison in 1988.





Peter R. Culpepper, 49, was appointed
to serve as our Chief Financial Officer in February 2004 and is also our Chief
Operating Officer. Previously, Mr. Culpepper served as Chief Financial Officer
for Felix Culpepper International, Inc. from 2001 to 2004; was a Registered
Representative with AXA Advisors, LLC from 2002 to 2003; has served as Chief
Accounting Officer and Corporate Controller for Neptec, Inc. from 2000 to 2001;
has served in various Senior Director positions with Metromedia Affiliated
Companies from 1998 to 2000; has served in various Senior Director and other
financial positions with Paging Network, Inc. from 1993 to 1998; and has served
in a variety of financial roles in public accounting and industry from 1982 to
1993. He earned a Masters in Business Administration in Finance from the
University of Maryland–College Park in 1992. He earned an AAS in Accounting from
the Northern Virginia Community College–Annandale, Virginia in 1985. He earned a
B.A. in Philosophy from the College of William and Mary–Williamsburg, Virginia
in 1982. He is a licensed Certified Public Accountant in both Tennessee and
Maryland.





Stuart Fuchs, 62, has served as a
member of our board of directors since January 23, 2003. He is a co-founder and
has served as a managing principal of Gryffindor Capital Partners, LLC, a
Chicago-based venture capital firm, since January 2000. Before joining
Gryffindor, he was a founding stockholder of several biotech companies,
including Angiogen LLC (since 1998), which develops combinations of drugs to
stimulate in vivo production of factors that inhibit the growth of blood vessels
in tumors, and Nace Pharma LLC (since 1996), which develops drugs that employ
novel drug delivery technologies. Through Nace Resources Inc., a Delaware
corporation providing strategic and financial advice to companies in the
technology sector, Mr. Fuchs has formed or participated in groups of investors
on behalf of several companies, including Abiant Inc., Celsion Corp. and
Photogen.  Before founding Nace Resources Inc., he served for 19 years
as an investment banker with Goldman, Sachs & Co., where he co-managed the
firm’s public finance activities for the Midwest region. Before joining Goldman,
Sachs & Co., Mr. Fuchs was a lawyer in private practice with Barrett Smith
Schapiro & Simon in New York. Mr. Fuchs holds an A.B. degree from Harvard
College and a J.D. from Harvard Law School and is a member of the Association of
the Bar of the City of New York.





12


Kelly M. McMasters M.D., Ph.D., 48, has
served as a member of our board of directors since June 9, 2008. Additionally,
Dr. McMasters serves as chairman of our scientific advisory
board.   Dr. McMasters received his undergraduate training at
Colgate University prior to completing the MD/PhD program at the University of
Medicine and Dentistry of New Jersey, Robert Wood Johnson Medical School and
Rutgers University.  He then completed the residency program in
General Surgery at the University of Louisville, and a fellowship in Surgical
Oncology at M.D. Anderson Cancer Center in Houston.  He is currently
the Sam and Lolita Weakley Professor of Surgical Oncology at the University of
Louisville in Kentucky, a position he has held since 1996.  Since
2005, he has chaired the Department of Surgery at the University of Louisville
and also has been Chief of Surgery at University of Louisville
Hospital.  Since 2000, he has also been Director of the
Multidisciplinary Melanoma Clinic of the James Graham Brown Cancer Center at the
University of Louisville.  His is an active member of the surgery
staff at the University of Louisville Hospital, Norton Hospital and Jewish
Hospital in Louisville. He is on the editorial boards of the Annals of Surgical
Oncology, Cancer Therapy and the Journal of Clinical Oncology as well as an ad
hoc reviewer for 9 other publications. He holds several honors, chief among them
is “Physician of the Year” awarded by the Kentucky Chapter of the American
Cancer Society.  He is the author and principal investigator (PI) of
the Sunbelt Melanoma Trial, a multi-institutional study involving 3500 patients
from 79 institutions across North America and one of the largest prospective
melanoma studies ever performed.  He has been a PI, Co-PI or local PI
in over thirty clinical trials ranging from Phase 1 to Phase 3.  For
the past 12 years he has also directed a basic and translational science
laboratory studying adenovirus-mediated cancer gene therapy funded by the
American Cancer Society and the National Institutes of Health
(NIH).








13


Item
1A.  Risk Factors.





Our business is subject to various
risks, including those described below. You should carefully consider these risk
factors, together with all of the other information included in this prospectus.
Any of these risks could materially adversely affect our business, operating
results, and financial condition:





Our technologies are in early stages
of development.





We generated minimal initial revenues
from sales and operations in 2006 and 2005, and we do not expect to generate
revenues to enable us to be profitable for several calendar quarters unless we
sell and/or license our technologies.  We discontinued our
proof-of-concept program in November 2006 and have, therefore, ceased selling
our OTC products.  To complete our current phases in clinical
development, we expect to spend approximately $900,000 in
2009.   We estimate that our existing capital resources will be
sufficient to fund our current operations.  We may need to raise
approximately $5 to $10 million additional funds beyond 2009 in order to fully
implement our integrated business plan, including execution of the next phases
in clinical development of our pharmaceutical products.





Ultimately, we must achieve profitable
operations if we are to be a viable entity, unless we are acquired by another
company. We intend to proceed as rapidly as possible with the asset sale and
licensure of OTC products that can be sold with a minimum of regulatory
compliance and with the development of revenue sources through licensing of our
existing intellectual property portfolio. We cannot assure you that we will be
able to raise sufficient capital to sustain operations beyond 2009 before we can
commence revenue generation or that we will be able to achieve or maintain a
level of profitability sufficient to meet our operating expenses.





We will need additional capital to
conduct our operations and develop our products beyond 2009, and our ability to
obtain the necessary funding is uncertain.





We estimate that our existing capital
resources will be sufficient to fund our current and planned operations through
2009; however, we may need additional capital. We have based this estimate on
assumptions that may prove to be wrong, and we cannot assure that estimates and
assumptions will remain unchanged. For example, we are currently assuming that
we will continue to operate without any significant staff or other resources
expansion. We intend to acquire additional funding through public or private
equity financings or other financing sources that may be available. Additional
financing may not be available on acceptable terms, or at all. As discussed in
more detail below, additional equity financing could result in significant
dilution to stockholders. Further, in the event that additional funds are
obtained through licensing or other arrangements, these arrangements may require
us to relinquish rights to some of our technologies, product candidates or
products that we would otherwise seek to develop and commercialize ourselves. If
sufficient capital is not available, we may be required to delay, reduce the
scope of, or eliminate one or more of our programs, any of which could have a
material adverse effect on our business and may impair the value of our patents
and other intangible assets.





Existing stockholders may face
dilution from our financing efforts.





We must raise additional capital from
external sources to execute our business plan beyond 2009. We plan to issue debt
securities, capital stock, or a combination of these securities, if necessary.
We may not be able to sell these securities, particularly under current market
conditions. Even if we are successful in finding buyers for our securities, the
buyers could demand high interest rates or require us to agree to onerous
operating covenants, which could in turn harm our ability to operate our
business by reducing our cash flow and restricting our operating activities. If
we were to sell our capital stock, we might be forced to sell shares at a
depressed market price, which could result in substantial dilution to our
existing shareholders. In addition, any shares of capital stock we may issue may
have rights, privileges, and preferences superior to those of our common
shareholders.





The prescription drug and medical
device products in our internal pipeline are at an early stage of development,
and they may fail in subsequent development or
commercialization.





14


We are continuing to pursue clinical
development of our most advanced pharmaceutical drug products, PH-10 and PV-10,
for use as treatments for specific conditions. These products and other
pharmaceutical drug and medical device products that we are currently developing
will require significant additional research, formulation and manufacture
development, and pre-clinical and extensive clinical testing prior to regulatory
licensure and commercialization. Pre-clinical and clinical studies of our
pharmaceutical drug and medical device products under development may not
demonstrate the safety and efficacy necessary to obtain regulatory approvals.
Pharmaceutical and biotechnology companies have suffered significant setbacks in
advanced clinical trials, even after experiencing promising results in earlier
trials. Pharmaceutical drug and medical device products that appear to be
promising at early stages of development may not reach the market or be marketed
successfully for a number of reasons, including the following:





·
            a
      product may be found to be ineffective or have harmful side effects during
      subsequent pre-clinical testing or clinical
  trials,





·
            a
      product may fail to receive necessary regulatory
  clearance,





·
            a
      product may be too difficult to manufacture on a large
    scale,





·
            a
      product may be too expensive to manufacture or
  market,





·
            a
      product may not achieve broad market
acceptance,





·
            others
      may hold proprietary rights that will prevent a product from being
      marketed, or





·
            others
      may market equivalent or superior
products.





We do not expect any pharmaceutical
drug products that we are developing to be commercially available for several
years, if at all. Our research and product development efforts may not be
successfully completed and may not result in any successfully commercialized
products. Further, after commercial introduction of a new product, discovery of
problems through adverse event reporting could result in restrictions on the
product, including withdrawal from the market and, in certain cases, civil or
criminal penalties.





Our OTC products are at an early
stage of introduction, and we cannot be sure that they will be sold through a
combination of asset sale and licensure in the marketplace.





We have previously focused on marketing
Pure-ific, one of our OTC products, on a limited basis to establish proof of
concept, which we believe we have accomplished. We have recognized minimal
revenue from this product, as the sales of this product have not been
material.  We discontinued our proof-of-concept program in November
2006 and have, therefore, ceased selling our OTC products.  In order
for this product, and our other OTC products, to become commercially successful,
the Company now intends to license the products which the Company has been
discussing with interested groups and the Company also intends to sell a
majority stake of the underlying assets via a non-core spin-out
transaction.





Competition in the prescription
drug, medical device and OTC pharmaceuticals markets is intense, and we may be
unable to succeed if our competitors have more funding or better
marketing.





The pharmaceutical and biotechnology
industries are intensely competitive. Other pharmaceutical and biotechnology
companies and research organizations currently engage in or have in the past
engaged in research efforts related to treatment of dermatological conditions or
cancers of the skin, liver and breast, which could lead to the development of
products or therapies that could compete directly with the prescription drug,
medical device and OTC products that we are seeking to develop and
market.





Many companies are also developing
alternative therapies to treat cancer and dermatological conditions and, in this
regard, are our competitors. Many of the pharmaceutical companies developing and
marketing these competing products have significantly greater financial
resources and expertise than we do in:





·
            research
      and development,





·
            manufacturing,




15


·
            preclinical
      and clinical testing,





·
            obtaining
      regulatory approvals, and





·
            marketing.





Smaller companies may also prove to be
significant competitors, particularly through collaborative arrangements with
large and established companies. Academic institutions, government agencies, and
other public and private research organizations may also conduct research, seek
patent protection, and establish collaborative arrangements for research,
clinical development, and marketing of products similar to ours. These companies
and institutions compete with us in recruiting and retaining qualified
scientific and management personnel as well as in acquiring technologies
complementary to our programs.





In addition to the above factors, we
expect to face competition in the following areas:





·
            product
      efficacy and safety;





·
            the
      timing and scope of regulatory
consents;





·
            availability
      of resources;





·
            reimbursement
      coverage;





·
            price;
      and





·
            patent
      position, including potentially dominant patent positions of
      others.





As a result of the foregoing, our
competitors may develop more effective or more affordable products or achieve
earlier product commercialization than we do.





Product
Competition.  Additionally, since our formerly marketed
products are generally established and commonly sold, they were subject to
competition from products with similar qualities when we marketed
them.





Our OTC product Pure-ific, when we sold
it in the proof-of-concept stage, competed in the market with other hand
sanitizing products, including in particular, the following hand
sanitizers:





·
            Purell
      (owned by Johnson & Johnson),





·
            Avagard
      D (manufactured by 3M), and





·
            a
      large number of generic and private-label equivalents to these market
      leaders.





Our OTC product GloveAid represents a
new product category that has no direct competitors; however, other types of
products, such as AloeTouch® disposable gloves (manufactured by Medline
Industries) target the same market niche.





Since our prescription products PV-10
and PH-10 have not yet been approved by the United Stated Food and Drug
Administration, which we refer to as the “FDA,” or introduced to the
marketplace, we cannot estimate what competition these products might face when
they are finally introduced, if at all. We cannot assure you that these products
will not face significant competition for other prescription drugs and generic
equivalents.





If we are unable to secure or
enforce patent rights, trademarks, trade secrets or other intellectual property
our business could be harmed.





We may not be successful in securing or
maintaining proprietary patent protection for our products and technologies we
develop or license. In addition, our competitors may develop products similar to
ours using methods and technologies that are beyond the scope of our
intellectual property protection, which could reduce our anticipated sales.
While




16




some of
our products have proprietary patent protection, a challenge to these patents
can be subject to expensive litigation. Litigation concerning patents, other
forms of intellectual property, and proprietary technology is becoming more
widespread and can be protracted and expensive and can distract management and
other personnel from performing their duties.





We also rely upon trade secrets,
unpatented proprietary know-how, and continuing technological innovation to
develop a competitive position. We cannot assure you that others will not
independently develop substantially equivalent proprietary technology and
techniques or otherwise gain access to our trade secrets and technology, or that
we can adequately protect our trade secrets and technology.





If we are unable to secure or enforce
patent rights, trademarks, trade secrets, or other intellectual property, our
business, financial condition, results of operations and cash flows could be
materially adversely affected. If we infringe on the intellectual property of
others, our business could be harmed.





We could be sued for infringing patents
or other intellectual property that purportedly cover products and/or methods of
using such products held by persons other than us. Litigation arising from an
alleged infringement could result in removal from the market, or a substantial
delay in, or prevention of, the introduction of our products, any of which could
have a material adverse effect on our business, financial condition, results of
operations, and cash flows.





If we do not update and enhance our
technologies, they will become obsolete.





The pharmaceutical market is
characterized by rapid technological change, and our future success will depend
on our ability to conduct successful research in our fields of expertise, to
discover new technologies as a result of that research, to develop products
based on our technologies, and to commercialize those products. While we believe
that our current technology is adequate for our present needs, if we fail to
stay at the forefront of technological development, we will be unable to compete
effectively. Our competitors are using substantial resources to develop new
pharmaceutical technologies and to commercialize products based on those
technologies. Accordingly, our technologies may be rendered obsolete by advances
in existing technologies or the development of different technologies by one or
more of our current or future competitors.





If we lose any of our key personnel,
we may be unable to successfully execute our business plan.





Our business is presently managed by
four key employees:





·
            H.
      Craig Dees, Ph.D., our Chief Executive
Officer;





·
            Timothy
      C. Scott, Ph.D., our President;





·
            Eric
      A. Wachter, Ph.D. our Executive Vice President - Pharmaceuticals;
      and





·
            Peter
      R. Culpepper, CPA, our Chief Financial Officer and Chief Operating
      Officer.





In addition to their responsibilities
for management of our overall business strategy, Drs. Dees, Scott and Wachter
are our chief researchers in the fields in which we are developing and planning
to develop prescription drugs, medical devices and OTC products. The loss of any
of these key employees could have a material adverse effect on our operations,
and our ability to execute our business plan might be negatively impacted. Any
of these key employees may leave their employment with us if they choose to do
so, and we cannot assure you that we would be able to hire similarly qualified
employees if any of our key employees should choose to leave.





Because we have only four employees
in total, our management may be unable to successfully manage our
business.





In order to successfully execute our
business plan, our management must succeed in all of the following critical
areas:





·
            Researching
      diseases and possible therapies in the areas of dermatology and skin care,
      oncology, and biotechnology;






17





·
            Developing
      prescription drug, medical device, and OTC products based on our
      research;





·
            Marketing
      and selling developed products;





·
            Obtaining
      additional capital to finance research, development, production, and
      marketing of our products; and





·
            Managing
      our business as it grows.





As discussed above, we currently have
only four employees, all of whom are full-time employees. The greatest burden of
succeeding in the above areas, therefore, falls on Drs. Dees, Scott, Wachter,
and Mr. Culpepper. Focusing on any one of these areas may divert their attention
from our other areas of concern and could affect our ability to manage other
aspects of our business. We cannot assure you that our management will be able
to succeed in all of these areas or, even if we do so succeed, that our business
will be successful as a result. We anticipate adding an additional regulatory
affairs officer on a consulting basis within several months. While we have not
historically had difficulty in attracting employees, our small size and limited
operating history may make it difficult for us to attract and retain employees
in the future, which could further divert management’s attention from the
operation of our business.





Our common stock price can be
volatile because of several factors, including a limited public float, which has
increased significantly from 2005 to 2008.





During the year ended December 31,
2008, the sale price of our common stock fluctuated from $0.74 to $1.64 per
share. We believe that our common stock is subject to wide price fluctuations
because of several factors, including:





·
            absence
      of meaningful earnings and ongoing need for external
      financing;





·
            a
      relatively thin trading market for our common stock, which causes trades
      of small blocks of stock to have a significant impact on our stock
      price;





·
            general
      volatility of the stock market and the market prices of other
      publicly-traded companies; and





·
            investor
      sentiment regarding equity markets generally, including public perception
      of corporate ethics and governance and the accuracy and transparency of
      financial reporting.





Financings
that may be available to us under current market conditions frequently involve
sales at prices below the prices at which our common stock trades on the OTC
Bulletin Board, as well as the issuance of warrants or convertible debt that
require exercise or conversion prices that are calculated in the future at a
discount to the then market price of our common stock. The current economic
downturn has made the financings available to development-stage companies like
us more dilutive in nature than they would otherwise be.





Any agreement to sell, or convert debt
or equity securities into, common stock at a future date and at a price based on
the then current market price will provide an incentive to the investor or third
parties to sell the common stock short to decrease the price and increase the
number of shares they may receive in a future purchase, whether directly from us
or in the market.





Financings that may be available to
us frequently involve high selling costs.





Because of our limited operating
history, low market capitalization, thin trading volume and other factors, we
have historically had to pay high costs to obtain financing and expect to
continue to be required to pay high costs for any future financings in which we
may participate. For example, our past sales of shares and our sale of the
debentures have involved the payment of finder’s fees or placement agent’s fees.
These types of fees are typically higher for small companies like us. Payment of
fees of this type reduces the amount of cash that we receive from a financing
transaction and makes it more difficult for us to obtain the amount of financing
that we need to maintain and expand our operations.





18


It is our general policy to retain
any earnings for use in our operation.





We have never declared or paid cash
dividends on our common stock. We currently intend to retain all of our future
earnings, if any, for use in our business and therefore do not anticipate paying
any cash dividends on our common stock in the foreseeable future.





Our stock price is below $5.00 per
share and is treated as a “penny stock”, which places restrictions on
broker-dealers recommending the stock for purchase.





Our common stock is defined as “penny
stock” under the Exchange Act and its rules. The SEC has adopted regulations
that define “penny stock” to include common stock that has a market price of
less than $5.00 per share, subject to certain exceptions. These rules include
the following requirements:





·
            broker-dealers
      must deliver, prior to the transaction a disclosure schedule prepared by
      the SEC relating to the penny stock
market;





·
            broker-dealers
      must disclose the commissions payable to the broker-dealer and its
      registered representative;





·
            broker-dealers
      must disclose current quotations for the
  securities;





·
            if
      a broker-dealer is the sole market-maker, the broker-dealer must disclose
      this fact and the broker-dealers presumed control over the market;
      and





·
            a
      broker-dealer must furnish its customers with monthly statements
      disclosing recent price information for all penny stocks held in the
      customer’s account and information on the limited market in penny
      stocks.





Additional sales practice requirements
are imposed on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. For these types of transactions,
the broker-dealer must make a special suitability determination for the
purchaser and must have received the purchaser’s written consent to the
transaction prior to sale. If our common stock remains subject to these penny
stock rules these disclosure requirements may have the effect of reducing the
level of trading activity in the secondary market for our common stock. As a
result, fewer broker-dealers may be willing to make a market in our stock, which
could affect a shareholder’s ability to sell their shares.





Future
sales by our stockholders may adversely affect our stock price and our ability
to raise funds in new stock offerings.





Sales of our common stock in the public
market following any prospective offering could lower the market price of our
common stock. Sales may also make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
our management deems acceptable.  The current economic downturn has
made the financings available to development-stage companies like us more
dilutive in nature than they would otherwise be.





Item
2. Properties.





We currently lease approximately 6,000
square feet of space outside of Knoxville, Tennessee for our corporate office
and operations. Our monthly rental charge for these offices is approximately
$4,500 per month, and the lease is renewed on an annual basis. We believe that
these offices generally are adequate for our needs currently and in the
immediate future.





Item 3. Legal
Proceedings.





From time to time, we are party to
litigation or other legal proceedings that we consider to be a part of the
ordinary course of our business.  At present, we are not involved in
any legal proceedings nor are we party to any pending claims that we believe
could reasonably be expected to have a material adverse effect on our business,
financial condition, or results of operations.





Item
4. Submission of Matters to a Vote of Security Holders.





During the
three months ended December 31, 2008, we did not submit any matters to a vote of
our stockholders.


19


Part
II





Item 5.  Market for Common
Equity and Related Stockholder Matters.





Market
Information and Holders





Quotations for our common stock are
reported on the OTC Bulletin Board under the symbol “PVCT." The following table
sets forth the range of high and low bid information for the periods indicated
since January 1, 2007:





High
            
            Low2007First
      Quarter (January 1 to March 31)
            
            1.64
            
            1.04Second
      Quarter (April 1 to June 30)
            
            1.94
            
            1.29Third
      Quarter (July 1 to September 30)
            
            3.07
            
            1.44Fourth
      Quarter (October 1 to December 31)
            
            2.49
            
            1.552008First
      Quarter (January 1 to March 31)
            
            1.59
            
            1.00Second
      Quarter (April 1 to June 30)
            
            1.30
            
            0.90Third
      Quarter (July 1 to September 30)
            
            1.64
            
            0.74Fourth
      Quarter (October 1 to December 31)
            
            1.56
            
            0.82





The closing price for our common stock
on March 17, 2009 was $1.01.  High and low quotation information was
obtained from data provided by Yahoo!  Inc.  Quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission,
and may not reflect actual transactions.





As of March 17, 2009, we had 1,767
shareholders of record of our common stock in physical certificate
form.





Dividend
Policy





We have never declared or paid any cash
dividends on our capital stock.  We currently  plan to
retain  future  earnings,  if any,  to
finance the growth and development of our business and do
not  anticipate  paying any cash dividends in
the  foreseeable  future.  We may incur
indebtedness in the future which may prohibit or effectively restrict the
payment of dividends, although we have no current plans to do so. Any future
determination to pay cash dividends will be at the discretion of our board of
directors.





Recent
Sales of Unregistered Securities





During the quarter ended December 31,
2008, we did not sell any securities which were not registered under the
Securities Act of 1933, as amended.





20


Item 7.  Management's
Discussion and Analysis of Financial Condition and Results of
Operations.





The following discussion is intended to
assist in the understanding and assessment of significant changes and trends
related to our results of operations and our financial condition together with
our consolidated subsidiaries. This discussion and analysis should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this prospectus. Historical results and percentage
relationships set forth in the statement of operations, including trends which
might appear, are not necessarily indicative of future operations.





Critical
Accounting Policies





Long-Lived
Assets





We review the carrying values of our
long-lived assets for possible impairment whenever an event or change in
circumstances indicates that the carrying amount of the assets may not be
recoverable.  Any long-lived assets held for disposal are reported at
the lower of their carrying amounts or fair value less cost to
sell.  Management has determined there to be no
impairment.





Patent
Costs





Internal patent costs are expensed in
the period incurred. Patents purchased are capitalized and amortized over their
remaining lives, which range from 8-13 years.  Annual amortization of
the patents is expected to be approximately $671,000 for the next
year.





Stock-Based
Compensation





We adopted Financial Accounting
Standards Board (“FASB”) Statement No. 123 (revised 2004), “Share-Based Payment”
(FASB 123R), effective January 1, 2006 under the modified prospective method,
which recognizes compensation cost beginning with the effective date (a) based
on the requirements of FASB 123R for all share-based payments granted after the
effective date and to awards modified, repurchased, or cancelled after that date
and (b) based on the requirements of FASB 123 for all awards granted to
employees prior to the effective date of FASB 123R that remain unvested on the
effective date.




The compensation cost relating to
share-based payment transactions is measured based on the fair value of the
equity or liability instruments issued and is expensed on a straight-line basis.
For purposes of estimating the fair value of each stock option, on the date of
grant, we utilized the Black-Scholes option-pricing model. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected volatility factor of the market price of the
company’s common stock (as determined by reviewing its historical public market
closing prices). Because our employee stock options and restricted stock units
have characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management’s opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.





The Company records the fair value of
warrants granted to non-employees in exchange for services in accordance with
EITF 96-18 “Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.”  Warrants to
non-employees are generally vested and nonforfeitable upon the date of the
grant.  Accordingly fair value is determined on the grant
date.





Research
and Development





Research and development costs are
charged to expense when incurred. An allocation of payroll expenses to research
and development is made based on a percentage estimate of time spent. The
research and development costs include the following: consulting - IT,
depreciation, lab equipment repair, lab supplies and pharmaceutical
preparations, insurance, legal - patents, office supplies, payroll expenses,
rental - building, repairs, software, taxes and fees, and
utilities.




21


Contractual
Obligations - Leases





We lease office and laboratory space in
Knoxville, Tennessee, on an annual basis, renewable for one year at our option.
We are committed to pay a total of $27,000 in lease payments through June 2009,
which is the remainder of our current lease term at December 31,
2008.





Capital
Structure





Our ability to continue as a going
concern is assured due to our financing completed during 2006 and warrants
exercised in 2007 and 2008, and thus far in 2009.Given our current rate
of expenditures, we expect to raise additional capital in 2009 to insure we
continue as a going concern.  However, our existing funds are
sufficient to meet minimal necessary expenses during 2009.





We have implemented our integrated
business plan, including execution of the current and next phases in clinical
development of our pharmaceutical products and continued execution of research
programs for new research initiatives.





We intend to proceed as rapidly as
possible with the asset sale and licensure of our OTC products that can be sold
with a minimum of regulatory compliance and with the further development of
revenue sources through licensing of our existing medical device and biotech
intellectual property portfolio. Although we believe that there is a reasonable
basis for our expectation that we will become profitable due to the asset sale
and licensure of our OTC products, we cannot assure you that we will be able to
achieve, or maintain, a level of profitability sufficient to meet our operating
expenses.





Our current plans include continuing to
operate with our four employees during the immediate future, but we have added
two additional consultants and anticipate adding two more consultants in the
next 12 months. Our current plans also include minimal purchases of new
property, plant and equipment, and increased research and development for
additional clinical trials.





Plan
of Operation





With the reorganization of Provectus
and PPI and the acquisition and integration into the Company of Valley and
Pure-ific, we believe we have obtained a unique combination of core intellectual
properties and OTC and other non-core products. This combination represents the
foundation for an operating company that we believe will provide both
profitability and long-term growth.  In 2008, we continued to
carefully control expenditures in preparation for the asset sale and licensure
or spin out of our OTC products, medical device and biotech technologies, and we
will issue equity only when it makes sense and primarily for purposes of
attracting strategic investors.





In the short term, we intend to develop
our business by licensing our existing OTC products, principally Pure-Stick,
GloveAid and Pure-ific, and selling a majority stake of the OTC
assets.  We are planning the majority sale of the OTC assets via a
spin-out transaction of the wholly-owned subsidiary that contains the OTC
assets.  We also plan to license our medical device and biotech
technologies and sell a majority stake via a spin-out transaction of those
non-core wholly-owned subsidiaries.  In the longer term, we expect to
continue the process of developing, testing and obtaining the approval of the U.
S. Food and Drug Administration for prescription drugs in
particular.  Additionally, we have restarted our research programs
that will identify additional conditions that our intellectual properties may be
used to treat as well as additional treatments for those and other
conditions.





We have continued to make significant
progress with the major research and development projects expected to be ongoing
in the next 12 months.  The Phase 2 trial in metastatic melanoma has
been significantly completed which is expected to cost approximately $575,000
during 2009 and has cost approximately $2,425,000 through
2008.  Additionally, we planned $675,000 of expenditures in 2007 and
2008 to substantially advance our work with other oncology indications which
included the third group of our expanded Phase 1 breast carcinoma clinical
trial.  The third group of our expanded Phase 1 breast carcinoma
clinical trial was completed in September 2008.  Our Phase 2 psoriasis
trial commenced in November 2007 and is expected to cost approximately
$1,725,000, of which approximately $1,500,000 has been expended thus
far.  Our Phase 2 atopic dermatitis trial commenced in May 2008 and
the cost is included in the psoriasis trial budget and actual
figures.  Our Phase 1 liver cancer trial is expected to commence in
the first half of 2009 and is expected to cost approximately $600,000, of which
approximately $500,000 has been expended thus far.  We anticipate
expending $900,000 in 2009 for direct clinical trial expense.  This
includes the 2009 expenditures for all projects currently
planned.  The table below summarizes our projects, the actual costs
expended to date and costs expected for 2009.




22




Projects
            Planned
      Project Cost
            Expenditures
      through
              December
      31, 2008
            Expected
      2009Melanoma
            $                           
      3,000,000
            $                2,425,000
            $                575,000Breast/Other
            $                         
           675,000
            $                   675,000
            $                         -0-Psoriasis/AD
            $                            1,725,000
            $                1,500,000
            $                225,000Liver
            $                               600,000
            $                   500,000
            $                100,000








Comparison
of the Years Ended December 31, 2008 and 2007





Revenues





OTC Product Revenue was $-0- in both
2008 and 2007.  We discontinued our proof-of-concept program in
November 2006 and have, therefore, ceased selling our OTC products. There was no
medical device revenue in 2008 or 2007 as we have not emphasized sales of
medical devices.  We have designated the OTC and medical device
products as non-core and are considering the sale of the underlying assets in
conjunction with the planned spin-out of the respective wholly-owned
subsidiaries.





Research
and development





Research and development costs totaling
$4,425,616 for 2008 included depreciation expense of $9,256, consulting and
contract labor of $1,256,032, lab supplies and pharmaceutical preparations of
$116,762, insurance of $108,905, legal of $297,363, payroll of $2,561,845, and
rent and utilities of $75,453.  Research and development costs
totaling $4,404,958 for 2007 included depreciation expense of $9,256, consulting
and contract labor of $661,655, lab supplies and pharmaceutical preparations of
$400,687, insurance of $124,244, legal of $297,846, payroll of $2,846,890, and
rent and utilities of $64,380.  The approximately $594,000 increase in
consulting and contract labor is the result of the greater consulting costs
incurred in 2008 to significantly advance Phase 2 clinical trial programs for
both atopic dermatitis and psoriasis, and especially metastatic melanoma versus
2007. The approximately $284,000 decrease in lab supplies and pharmaceutical
preparations is primarily the result of materials necessary to provide for the
Phase 2 clinical trials that were purchased to a greater extent in 2007 versus
2008.  Approximately $285,000 of the decrease in payroll is primarily
the result of lower bonuses and the lower impact of stock-based compensation
expense for stock options in 2008 versus 2007, offset partially by an increase
in salaries in 2008 versus 2007.





General
and administrative





General and administrative expenses
increased by $10,788 in 2008 to $5,246,849 from $5,236,061 in
2007.  Expenses in 2008 were generally similar in nature to expenses
in 2007 except payroll decreased approximately $600,000 in 2008 due to lower
bonuses and stock compensation expense offset partially by higher salaries and
investor relations increased approximately $550,000.





Investment
income





Investment income decreased by $243,903
in 2008 to $74,014 from $317,917 in 2007.  The decrease resulted due
to significant lower interest rates on cash and cash equivalents as well as
lower balances in 2008 versus 2007.





23


Cash
Flow





Our cash, cash equivalents, and
short-term United States Treasury Notes were $2,800,000 at December 31, 2008,
compared with $7,300,000 at December 31, 2007.  The decrease of
$4,500,000 was due primarily to cash of $7,120,000 used in operating activities,
partially offset by $2,640,000 from the exercises of warrants and stock options
during the year ended December 31, 2008.  We increased our expenditure
rate in 2008 primarily by accelerating our clinical trial projects and our
investor relations efforts to communicate the progress of the
Company.  As of February 28, 2009 additional exercises of warrants
totaled $363,000.





At our current cash expenditure rate,
our cash and cash equivalents will be sufficient to meet our current and planned
needs in 2009 since we expect additional cash inflows from the exercise of
existing warrants and sales of equity securities.  If we do not have
sufficient cash inflows from the exercise of existing warrants and sales of
equity securities, then we will reduce administrative expenses including
management salaries which will enable us to meet minimum expenditures planned in
2009.  Since we plan for $900,000 of direct clinical trial expense and
$1,600,000 of fixed expenses to operate in 2009, we have enough cash on hand at
the end of 2008 to fund 2009 operations.





We are seeking to improve our cash flow
through the majority stake asset sale and licensure of our OTC products as well
as other non-core assets.  However, we cannot assure you that we will
be successful in selling a majority stake of the OTC and other non-core assets
via a spin-out transaction and licensing our existing OTC
products.  Moreover, even if we are successful in improving our
current cash flow position, we nonetheless plan to seek additional funds to meet
our long-term requirements in 2010 and beyond.  We anticipate that
these funds will come from the proceeds of private placements, the exercise of
existing warrants outstanding, or public offerings of debt or equity
securities.  We also intend to license our dermatology drug product
candidate portfolio once we have completed our Phase 2 psoriasis and atopic
eczema studies later in 2009.





Capital
Resources





As noted above, our present cash flow
is currently sufficient to meet our short-term operating
needs.  Excess cash will be used to finance the next phases in
clinical development of our pharmaceutical products.  We anticipate
that any required funds for our operating and development needs beyond 2009 will
come from the proceeds of private placements, the exercise of existing warrants
outstanding, or public offerings of debt or equity securities.  While
we believe that we have a reasonable basis for our expectation that we will be
able to raise additional funds, we cannot assure you that we will be able to
complete additional financing in a timely manner.  In addition, any
such financing may result in significant dilution to shareholders.




Recent
Accounting Pronouncements





The FASB released SFAS No. 157, “Fair
Value Measurements,” to define fair value, establish a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expand disclosures about fair value measurements. SFAS No. 157 is effective as
of the beginning of an entity’s first fiscal year that begins after December 15,
2007.  SFAS No. 157 was partially adopted by the Company as of January
1, 2008, the beginning of the Company’s fiscal-2008 year for its financial
assets and liabilities. As allowed by SFAS No. 157, the Company has deferred
adoption of SFAS No. 157 for non-financial assets and non-financial
liabilities.  The adoption of SFAS No. 157 did not have a material
impact on the Company’s consolidated financial position and results of
operations.





In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities--Including an amendment of FASB Statement No. 115,” which permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is expected to expand the use
of fair value measurement, which is consistent with the long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to apply
the provisions of SFAS No. 157, “Fair Value Measurements.” SFAS No. 159 was
adopted by the Company as of January 1, 2008, the beginning of the Company’s
fiscal-2008 year.  The adoption of SFAS No. 159 did not have a
material impact on the Company’s consolidated financial position and results of
operations.





In June 2008, the FASB ratified
EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). Equity-linked
instruments (or embedded features) that otherwise meet the definition of a
derivative as outlined in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” are not accounted for as derivatives if
certain criteria are met, one of which is that the instrument (or embedded
feature) must be indexed to the entity’s stock. EITF 07-5 provides guidance on
determining if equity-linked instruments (or embedded features) such as warrants
to purchase our stock are considered indexed to our stock. EITF 07-5 is
effective for the financial statements issued for fiscal years and interim
periods within those fiscal years, beginning after December 15, 2008 and
will be applied to outstanding instruments as of the beginning of the fiscal
year in which it is adopted. Upon adoption, a cumulative effect adjustment will
be recorded, if necessary, based on amounts that would have been recognized if
this guidance had been applied from the issuance date of the affected
instruments. The Company is currently determining the impact, if any, that EITF
07-05 will have on its financial statements.




24


Item 8. Financial
Statements.





Our consolidated financial statements,
together with the report thereon of BDO Seidman LLP, independent accountants,
are set forth on the pages of this Annual Report on Form 10-K indicated
below.





PageReport
      of Independent Registered Public Accounting Firm
            29Consolidated
      Balance Sheets as of December 31, 2008 and December 31,
    2007
            30Consolidated
      Statements of Operations for the years December 31, 2008 and 2007, and
      cumulative amounts from January 17, 2002 (Inception) through December 31,
      2008
            31Consolidated
      Statements of Shareholders' Equity for years ended December 31, 2008 and
      2007, and cumulative amounts from January 17, 2002 (Inception) through
      December 31, 2008
            32Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and 2007,
      cumulative amounts from January 17, 2002 (Inception) through December 31,
      2008
            34Notes
      to Consolidated Financial Statements
            36





Forward-Looking
Statements





This Annual Report on Form 10-K
contains forward-looking statements regarding, among other things, our
anticipated financial and operating results.  Forward-looking
statements reflect our management’s current assumptions, beliefs, and
expectations.  Words such as "anticipate," "believe, “estimate,"
"expect," "intend," "plan," and similar expressions are intended to identify
forward-looking statements.  While we believe that the expectations
reflected in our forward-looking statements are reasonable, we can give no
assurance that such expectations will prove correct.  Forward-looking
statements are subject to risks and uncertainties that could cause our actual
results to differ materially from the future results, performance, or
achievements expressed in or implied by any forward-looking statement we
make.  Some of the relevant risks and uncertainties that could cause
our actual performance to differ materially from
the  forward-looking  statements contained in this report
are discussed below under the heading "Risk  Factors" and elsewhere in
this Annual  Report on Form 10-K.  We caution investors that
these discussions of important risks and uncertainties are not exclusive, and
our business may be subject to other risks and uncertainties which are not
detailed there.





Investors are cautioned not to place
undue reliance on our forward-looking statements.  We make
forward-looking statements as of the date on which this Annual Report on Form
10-K is filed with the SEC, and we assume no obligation to update the
forward-looking statements  after the date hereof  whether
as a result of new information or events, changed circumstances, or otherwise,
except as required by law.





Item 9.  Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure.





N/A.





Item
9A (T). Controls and Procedures





Evaluation of Disclosure Controls
and Procedures.We have carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14.  Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.





25


Management’s Report on Internal
Control Over Financial Reporting.Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting.  Internal control over financial reporting is
defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a
process designated by, or under the supervision of, our principal executive and
principal financial officers and effected by our board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:





·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and disposition of our
    assets;


·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and


·
            Provide
      reasonable assurance regarding prevention or timely detention of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.





Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.  Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.  Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.





Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2008.  In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control – Integrated Framework.





Based on our assessment, management
believes that, as of December 31, 2008, our internal control over financial
reporting is effective based on those criteria.





This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting.  Management’s  report was
not subject to attestation by our registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this annual report.





Changes in Internal Control Over
Financial Reporting.  There was no change in our internal
control over financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





Item 9B. Other
Information.





None.


26





Part
III





Item 10. Directors, Executive
Officers and Corporate Governance.





Except as set forth  below,
the information called for by this item with respect to our executive officers
as of March 30, 2009 is furnished in Part I of this report under the
heading  "Personnel--Executive  Officers." The information
called for by this item, to the extent it relates to our directors or to certain
filing obligations of our directors and executive officers under the federal
securities laws, is incorporated herein by reference to the Proxy Statement for
our Annual Meeting of Stockholders to be held on June 18, 2009, which will be
filed with the SEC pursuant to Regulation 14A under the Exchange
Act.





Audit
Committee Financial Expert





We do not currently have an "audit
committee financial expert," as defined under the rules of the SEC. Because the
board of directors consists of only five members and our operations remain
amenable to oversight by a limited number of directors, the board has not
delegated any of its functions to committees.  The entire board of
directors acts as our audit committee as permitted under Section 3(a)(58)(B) of
the Exchange Act. We believe that all of the members of our board are qualified
to serve as the committee and have the experience and knowledge to perform the
duties required of the committee.  We do not have any independent
directors who would qualify as an audit committee financial expert, as defined.
We believe that it has been, and may continue to be, impractical to recruit such
a director unless and until we are significantly larger.





Code
of Ethics





We have adopted a formal Code of
Ethics.  The Company’s four employees adhere to high standards of
ethics and have signed a formal policy.





Item 11.  Executive
Compensation.





The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 18, 2009, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.





Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.





The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 18, 2009, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.





Item 13.  Certain
Relationships and Related Transactions.





The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 18, 2009, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.





Item
14.  Principal Accountant Fees and Services.





The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 18, 2009, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.





Item
15. Exhibits





Exhibits required by Item 601 of
Regulation S-K are incorporated herein by reference and are listed on the
attached Exhibit Index, which begins on page X-1 of this Annual Report on Form
10-K.





27











Signatures





In accordance with Section 13 or 15(d)
of the Exchange Act, the Registrant caused this annual report on From 10-K for
the year ended December 31, 2008 to be signed on its behalf by the undersigned,
thereunto duly authorized.





Provectus Pharmaceuticals, Inc.





By: /s/ H. Craig
Dees


H.
Craig Dees, Ph.D. Chief Executive Officer





Date:    March
30, 2009











In
accordance with the requirements of the Securities Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated:





Signature
            Title
            Date/s/  H.
      Craig Dees
              H.
      Craig Dees, Ph.D.
            Chief
      Executive Officer (principal executive officer) and Chairman of the
      Board
            March
      30, 2009/s/  Peter
      R. Culpepper
              Peter
      R. Culpepper, CPA
            Chief
      Financial Officer (principal financial officer and principal accounting
      officer) and Chief Operating Officer
            March
      30, 2009/s/  Timothy C.
      Scott
              Timothy
      C. Scott, Ph.D.
            President
      and Director
            March
      30, 2009/s/  Eric A.
      Wachter , Ph.D
              Eric
      A. Wachter, Ph.D.
            Executive
      Vice President - Pharmaceuticals and Director
            March
      30, 2009/s/ Stuart
      Fuchs
              Stuart
      Fuchs
            Director
            March
      30, 2009/s/  Kelly
      M. McMasters, M.D., Ph.D
              Kelly
      M. McMasters, M.D., Ph.D.
            Director
            March
      30, 2009





28





Report
of Independent Registered Public Accounting Firm











Board
of Directors


Provectus
Pharmaceuticals, Inc.


Knoxville,
Tennessee





We have
audited the accompanying consolidated balance sheets of Provectus
Pharmaceuticals, Inc., a development stage company, as of December 31, 2008 and
2007 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from January 17, 2002 (date of inception)
to December 31, 2008 and for each of the two years in the period ended December
31, 2008.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Provectus Pharmaceuticals,
Inc. at December 31, 2008 and 2007, and the results of its operations and its
cash flows for the period from January 17, 2002 (date of inception) to December
31, 2008 and for each of the two years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.








/s/BDO Seidman, LLP





Chicago,
Illinois


March 30,
2009





29


PROVECTUS
PHARMACEUTICALS, INC.


(A
Development-Stage Company)




CONSOLIDATED
BALANCE SHEETS





December
      31,
              2008
            
            
            December
      31,
              2007AssetsCurrent
      AssetsCash and cash
      equivalents
            
            $
            2,796,020
            
            
            $
            3,262,546United States Treasury Notes,
      total face value of $4,000,000 in 2007
            
            
            --
            
            
            
            3,997,680Prepaid expenses and other
      current assets
            
            
            50,691
            
            
            
            99,460Total
      Current Assets
            
            
            2,846,711
            
            
            
            7,359,686Equipment
      and Furnishings, less accumulated depreciation of $391,233 and
      $381,977
            
            
            33,690
            
            
            
            42,946Patents,
      net of amortization of $4,105,017 and $3,433,897,
    respectively
            
            
            7,610,428
            
            
            
            8,281,548Other
      assets
            
            
            27,000
            
            
            
            27,000$
            10,517,829
            
            
            $
            15,711,180Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesAccounts payable –
      trade
            
            $
            267,093
            
            
            $
            455,192Accrued compensation and payroll
      taxes
            
            
            79,955
            
            
            
            274,011Accrued consulting
      expense
            
            
            66,250
            
            
            
            102,037Other accrued
      expenses
            
            
            48,995
            
            
            
            48,430Total
      Current Liabilities
            
            
            462,293
            
            
            
            879,670Stockholders’
      EquityPreferred stock; par value $.001 per share; 25,000,000 shares authorized;
      no

              shares issued and outstanding
            
            
            --
            
            
            
            --Common
      stock; par value $.001 per share; 100,000,000 shares
      authorized;
              53,017,076
      and 49,399,281 shares issued and outstanding, respectively
            
            
            53,017
            
            
            
            49,399Paid-in capital
            
            
            65,478,126
            
            
            
            59,988,147Deficit accumulated during the
      development stage
            
            
            (55,475,607
            )
            
            
            (45,206,036
            )Total
      Stockholders’ Equity
            
            
            10,055,536
            
            
            
            14,831,510$
            10,517,829
            
            
            $
            15,711,180





See
accompanying notes to consolidated financial statements.





30





PROVECTUS
PHARMACEUTICALS, INC.


(A
Development-Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS








Year
      Ended
              December
      31,
              2008
            
            
            Year
      Ended
              December
      31,
              2007
            
            
            Cumulative
              Amounts
      from
              January
      17, 2002
              (Inception)
              Through
              December
      31, 2008RevenuesOTC
      product revenue
            
            $
            --
            
            
            $
            --
            
            
            $
            25,648Medical
      device revenue
            
            
            --
            
            
            
            --
            
            
            
            14,109Total
      revenues
            
            
            --
            
            
            
            --
            
            
            
            39,757Cost
      of sales
            
            
            --
            
            
            
            --
            
            
            
            15,216Gross
      profit
            
            
            --
            
            
            
            --
            
            
            
            24,541Operating
      expensesResearch
      and development
            
            
            4,425,616
            
            
            
            4,404,958
            
            
            
            15,958,781General
      and administrative
            
            
            5,246,849
            
            
            
            5,236,061
            
            
            
            27,212,878Amortization
            
            
            671,120
            
            
            
            671,120
            
            
            
            4,105,017Total
      operating loss
            
            
            (10,343,585
            )
            
            
            (10,312,139
            )
            
            
            (47,252,135
            )Gain
      on sale of fixed assets
            
            
            --
            
            
            
            --
            
            
            
            55,075Loss
      on extinguishment of debt
            
            
            --
            
            
            
            --
            
            
            
            (825,867
            )Investment
      income
            
            
            74,014
            
            
            
            317,917
            
            
            
            645,324Net
      interest expense
            
            
            --
            
            
            
            (11,409
            )
            
            
            (8,098,004
            )Net
      loss
            
            $
            (10,269,571
            )
            
            
            (10,005,631
            )
            
            
            (55,475,607
            )Basic
      and diluted loss per  common share
            
            $
            (0.20
            )
            
            
            (0.22
            )Weighted
      average number of common
              shares
      outstanding – basic and diluted
            
            
            51,320,138
            
            
            
            46,350,056





See
accompanying notes to consolidated financial statements.





31


PROVECTUS
PHARMACEUTICALS, INC.
 (A
Development-Stage Company)
  CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 Common
      StockNumber
      of Shares
              
              
              Par
      Value
              
              
              Paid
      in capital
              
              
              Accumulated
      Deficit
              
              
              TotalBalance,
      at January 17 2002
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Issuance
      to founding shareholders
              
              
              6,000,000
              
              
              
              6,000
              
              
              
              (6,000
              )
              
              
              --
              
              
              
              --Sale
      of stock
              
              
              50,000
              
              
              
              50
              
              
              
              24,950
              
              
              
              --
              
              
              
              25,000Issuance
      of stock to employees
              
              
              510,000
              
              
              
              510
              
              
              
              931,490
              
              
              
              --
              
              
              
              932,000Issuance
      of stock for services
              
              
              120,000
              
              
              
              120
              
              
              
              359,880
              
              
              
              --
              
              
              
              360,000Net
      loss for the period from January 17, 2002 (inception) to April 23, 2002
      (date of reverse merger)
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (1,316,198
              )
              
              
              (1,316,198
              )Balance,
      at April 23, 2002
              
              
              6,680,000
              
              
              
              6,680
              
              
              
              1,310,320
              
              
              
              (1,316,198
              )
              
              
              802Shares
      issued in reverse merger
              
              
              265,763
              
              
              
              266
              
              
              
              (3,911
              )
              
              
              --
              
              
              
              (3,645
              )Issuance
      of stock for services
              
              
              1,900,000
              
              
              
              1,900
              
              
              
              5,142,100
              
              
              
              --
              
              
              
              5,144,000Purchase
      and retirement of stock
              
              
              (400,000
              )
              
              
              (400
              )
              
              
              (47,600
              )
              
              
              --
              
              
              
              (48,000
              )Stock
      issued for acquisition of ValleyPharmaceuticals
              
              
              500,007
              
              
              
              500
              
              
              
              12,225,820
              
              
              
              --
              
              
              
              12,226,320Exercise
      of warrants
              
              
              452,919
              
              
              
              453
              
              
              
              --
              
              
              
              --
              
              
              
              453Warrants
      issued in connection withconvertible
      debt
              
              
              --
              
              
              
              --
              
              
              
              126,587
              
              
              
              --
              
              
              
              126,587Stock
      and warrants issued for acquisitionof
      Pure-ific
              
              
              25,000
              
              
              
              25
              
              
              
              26,975
              
              
              
              --
              
              
              
              27,000Net
      loss for the period from April 23, 2002 (date of reverse merger) to
      December 31,2002
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (5,749,937
              )
              
              
              (5,749,937
              )Balance,
      at December 31, 2002
              
              
              9,423,689
              
              
              
              9,424
              
              
              
              18,780,291
              
              
              
              (7,066,135
              )
              
              
              11,723,580Issuance
      of stock for services
              
              
              764,000
              
              
              
              764
              
              
              
              239,036
              
              
              
              --
              
              
              
              239,800Issuance
      of warrants for services
              
              
              --
              
              
              
              --
              
              
              
              145,479
              
              
              
              --
              
              
              
              145,479Stock
      to be issued for services
              
              
              --
              
              
              
              --
              
              
              
              281,500
              
              
              
              --
              
              
              
              281,500Employee
      compensation from stock options
              
              
              --
              
              
              
              --
              
              
              
              34,659
              
              
              
              --
              
              
              
              34,659Issuance
      of stock pursuant to Regulation S
              
              
              679,820
              
              
              
              680
              
              
              
              379,667
              
              
              
              --
              
              
              
              380,347Beneficial
      conversion related to convertible
                Debt
              
              
              --
              
              
              
              --
              
              
              
              601,000
              
              
              
              --
              
              
              
              601,000Net
      loss for the year ended December 31, 2003
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (3,155,313
              )
              
              
              (3,155,313
              )Balance,
      at December 31, 2003
              
              
              10,867,509
              
              
              
              10,868
              
              
              
              20,461,632
              
              
              
              (10,221,448
              )
              
              
              (10,251,052
              )Issuance
      of stock for services
              
              
              733,872
              
              
              
              734
              
              
              
              449,190
              
              
              
              --
              
              
              
              449,923Issuance
      of warrants for services
              
              
              --
              
              
              
              --
              
              
              
              495,480
              
              
              
              --
              
              
              
              495,480Exercise
      of warrants
              
              
              132,608
              
              
              
              133
              
              
              
              4,867
              
              
              
              --
              
              
              
              5,000Employee
      compensation from stock options
              
              
              --
              
              
              
              --
              
              
              
              15,612
              
              
              
              --
              
              
              
              15,612Issuance
      of stock pursuant to Regulation S
              
              
              2,469,723
              
              
              
              2,469
              
              
              
              790,668
              
              
              
              --
              
              
              
              793,137Issuance
      of stock pursuant to Regulation D
              
              
              1,930,164
              
              
              
              1,930
              
              
              
              1,286,930
              
              
              
              --
              
              
              
              1,288,861Beneficial
      conversion related to convertibleDebt
              
              
              --
              
              
              
              --
              
              
              
              360,256
              
              
              
              --
              
              
              
              360,256Issuance
      of convertible debt with warrants
              
              
              --
              
              
              
              --
              
              
              
              105,250
              
              
              
              --
              
              
              
              105,250Repurchase
      of beneficial conversion feature
              
              
              --
              
              
              
              --
              
              
              
              (258,345
              )
              
              
              --
              
              
              
              (258,345
              )Net
      loss for the year ended  December 31, 2004
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (4,344,525
              
              
              
              (4,344,525
              )
 Balance,
      at December 31, 2004
              
              
              16,133,876
              
              
              
              16,134
              
              
              
              23,711,540
              
              
              
              (14,565,973
              )
              
              
              9,161,701
   32
  Issuance
      of stock for services
              
              
              226,733
              
              
              
              227
              
              
              
              152,058
              
              
              
              --
              
              
              
              152,285Issuance
      of stock for interest payable
              
              
              263,721
              
              
              
              264
              
              
              
              195,767
              
              
              
              --
              
              
              
              196,031Issuance
      of warrants for services
              
              
              --
              
              
              
              --
              
              
              
              1,534,405
              
              
              
              --
              
              
              
              1,534,405Issuance
      of warrants for contractual
                obligations
              
              
              --
              
              
              
              --
              
              
              
              985,010
              
              
              
              --
              
              
              
              985,010Exercise
      of warrants and stock options
              
              
              1,571,849
              
              
              
              1,572
              
              
              
              1,438,223
              
              
              
              --
              
              
              
              1,439,795Employee
      compensation from stock options
              
              
              --
              
              
              
              --
              
              
              
              15,752
              
              
              
              --
              
              
              
              15,752Issuance
      of stock pursuant to Regulation D
              
              
              6,221,257
              
              
              
              6,221
              
              
              
              6,506,955
              
              
              
              --
              
              
              
              6,513,176Debt
      conversion to common stock
              
              
              3,405,541
              
              
              
              3,405
              
              
              
              3,045,957
              
              
              
              --
              
              
              
              3,049,362Issuance
      of warrants with convertible debt
              
              
              --
              
              
              
              --
              
              
              
              1,574,900
              
              
              
              --
              
              
              
              1,574,900Beneficial
      conversion related to convertible
                debt
              
              
              --
              
              
              
              --
              
              
              
              1,633,176
              
              
              
              --
              
              
              
              1,633,176Beneficial
      conversion related to interest
                expense
              
              
              --
              
              
              
              --
              
              
              
              39,529
              
              
              
              --Repurchase
      of beneficial conversion feature
              
              
              --
              
              
              
              --
              
              
              
              (144,128
              )
              
              
              --
              
              
              
              (144,128
              )Net
      loss for the year ended 2005
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (11,763,853
              )
              
              
              (11,763,853
              )Balance,
      at December 31, 2005
              
              
              27,822,977
              
              
              
              27,823
              
              
              
              40,689,144
              
              
              
              (26,329,826
              
              
              
              14,387,141Issuance
      of stock for services
              
              
              719,246
              
              
              
              719
              
              
              
              676,024
              
              
              
              --
              
              
              
              676,743Issuance
      of stock for interest payable
              
              
              194,327
              
              
              
              195
              
              
              
              183,401
              
              
              
              --
              
              
              
              183,596Issuance
      of warrants for services
              
              
              --
              
              
              
              --
              
              
              
              370,023
              
              
              
              --
              
              
              
              370,023Exercise
      of warrants and stock options
              
              
              1,245,809
              
              
              
              1,246
              
              
              
              1,188,570
              
              
              
              --
              
              
              
              1,189,816Employee
      compensation from stock options
              
              
              --
              
              
              
              --
              
              
              
              1,862,456
              
              
              
              --
              
              
              
              1,862,456Issuance
      of stock pursuant to Regulation D
              
              
              10,092,495
              
              
              
              10,092
              
              
              
              4,120,329
              
              
              
              --
              
              
              
              4,130,421Debt
      conversion to common stock
              
              
              2,377,512
              
              
              
              2,377
              
              
              
              1,573,959
              
              
              
              --
              
              
              
              1,576,336Beneficial
      conversion related to interest
                expense
              
              
              --
              
              
              
              --
              
              
              
              16,447
              
              
              
              --
              
              
              
              16,447Net
      loss for the year ended 2006
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (8,870,579
              
              
              
              (8,870,579
              )Balance,
      at December 31, 2006
              
              
              42,452,366
              
              
              
              42,452
              
              
              
              50,680,353
              
              
              
              (35,200,405
              )
              
              
              15,522,400Issuance
      of stock for services
              
              
              150,000
              
              
              
              150
              
              
              
              298,800
              
              
              
              --
              
              
              
              298,950Issuance
      of stock for interest payable
              
              
              1,141
              
              
              
              1
              
              
              
              1,257
              
              
              
              --
              
              
              
              1,258Issuance
      of warrants for services
              
              
              --
              
              
              
              --
              
              
              
              472,635
              
              
              
              --
              
              
              
              472,635Exercise
      of warrants and stock options
              
              
              3,928,957
              
              
              
              3,929
              
              
              
              3,981,712
              
              
              
              --
              
              
              
              3,985,641Employee
      compensation from stock options
              
              
              --
              
              
              
              --
              
              
              
              2,340,619
              
              
              
              --
              
              
              
              2,340,619Issuance
      of stock pursuant to Regulation D
              
              
              2,376,817
              
              
              
              2,377
              
              
              
              1,845,761
              
              
              
              --
              
              
              
              1,848,138Debt
      conversion to common stock
              
              
              490,000
              
              
              
              490
              
              
              
              367,010
              
              
              
              --
              
              
              
              367,500Net
      loss for the year ended 2007
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (10,005,631
              )
              
              
              (10,005,631
              )Balance,
      at December 31, 2007
              
              
              49,399,281
              
              
              
              49,399
              
              
              
              59,988,147
              
              
              
              (45,206,036
              )
              
              
              14,831,510Issuance
      of stock for services
              
              
              350,000
              
              
              
              350
              
              
              
              389,650
              
              
              
              --
              
              
              
              390,000Issuance
      of warrants for services
              
              
              --
              
              
              
              --
              
              
              
              517,820
              
              
              
              --
              
              
              
              517,820Exercise
      of warrants and stock options
              
              
              3,267,795
              
              
              
              3,268
              
              
              
              2,636,443
              
              
              
              --
              
              
              
              2,639,711Employee
      compensation from stock options
              
              
              --
              
              
              
              --
              
              
              
              1,946,066
              
              
              
              --
              
              
              
              1,946,066Net
      loss for the year ended 2008
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (10,269,571
              )
              
              
              (10,269,571
              )Balance,
      at December 31, 2008
              
              
              53,017,076
              
              
              
              53,017
              
              
              
              65,478,126
              
              
              
              (55,475,607
              )
              
              
              10,055,536
 
 
 See
accompanying notes to consolidated financial statements.





33


PROVECTUS
PHARMACEUTICALS, INC.
 (A
Development-Stage Company)
 CONSOLIDATED
STATEMENTS OF CASH FLOW
 
 Year
      Ended
                December
      31, 2008
              
              
              Year
      Ended
                December
      31, 2007
              
              
              Cumulative
                Amounts
      from
                January
      17, 2002
                (Inception)
      through December 31, 2008Cash
      Flows From Operating ActivitiesNet
      loss
              
              $
              (10,269,571
              )
              
              $
              (10,005,631
              )
              
              $
              (55,475,607
              )Adjustments to
      reconcile net loss to net cash used in
                operating
      activitiesDepreciation
              
              
              9,256
              
              
              
              9,256
              
              
              
              414,234Amortization
      of patents
              
              
              671,120
              
              
              
              671,120
              
              
              
              4,105,017Amortization
      of original issue discount
              
              
              --
              
              
              
              2,797
              
              
              
              3,845,721Amortization
      of commitment fee
              
              
              --
              
              
              
              --
              
              
              
              310,866Amortization
      of prepaid consultant expense
              
              
              --
              
              
              
              84,019
              
              
              
              1,295,226Amortization
      of deferred loan costs
              
              
              --
              
              
              
              3,713
              
              
              
              2,261,584Accretion
      of United States Treasury Bills
              
              
              (16,451
              )
              
              
              (174,646
              )
              
              
              (373,295
              )Loss
      on extinguishment of debt
              
              
              --
              
              
              
              --
              
              
              
              825,867Loss
      on exercise of warrants
              
              
              --
              
              
              
              --
              
              
              
              236,146Beneficial
      conversion of convertible interest
              
              
              --
              
              
              
              --
              
              
              
              55,976Convertible
      interest
              
              
              --
              
              
              
              1,258
              
              
              
              389,950Compensation
      through issuance of stock options
              
              
              1,946,066
              
              
              
              2,340,619
              
              
              
              6,215,164Compensation
      through issuance of stock
              
              
              --
              
              
              
              --
              
              
              
              932,000Issuance
      of stock for services
              
              
              390,000
              
              
              
              327,617
              
              
              
              6,712,648Issuance
      of warrants for services
              
              
              517,820
              
              
              
              472,635
              
              
              
              1,533,624Issuance
      of warrants for contractual obligations
              
              
              --
              
              
              
              --
              
              
              
              985,010Gain
      on sale of equipment
              
              
              --
              
              
              
              --
              
              
              
              (55,075
              )(Increase)
      decrease in assetsPrepaid
      expenses and other current assets
              
              
              48,769
              
              
              
              (9,786
              )
              
              
              (50,691
              )Increase
      (decrease) in liabilitiesAccounts
      payable
              
              
              (188,099
              )
              
              
              390,257
              
              
              
              263,448Accrued
      expenses
              
              
              (229,278
              )
              
              
              40,882
              
              
              
              344,830Net cash
      used in operating activities
              
              
              (7,120,368
              )
              
              
              (5,845,890
              )
              
              
              (25,227,357
              )Cash
      Flows From Investing ActivitiesProceeds
      from sale of fixed assets
              
              
              --
              
              
              
              --
              
              
              
              180,075Capital
      expenditures
              
              
              --
              
              
              
              (22,127
              )
              
              
              (62,049
              )Proceeds
      from investments
              
              
              8,000,000
              
              
              
              18,010,494
              
              
              
              37,010,481Purchases
      of investments
              
              
              (3,985,869
              )
              
              
              (16,841,513
              )
              
              
              (36,637,186
              )Net cash
      provided by investing activities
              
              
              4,014,131
              
              
              
              1,146,854
              
              
              
              491,321Cash
      Flows From Financing ActivitiesNet
      proceeds from loans from stockholder
              
              
              --
              
              
              
              --
              
              
              
              174,000Proceeds
      from convertible debt
              
              
              --
              
              
              
              --
              
              
              
              6,706,795Net
      proceeds from sales of common stock
              
              
              --
              
              
              
              1,830,588
              
              
              
              14,979,081Proceeds
      from exercises of warrants and stock options
              
              
              2,639,711
              
              
              
              3,985,641
              
              
              
              9,024,270Cash
      paid to retire convertible debt
              
              
              --
              
              
              
              --
              
              
              
              (2,385,959
              )Cash
      paid for deferred loan costs
              
              
              --
              
              
              
              --
              
              
              
              (747,612
              )Premium
      paid on extinguishments of debt
              
              
              --
              
              
              
              --
              
              
              
              (170,519
              )Purchase
      and retirement of common stock
              
              
              --
              
              
              
              --
              
              
              
              (48,000
              )Net cash
      provided by financing activities
              
              
              2,639,711
              
              
              
              5,816,229
              
              
              
              27,532,056
  34


Year
      Ended
                December
      31, 2008
              
              
              Year
      Ended
                December
      31, 2007
              
              
              Cumulative
                Amounts
      from
                January
      17, 2002
                (Inception)
      through December 31, 2008Net
      change in cash and cash equivalents
              
              $
              (466,526
              )
              
              $
              1,117,193
              
              
              $
              2,796,020Cash and
      cash equivalents, at beginning of period
              
              $
              3,262,546
              
              
              $
              2,145,353
              
              
              $
              --Cash and
      cash equivalents, at end of period
              
              $
              2,796,020
              
              
              $
              3,262,546
              
              
              $
              2,796,020
   Supplemental
Disclosure of Noncash Investing and Financing Activities:
 Year
ended December 31, 2008
 
 None
 
 Year
ended December 31, 2007
 
 1. Debt
converted to common stock of $367,500
 2.
Payment of accrued interest through the issuance of stock of $1,258
 3.
Issuance of stock for stock issuance costs of $17,550 incurred in
2006
 4. Stock
committed to be issued for services of $28,667 accrued at December 31, 2007 and
issued in 2008
 
 
 See
accompanying notes to consolidated financial statements.


35


PROVECTUS
PHARMACEUTICALS, INC.


(A
Development-Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.           Organization
and Significant Accounting Policies





Nature of
Operations





Provectus Pharmaceuticals, Inc.
(together with its subsidiaries, the “Company”) is a development-stage
biopharmaceutical company that is focusing on developing minimally invasive
products for the treatment of psoriasis and other topical diseases, and certain
forms of cancer including recurrent breast carcinoma, metastatic melanoma, and
liver cancer. The Company intends to license and sell a majority stake of its
laser device and biotech technology assets via a spin-out transaction. Through a
previous acquisition, the Company also intends to license and sell a majority
stake of the underlying assets of its over-the-counter pharmaceuticals via a
spin-out transaction. To date the Company has no material revenues.





Principles of
Consolidation





Intercompany balances and transactions
have been eliminated in consolidation.





Estimates





The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.





Cash and cash
equivalents





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





United States Treasury
Notes





United States Treasury Notes are
classified as held-to-maturity securities and all investments mature within one
year. Held-to-maturity securities are stated at amortized cost which
approximates market.





Deferred Loan Costs and Debt
Discounts





The costs related to the issuance of
the convertible debt, including lender fees, legal fees, due diligence costs,
escrow agent fees and commissions, were recorded as deferred loan costs and
amortized over the term of the loan using the effective interest method.
Additionally, the Company recorded debt discounts related to warrants and
beneficial conversion features issued in connection with the debt. Debt
discounts were amortized over the term of the loan using the effective interest
method.





Equipment and
Furnishings





Equipment and furnishings acquired
through the acquisition of Valley Pharmaceuticals, Inc. (Note 2) have been
stated at carry-over basis because the majority shareholders of Provectus also
owned all of the shares of Valley.  Other equipment and furnishings
are stated at cost. Depreciation of equipment is provided for using the
straight-line method over the estimated useful lives of the assets. Computers
and laboratory equipment are being depreciated over five years, furniture and
fixtures are being depreciated over seven years.





Long-Lived
Assets





The Company reviews the carrying values
of its long-lived assets for possible impairment whenever an event or change in
circumstances indicates that the carrying amount of the assets may not be
recoverable.  Any long-lived assets held for disposal are reported at
the lower of their carrying amounts or fair value less cost to
sell.  Management has determined there to be no
impairment.





36


Patent
Costs





Internal patent costs are expensed in
the period incurred. Patents purchased are capitalized and amortized over the
remaining life of the patent.





Patents at December 31, 2008 were
acquired as a result of the merger with Valley Pharmaceuticals, Inc. (“Valley”)
(Note 2). The majority shareholders of Provectus also owned all of the shares of
Valley and therefore the assets acquired from Valley were recorded at their
carry-over basis. The patents are being amortized over the remaining lives of
the patents, which range from 8-13 years. Annual amortization of the patents is
expected to be approximately $671,000 for the next year.





Revenue
Recognition





Prior to 2007, the Company recognized
revenue when product was shipped. When advance payments were received, these
payments were recorded as deferred revenue and recognized when the product was
shipped.  The Company has not had revenue in 2008 or
2007.





Research and
Development





Research and development costs are
charged to expense when incurred. An allocation of payroll expenses to research
and development is made based on a percentage estimate of time spent. The
research and development costs include the following: consulting - IT,
depreciation, lab equipment repair, lab supplies and pharmaceutical
preparations, insurance, legal - patents, office supplies, payroll expenses,
rental - building, repairs, software, taxes and fees, and
utilities.





Income
Taxes





The Company accounts for income taxes
under the liability method in accordance with Statement of Financial Accounting
Standards No. 109 (“SFAS No. 109”), “Accounting for Income Taxes.” Under this
method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is
established if it is more likely than not that all, or some portion, of deferred
income tax assets will not be realized. The Company has recorded a full
valuation allowance to reduce its net deferred income tax assets to zero. In the
event the Company were to determine that it would be able to realize some or all
its deferred income tax assets in the future, an adjustment to the deferred
income tax asset would increase income in the period such determination was
made.





Beginning with the adoption of FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) as
of January 1, 2007, the Company recognizes the effect of income tax positions
only if those positions are more likely than not of being sustained upon an
examination. Recognized income tax positions are measured at the largest amount
that is greater than 50% likely of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs.
Prior to the adoption of FIN 48, the Company recognized the effect of income tax
positions only if such positions were probable of being sustained.





Basic and Diluted Loss Per
Common Share





Basic and diluted loss per common share
is computed based on the weighted average number of common shares
outstanding.  Loss per share excludes the impact of outstanding
options and warrants as they are antidilutive. Potential common shares excluded
from the calculation for the years ended December 31, 2008 and 2007 are
21,025,172 and 22,999,788 from warrants, and 8,848,427 and 8,903,169 from
options.   Included as of December 31, 2007 were 330,881 shares
committed to be issued.





37


Financial
Instruments





The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, United States
Treasury Notes, accounts payable and accrued expenses approximate fair value
because of the short-term nature of these amounts.





Stock-Based
Compensation





The Company adopted FASB 123R effective
January 1, 2006 under the modified prospective method, which recognizes
compensation cost beginning with the effective date (a) based on the
requirements of FASB 123R for all share-based payments granted after the
effective date and to awards modified, repurchased, or cancelled after that date
and (b) based on the requirements of FASB 123 for all awards granted to
employees prior to the effective date of FASB 123R that remain unvested on the
effective date.





The compensation cost relating to
share-based payment transactions is measured based on the fair value of the
equity or liability instruments issued and is expensed on a straight-line basis.
For purposes of estimating the fair value of each stock option on the date of
grant, the Company utilized the Black-Scholes option-pricing model. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected volatility factor of the market
price of the Company’s common stock (as determined by reviewing its historical
public market closing prices). Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.





The Company records the fair value of
warrants granted to non-employees in exchange for services in accordance with
EITF 96-18 “Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.”  Warrants to
non-employees are generally vested and nonforfeitable upon the date of the
grant.  Accordingly fair value is determined on the grant
date.





Reclassification





Certain investments as of December 31,
2007 were reclassified to cash and cash equivalents to conform to the
presentation as of December 31, 2008.





Recent Accounting
Pronouncements





The FASB released SFAS No. 157, “Fair
Value Measurements,” to define fair value, establish a framework for measuring
fair value in accordance with generally accepted accounting principles, and
expand disclosures about fair value measurements. SFAS No. 157 is effective as
of the beginning of an entity’s first fiscal year that begins after December 15,
2007.  SFAS No. 157 was partially adopted by the Company as of January
1, 2008, the beginning of the Company’s fiscal-2008 year for its financial
assets and liabilities. As allowed by SFAS No. 157, the Company has deferred
adoption of SFAS No. 157 for non-financial assets and non-financial
liabilities.  The adoption of SFAS No. 157 did not have a material
impact on the Company’s consolidated financial position and results of
operations.





In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities--Including an amendment of FASB Statement No. 115,” which permits
entities to choose to measure many financial instruments and certain other items
at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is expected to expand the use
of fair value measurement, which is consistent with the long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to apply
the provisions of SFAS No. 157, “Fair Value Measurements.” SFAS No. 159 was
adopted by the Company as of January 1, 2008, the beginning of the Company’s
fiscal-2008 year.  The adoption of SFAS No. 159 did not have a
material impact on the Company’s consolidated financial position and results of
operations.





38


In June 2008, the FASB ratified
EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). Equity-linked
instruments (or embedded features) that otherwise meet the definition of a
derivative as outlined in SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” are not accounted for as derivatives if
certain criteria are met, one of which is that the instrument (or embedded
feature) must be indexed to the entity’s stock. EITF 07-5 provides guidance on
determining if equity-linked instruments (or embedded features) such as warrants
to purchase our stock are considered indexed to our stock. EITF 07-5 is
effective for the financial statements issued for fiscal years and interim
periods within those fiscal years, beginning after December 15, 2008 and
will be applied to outstanding instruments as of the beginning of the fiscal
year in which it is adopted. Upon adoption, a cumulative effect adjustment will
be recorded, if necessary, based on amounts that would have been recognized if
this guidance had been applied from the issuance date of the affected
instruments. The Company is currently determining the impact, if any, that EITF
07-05 will have on its financial statements.





2.           Recapitalization
and Merger





On April 23, 2002, Provectus
Pharmaceutical, Inc., a Nevada corporation and a Merger “blank check” public
company, acquired Provectus Pharmaceuticals, Inc., a privately-held Tennessee
corporation (“PPI”), by issuing 6,680,000 shares of common stock of Provectus
Pharmaceutical to the stockholders of PPI in exchange for all of the issued and
outstanding shares of PPI, as a result of which Provectus Pharmaceutical changed
its name to Provectus Pharmaceuticals, Inc. (the “Company”) and PPI became a
wholly-owned subsidiary of the Company. Prior to the transaction, PPI had no
significant operations and had not generated any revenues.





For financial reporting purposes, the
transaction has been reflected in the accompanying financial statements as a
recapitalization of PPI and the financial statements reflect the historical
financial information of PPI which was incorporated on January 17, 2002.
Therefore, for accounting purposes, the shares recorded as issued in the reverse
merger are the 265,763 shares owned by Provectus Pharmaceuticals, Inc.
shareholders prior to the reverse merger.





The issuance of 6,680,000 shares of
common stock of Provectus Pharmaceutical, Inc. to the stockholders of PPI in
exchange for all of the issued and outstanding shares of PPI was done in
anticipation of PPI acquiring Valley Pharmaceuticals, Inc, which owned the
intellectual property to be used in the Company's operations.





On November 19, 2002, the Company
acquired Valley Pharmaceuticals, Inc, (“Valley”) a privately-held Tennessee
corporation by merging PPI with and into Valley and naming the surviving company
Xantech Pharmaceuticals, Inc. Valley had no significant operations and had not
generated any revenues. Valley was formed to hold certain intangible assets
which were transferred from an entity which was majority owned by the
shareholders of Valley. Those shareholders gave up their shares of the other
company in exchange for the intangible assets in a non-pro- rata split-off. The
intangible assets were valued based on the market price of the stock given up in
the split-off. The shareholders of Valley also owned the majority of the shares
of the Company at the time of the transaction. The Company issued 500,007 shares
of stock in exchange for the net assets of Valley which were valued at
$12,226,320 and included patents of $11,715,445 and equipment and furnishings of
$510,875.





3.           Commitments





Leases





The Company leases office and
laboratory space in Knoxville, Tennessee, on an annual basis, renewable for one
year at the option of the Company. The Company is committed to pay a total of
$27,000 in lease payments over six months.  The current lease term
ends June 30, 2009.  Rent expense was approximately $52,800 in 2008
and $51,000 in 2007.





Employee
Agreements





On July 1, 2008, the Company entered
into executive employment agreements with each of H. Craig Dees. Ph.D., Timothy
C. Scott, Ph.D., Eric A. Wachter, Ph.D., and Peter R. Culpepper, CPA, to serve
as our Chief Executive Officer, President, Executive Vice President and Chief
Financial Officer, respectively. Each agreement provides that such executive
will be employed for a one-year term with automatic one-year renewals unless
previously terminated pursuant to the terms of the agreement or either party
gives notice that the term will not be extended. The Company is committed to pay
a total of $1,000,000 over six months, which is the remainder of the current
employment agreements at December 31, 2008. Executives are also entitled to
participate in any incentive compensation plan or bonus plan adopted by the
Company without diminution of any compensation or payment under the agreement.
Executives are further entitled to reimbursement for all reasonable
out-of-pocket expenses incurred during his performance of services under the
agreement.





39


Each agreement generally provides that
if the executive’s employment is terminated prior to a change in control (as
defined in the agreement) (1) due to expiration or non-extension of the term by
the Company; or (2) by the Company for any reason other than for cause (as
defined in the agreement), then such executive shall be entitled to receive
payments under the agreement as if the agreement was still in effect through the
end of the period in effect as of the date of such termination. If the
executive’s employment (1) is terminated by the Company at any time for cause,
(2) is terminated by executive prior to, and not coincident with, a change in
control or (3) is terminated by executive’s death, disability or retirement
prior to a change in control, the executive (or his estate, as the case may be)
shall be entitled to receive payments under the agreement through the last date
of the month of such termination, a pro-rata portion of any incentive or bonus
payment earned prior to such termination, any benefits to which he is entitled
under the terms and conditions of the pertinent plans in effect at termination
and any reasonable expenses incurred during the performance of services under
the agreement.





In the event that coincident with or
following a change in control, the executive’s employment is terminated or the
agreement is not extended (1) by action of the executive including his death,
disability or retirement or (2) by action of the Company not for cause, the
executive (or his estate, as the case may be) shall be entitled to receive
payments under the agreement through the last day of the month of such
termination, a pro-rata portion of any incentive or bonus payment earned prior
to such termination, any benefits to which he is entitled under the terms and
conditions of the pertinent plans in effect at termination and any reasonable
expenses incurred during the performance of services under the agreement. In
addition, the Company shall pay to the executive (or his estate, as the case may
be), within 30 days following the date of termination or on the effective date
of the change in control (whichever occurs later), a lump sum payment in cash in
an amount equal to 2.90 times the base salary paid in the preceding calendar
year, or scheduled to be paid to such executive during the year of such
termination, whichever is greater, plus an additional amount sufficient to pay
United States income taxes on the lump-sum amount paid.





4.           Equity
Transactions





(a) During 2002, the Company issued
2,020,000 shares of common stock in exchange for consulting services. These
services were valued based on the fair market value of the stock exchanged which
resulted in consulting costs charged to operations of $5,504,000.





(b) During 2002, the Company issued
510,000 shares of common stock to employees in exchange for services rendered.
These services were valued based on the fair market value of the stock exchanged
which resulted in compensation costs charged to operations of
$932,000.





(c) In February 2002, the Company sold
50,000 shares of common stock to a related party in exchange for proceeds of
$25,000.





(d) In October 2002, the Company
purchased 400,000 outstanding shares of stock from one shareholder for $48,000.
These shares were then retired.





(e) On December 5, 2002, the
Company purchased the assets of Pure-ific L.L.C, a Utah limited liability
company, and created a wholly-owned subsidiary called Pure-ific Corporation, to
operate the Pure-ific business which consists of product formulations for
Pure-ific personal sanitizing sprays, along with the Pure-ific trademarks. The
assets of Pure-ific were acquired through the issuance of 25,000 shares of the
Company's stock with a fair market value of $0.50 and the issuance of various
warrants. These warrants included warrants to purchase 10,000 shares of the
Company's stock at an exercise price of $0.50 issuable on the first, second and
third anniversary dates of the acquisition. Accordingly, the fair market value
of these warrants of $14,500, determined using the Black-Scholes option pricing
model, was recorded as additional purchase price for the acquisition of the
Pure-ific assets. In 2004, 20,000 warrants were issued for the first and second
anniversary dates. 10,000 of these warrants were exercised in 2004. In 2005,
10,000 warrants were issued for the third anniversary date. In January 2006,
10,000 warrants were exercised in a cashless exercise resulting in 4,505 shares
issued.  In 2007, the remaining 10,000 warrants were
forfeited.  In addition, warrants to purchase 80,000 shares of stock
at an exercise price of $0.50 will be issued upon the achievement of certain
sales targets of the Pure-ific product. At December 31, 2008 and 2007, none of
these targets have been met and accordingly, no costs have been
recorded.





40


(f) In 2003, the Company issued 764,000
shares to consultants in exchange for services rendered, consisting of 29,000
shares issued in January valued at $11,600, 35,000 shares issued in March valued
at $11,200, and 700,000 shares issued in October valued at $217,000. The value
for these shares was based on the market value of the shares issued. As all of
these amounts represented payments for services to be provided in the future and
the shares were fully vested and non-forfeitable, a prepaid consulting expense
was recorded in 2003 which was fully amortized as of December 31,
2004.





(g) In November and December 2003, the
Company committed to issue 341,606 shares of common stock to consultants in
exchange for services rendered. The total value for these shares was $281,500
which was based on the market value of the shares issued. The shares were issued
in January 2004. As these amounts represented payments for services to be
provided in the future and the shares were fully vested and non-forfeitable, a
prepaid consulting expense was recorded in 2003 which was fully amortized as of
December 31, 2004.





(h) The Company applies the recognition
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” in
accounting for stock options and warrants issued to nonemployees. In January
2003, the Company issued 25,000 warrants to a consultant for services rendered.
In February 2003, the Company issued 360,000 warrants to a consultant, 180,000
of which were fully-vested and non-forfeitable at the issuance and 180,000 of
which were cancelled in August 2003 due to the termination of the consulting
contract. In September 2003, the Company issued 200,000 warrants to two
consultants in exchange for services rendered. In November 2003, the Company
issued 100,000 warrants to one consultant in exchange for services rendered. As
the fair market value of these services was not readily determinable, these
services were valued based on the fair market value, determined using the
Black-Scholes option-pricing model. Fair market value for the warrants issued in
2003 ranged from $0.20 to $0.24 and totaled $145,479. As these amounts
represented payments for services to be provided in the future and the warrants
were fully vested and non-forfeitable, a prepaid consulting expense was recorded
in 2003 which was fully amortized as of December 31, 2004.





In May 2004, the Company issued 20,000
warrants to consultants in exchange for services rendered. Consulting costs
charged to operations were $18,800. In August 2004, the Company issued 350,000
warrants to consultants in exchange for services valued at
$329,000.  In December 2004, the Company issued 10,000 warrants to
consultants in exchange for services valued at $3,680. Fair market value for the
warrants issued in 2004 ranged from $0.37 to $1.22.





In January 2005, the Company issued
16,000 warrants to consultants in exchange for services rendered. Consulting
costs charged to operations were $6,944. In February 2005, the Company issued
13,000 warrants to consultants in exchange for services rendered. Consulting
costs charged to operations were $13,130. In March 2005, the Company issued
100,000 warrants to consultants in exchange for services rendered. Consulting
costs charged to operations were $68,910. In April 2005, the Company issued
410,000 warrants to consultants in exchange for services rendered. Consulting
costs charged to operations were $195,900. In May 2005, the Company issued
25,000 warrants to consultants in exchange for services rendered. Consulting
costs charged to operations were $9,250.  In December 2005, the
Company issued 33,583 warrants to consultants in exchange for services.
Consulting costs charged to operations were $24,571.  The fair market
value for the warrants issued in 2005 ranged from $0.37 to $1.01.





In May 2006, 350,000 warrants were
exercised for $334,000 resulting in 350,000 shares issued. During April, May and
June, the Company issued 60,000 warrants to consultants in exchange for
services. Consulting costs charged to operations were $58,400. In August and
September 2006, 732,534 warrants were exercised for $693,357 resulting in
732,534 shares issued. During the three months ended September 30, 2006, the
Company issued 335,000 warrants to consultants in exchange for services. At
December 31, 2006, $155,814 of these costs have been charged to operations with
the remaining $84,019 recorded as prepaid consulting expense as it represents
payments for future services and the warrants are fully vested and
non-forfeitable. As of December 31, 2007, the prepaid expense has been fully
recognized. In November 2006, 100,000 warrants were forfeited. During the three
months ended December 31, 2006, the Company issued 85,000 warrants to
consultants in exchange for services. Consulting costs charged to operations
were $71,790. The fair market value for the warrants issued in 2006 ranged from
$0.67 to $1.11.





41


During the three months ended March 31,
2007, the Company issued 85,000 warrants to consultants in exchange for
services.  Consulting costs charged to operations were
$75,933.  During the three months ended June 30, 2007, the Company
issued 85,000 warrants to consultants in exchange for
services.  Consulting costs charged to operations were
$98,185.  In April and May 2007, 260,000 warrants were exercised for
$196,900 resulting in 260,000 shares being issued.  In May 2007,
10,000 warrants were forfeited.  During the three months ended
September 30, 2007, the Company issued 135,000 warrants to consultants in
exchange for services.  Consulting costs charged to operations were
$250,342.  During the three months ended September 30, 2007, 2,305,756
warrants were exercised for $2,219,657 resulting in 2,305,756 shares being
issued.  350,000 of the warrants exercised had an exercise price of
$1.00 that was reduced to $0.90.  Additional consulting costs of
$35,000 were charged to operations as a result of the reduction of the exercise
price of the 350,000 warrants.  During the three months ended December
31, 2007, 1,502,537 warrants were exercised for $1,327,072 resulting in
1,051,656 shares being issued and 330,881 shares committed to be issued as of
December 31, 2007 and then issued January 2, 2008.  65,874 of the
warrants exercised had an exercise price of $1.00 that was reduced to
$0.80.  Additional consulting costs of $13,175 were charged to
operations as a result of the reduction of the exercise price of the 65,874
warrants. In December 2007, 10,000 warrants were forfeited.  The fair
market value for the warrants issued in 2007 ranged from $0.80 to
$2.19.





During the three months ended March 31,
2008, the Company issued 60,000 warrants to consultants in exchange for
services.  Consulting costs charged to operations were
$40,657.  During the three months ended March 31, 2008, 197,013
warrants were exercised for $184,402 resulting in 197,013 shares being
issued.  24,050 of the warrants exercised had an exercise price of
$1.00 that was reduced to $0.80.  Additional consulting costs of
$4,810 were charged to operations as a result of the reduction of the exercise
price of the 24,050 warrants.  During the three months ended March 31,
2008, 143,999 warrants were forfeited.  Additionally, 330,881 shares
committed to be issued as of December 31, 2007 were issued January 2,
2008.  During the three months ended June 30, 2008, the Company issued
12,000 warrants to consultants in exchange for services.  Consulting
costs charged to operations were $5,254.   During the three
months ended June 30, 2008, 1,075,104 warrants were exercised for $980,064
resulting in 1,075,104 shares being issued.  576,012 of the warrants
exercised had an exercise price of $1.00 that was reduced to
$0.90.  Additional consulting costs of $57,602 were charged to
operations as a result of the reduction of the exercise price of the 576,012
warrants.  15,050 of the warrants exercised had an exercise price of
$1.00 that was reduced to $0.80.  Additional consulting costs of
$3,010 were charged to operations as a result of the reduction of the exercise
price of the 15,050 warrants.  During the three months ended September
30, 2008, the Company issued 21,500 warrants to consultants in exchange for
services.  Consulting costs charged to operations were
$22,023.   During the three months ended September 30, 2008,
1,156,555 warrants were exercised for $1,081,704 resulting in 1,156,555 shares
being issued.  During the three months ended December 31, 2008, the
Company issued 708,055 warrants to consultants in exchange for
services.  Consulting costs charged to operations were
$384,464.  During the three months ended December 31, 2008, 203,500
warrants were exercised for $172,000 resulting in 203,500 shares being
issued.  The fair market value for the warrants issued in 2008 ranged
from $0.58 to $1.03.





(i) In December 2003, the Company
commenced an offering for sale of restricted common stock. As of December 31,
2003, the Company had sold 874,871 shares at an average gross price of $1.18 per
share. As of December 31, 2003, the Company had received net proceeds of
$292,472 and recorded a stock subscription receivable of $87,875 for stock
subscriptions prior to December 31, 2003 for which payment was received
subsequent to December 31, 2003. The transaction is a Regulation S offering to
foreign investors as defined by Regulation S of the Securities Act. The
restricted shares cannot be traded for 12 months. After the first 12 months,
sales of the shares are subject to restrictions under rule 144 for an additional
year. The Company used a placement agent to assist with the offering. Costs
related to the placement agent of $651,771 have been off-set against the gross
proceeds of $1,032,118 and therefore are reflected as a direct reduction of
equity at December 31, 2003. At December 31, 2003, 195,051 shares had not yet
been issued. These shares were issued in the first quarter of 2004.





In 2004, the Company sold 2,274,672
shares of restricted common stock under this offering of which 1,672,439 shares
were issued in the first quarter 2004 and 602,233 were issued in the second
quarter 2004. Shares were sold during 2004 at an average gross price of $1.05
per share with net proceeds of $793,137. Costs related to the placement agent
for proceeds received in 2004 of $1,588,627 have been off-set against gross
proceeds of $2,381,764.





(j) In January 2004, the Company issued
10,000 shares to a consultant in exchange for services rendered. Consulting
costs charged to operations were $11,500. In March 2004, the Company committed
to issue 36,764 shares to consultants in exchange for services. These shares
were recorded as a prepaid consulting expense and were fully amortized at
December 31, 2004. Consulting costs charged to operations were $62,500. These
36,764 shares, along with 75,000 shares committed in 2003 were issued in August
2004. The 75,000 shares committed to be in 2003 were the result of a cashless
exercise of 200,000 warrants in 2003, which were not issued as of December 31,
2003. In August 2004, the Company also issued 15,000 shares to a consultant in
exchange for services rendered. Consulting costs charged to operations were
$25,200. In September 2004, the Company issued 16,666 shares to a consultant in
exchange for services rendered. Consulting costs charged to operations were
$11,666. In October 2004, the Company issued 16,666 shares to a consultant in
exchange for services rendered. Consulting costs charged to operations were
$13,666. In November 2004, the Company issued 16,666 shares to a consultant in
exchange for services rendered. Consulting costs charged to operations were
$11,000. In December 2004, the Company issued 7,500 shares to a consultant in
exchange for services rendered. Consulting costs charged to operations were
$3,525.





42


In January 2005, the Company issued
7,500 shares to consultants in exchange for services rendered. Consulting costs
charged to operations were $4,950. In February 2005, the Company issued 7,500
shares to consultants in exchange for services. Consulting costs charged to
operations were $7,574. In April 2005, the Company issued 190,733 shares to
consultants in exchange for services. Consulting costs charged to operations
were $127,791. In May 2005, the Company issued 21,000 shares to consultants in
exchange for services. Consulting costs charged to operations were
$11,970.





In December 2005, the Company committed
to issue 689,246 shares to consultants in exchange for services rendered.
655,663 of these shares of were issued in February 2006 and 33,583 shares were
issued in May 2006. The total value for these shares was $650,643 which was
based on the market value of the shares issued and was recorded as an accrued
liability at December 31, 2005. In February 2006, the Company issued 30,000
shares to consultants in exchange for services. Consulting costs charged to
operations were $26,100.





In May 2007, the Company issued 50,000
shares to consultants in exchange for services.  Consulting costs
charged to operations were $84,000.  In August 2007, the Company
issued 50,000 shares to consultants in exchange for
services.  Consulting costs charged to operations were
$104,950.  In November 2007, the Company issued 50,000 shares to
consultants in exchange for services.  Consulting costs charged to
operations were $110,000.  As of December 31, 2007, the Company is
also committed to issue 16,667 shares to consultants in exchange for
services.  At December 31, 2007, these shares have a value of $28,667
and have been included in accrued consulting expense.





During the three months ended March 31,
2008, the Company issued 100,000 shares of common stock to


consultants
in exchange for services.  Consulting costs charged to operations were
$122,500.  During the three months ended June 30, 2008, the Company
issued 12,500 shares of common stock to consultants in exchange for
services.  Consulting costs charged to operations were
$13,000.  During the three months ended September 30, 2008, the
Company issued 62,500 shares of common stock to consultants in exchange for
services.  Consulting costs charged to operations were
$70,250.  During the three months ended December 31, 2008, the Company
issued 175,000 shares of common stock to consultants in exchange for
services.  Consulting costs charged to operations were
$184,250.





(k) On June 25, 2004, the Company
entered into an agreement to sell 1,333,333 shares of common stock at a purchase
price of $.75 per share for an aggregate purchase price of $1,000,000. Payments
were received in four installments, the last of which was on August 9, 2004.
Stock issuance costs included 66,665 shares of stock valued at $86,666 and cash
costs of $69,000. The cash costs have been off-set against the proceeds
received. In conjunction with the sale of the common stock, the Company issued
1,333,333 warrants with an exercise price of $1.00 and a termination date of
three years from the installment payment dates. In addition, the Company has
given the investors an option to purchase 1,333,333 shares of additional stock
including the attachment of warrants under the same terms as the original
agreement. This option expired February 8, 2005.





(l) Pursuant to a Standby Equity
Distribution Agreement (“SEDA”) dated July 28, 2004 between the Company and
Cornell Capital Partners, L.P. (“Cornell”), the Company could, at its
discretion, issue shares of common stock to Cornell at any time until June 28,
2006. As of December 31, 2006 there were no shares issued pursuant to the SEDA.
The facility is subject to having in effect a registration statement covering
the shares. A registration statement covering 2,023,552 shares was declared
effective by the Securities and Exchange Commission on November 16, 2004. The
maximum aggregate amount of the equity placements pursuant to the SEDA was $20
million, and the Company could draw down up to $1 million per month. Pursuant to
the SEDA, on July 28, 2004, the Company issued 190,084 shares of common stock to
Cornell and 7,920 shares of common stock to Newbridge Securities Corporation as
commitment shares. These 198,004 shares had a FMV of $310,866 on July 28, 2004
which was being amortized over the term of the commitment period which was one
year from the date of registration. The full amount was amortized as of December
31, 2006.





43


(m) On November 16, 2004, the Company
completed a private placement transaction with fourteen (14) accredited
investors, pursuant to which the Company sold 530,166 shares of common stock at
a purchase price of $0.75 per share, for an aggregate purchase price of
$397,625. In connection with the sale of the common stock, the Company also
issued warrants to the investors to purchase up to 795,249 shares of our common
stock at an exercise price of $1.00 per share. The Company paid $39,764 and
issued 198,812 warrants to Venture Catalyst, LLC as placement agent for this
transaction. The cash costs have been off-set against the proceeds
received.





During the three months ended March 31,
2005, the Company completed a private placement transaction with eight (8)
accredited investors, which were registered effective June 20, 2005, pursuant to
which the Company sold 214,666 shares of common stock at a purchase price of
$0.75 per share, for an aggregate purchase price of $161,000. In connection with
the sale of common stock, the Company also issued warrants to the investors to
purchase up to 322,000 shares of common stock at an exercise price of $1.00 per
share. The Company paid $16,100 and issued 80,500 warrants to Venture Catalyst,
LLC as placement agent for this transaction. The cash costs have been off-set
against the proceeds received.





During the three months ended June 30,
2005, the Company completed a private placement transaction with four (4)
accredited investors, which were registered effective June 20, 2005, pursuant to
which the Company sold 230,333 shares of common stock at a purchase price of
$0.75 per share, for an aggregate purchase price of $172,750. In connection with
the sale of common stock, the Company also issued warrants to the investors to
purchase up to 325,500 shares of common stock at an exercise price of $1.00 per
share. The Company paid $16,275 and issued 81,375 warrants to Venture Catalyst,
LLC as placement agent for this transaction. The cash costs have been off-set
against the proceeds received.





During the three months ended September
30, 2005, the Company completed a private placement transaction with twelve (12)
accredited investors pursuant to which the Company sold 899,338 shares of common
stock at a purchase price of $0.75 per share of which 109,333 are committed to
be issued at December 31, 2005, for an aggregate purchase price of $674,500. In
connection with the sale of common stock, the Company also issued warrants to
the investors to purchase up to 1,124,167 shares of common stock at an exercise
price of $0.935 per share. The Company paid $87,685 and committed to issue
79,000 shares of common stock at a fair market value of $70,083 to Network 1
Financial Securities, Inc. as placement agent for this transaction which is
accrued at December 31, 2005. The cash and common stock costs have been off-set
against the proceeds received.





During the three months ended December
31, 2005, the Company completed a private placement transaction with sixty-two
(62) accredited investors pursuant to which the Company sold 10,065,605 shares
of common stock at a purchase price of $0.75 per share of which 5,126,019 are
committed to be issued at December 31, 2005, for an aggregate purchase price of
$7,549,202. In connection with the sale of common stock, the Company also issued
warrants to the investors to purchase up to 12,582,009 shares of common stock at
an exercise price of $0.935 per share. The Company paid $959,540, issued 46,667
shares of common stock at a fair market value of $46,467, issued 30,550
warrants, and committed to issue 950,461 shares of common stock at a fair market
value of $894,593 to a syndicate led by Network 1 Financial Securities, Inc. as
placement agent for this transaction which is accrued at December 31, 2005. The
cash and common stock costs have been off-set against the proceeds
received.





In January 2006, the Company issued
5,235,352 shares committed to be issued at December 31, 2005 for shares sold in
2005. In February 2006, the Company issued 1,029,460 shares committed to be
issued at December 31, 2005 for stock issuance costs related to shares sold in
2005. The total value for these shares was $964,676 which was based on the
market value of the shares issued and was recorded as an accrued liability at
December 31, 2005.





During the three months ended March 31,
2006, the Company completed a private placement transaction with five (5)
accredited investors pursuant to which the Company sold 466,833 shares of common
stock at a purchase price of $0.75 per share for an aggregate purchase price of
$350,125. In connection with the sale of common stock, the Company also issued
warrants to the investors to purchase up to 466,833 shares of common stock at an
exercise price of $0.935 per share. The Company paid $35,013 and issued 46,683
shares of common stock at a fair market value of $41,815 to Chicago Investment
Group, L.L.C. as placement agent for this transaction. The cash costs have been
off-set against the proceeds received.





In May 2006, the Company completed a
private placement transaction with two (2) accredited investors pursuant to
which the Company sold a total of 153,647 shares of common stock at an average
purchase price of $1.37 per share, for an aggregate purchase price of $210,000.
In connection with the sale of common stock, the Company also issued warrants to
the 2 investors to purchase up to 76,824 shares of common stock at an average
exercise price of $2.13 per share.





44


In September 2006, the Company
completed a private placement transaction with seven (7) accredited investors
pursuant to which the Company sold a total of 708,200 shares of common stock at
a purchase price of $1.00 per share, for an aggregate purchase price of
$708,200. The Company paid $92,067 and issued 70,820 shares of common stock at a
fair market value of $84,984 to Network 1 Financial Securities, Inc. as
placement agent for this transaction. The cash costs have been off-set against
the proceeds received.





In October 2006 the Company completed a
private placement transaction with 15 accredited investors pursuant to which the
Company sold a total of 915,000 shares of common stock at a purchase price of
$1.00 per share, for an aggregate purchase price of $915,000. The Company paid
$118,950 and issued 91,500 shares of common stock at a fair market value of
$118,500 to Network 1 Financial Securities, Inc. as placement agent for this
transaction. The cash costs have been off-set against the proceeds
received.





During the three months ended
December 31, 2006, the Company completed a private placement transaction with 10
accredited investors pursuant to which the Company sold 1,400,000 shares of
common stock at a purchase price of $1.00 per share of which 150,000 are
committed to be issued at December 31, 2006, for an aggregate purchase price of
$1,400,000. The Company paid $137,500, issued 125,000 shares of common stock at
a fair market value of $148,750, and committed to pay $16,500 and to issue
15,000 shares of common stock at a fair market value of $17,550 to Chicago
Investment Group of Illinois, L.L.C. as a placement agent for this transaction
which is accrued at December 31, 2006. The cash and accrued stock costs have
been off-set against the proceeds received.





In January 2007, the Company issued
150,000 shares committed to be issued at December 31, 2006 for shares sold in
2006.  In January 2007, the Company also issued 15,000 shares
committed to be issued at December 31, 2006 for common stock costs related to
shares sold in 2006.  The total value for these shares was $17,550
which was based on the market value of the shares issued and was recorded as an
accrued liability at December 31, 2006.  In January and February 2007,
the Company completed a private placement transaction with six accredited
investors pursuant to which the Company sold a total of 265,000 shares of common
stock at a purchase price of $1.00 per share, for an aggregate purchase price of
$265,000.  The Company paid $29,150 and issued 26,500 shares of common
stock at a fair market value of $32,130 to Chicago Investment Group of Illinois,
L.L.C. as a placement agent for this transaction.  The cash costs have
been off-set against the proceeds received.  Also in January and
February 2007, the Company completed a private placement transaction with 13
accredited investors pursuant to which the Company sold a total of 1,745,743
shares of common stock at a purchase price of $1.05 per share, for an aggregate
purchase price of $1,833,031.  The Company paid $238,293 and issued
174,574 shares of common stock at a fair market value of $200,760 to Network 1
Financial Securities, Inc. as placement agent for this
transaction.  The cash costs have been off-set against the proceeds
received.





(n) The Company issued 175,000 warrants
each month from March 2005 to November 2005, resulting in total warrants of
1,575,000, to Gryffindor Capital Partners I, L.L.C. pursuant to the terms of the
Second Amended and Restated Note dated November 26, 2004. Total interest costs
charged to operations were $985,010.





5.           Stock
Incentive Plan and Warrants





The Company maintains one long-term
incentive compensation plan, the Provectus Pharmaceuticals, Inc. 2002 Stock
Plan, which provides for the issuance of up to 10,000,000 shares of common stock
pursuant to stock options, stock appreciation rights, stock purchase rights and
long-term performance awards granted to key employees and directors of and
consultants to the Company.





Options granted under the 2002 Stock
Plan may be either “incentive stock options” within the meaning of Section 422
of the Internal Revenue Code or options which are not incentive stock options.
The stock options are exercisable over a period determined by the Board of
Directors (through its Compensation Committee), but generally no longer than 10
years after the date they are granted.





Included in the results for the years
ended December 31, 2008 and 2007 is $1,946,066 and $2,340,619, respectively, of
stock-based compensation expense which relates to the fair value of stock
options, net of expected forfeitures, which continue to vest over the related
employees’ requisite service periods which generally end by June
2009.





45


For stock options granted to employees
during 2008 and 2007, the Company has estimated the fair value of each option
granted using the Black-Scholes option pricing model with the following
assumptions:




2008
            
            
            2007Weighted
      average fair value per options granted
            
            $
            0.94
            
            
            $
            1.40Significant
      assumptions (weighted average) risk-free interest rate at grant
      date
            
            
            0.25%
      - 4.0
            %
            
            
            4.0%
      - 5.0
            %Expected
      stock price volatility
            
            
            100%
      - 105
            %
            
            
            105%
      - 116
            %Expected
      option life (years)
            
            
            10
            
            
            
            10





On March 1, 2004, the Company issued
1,200,000 stock options to employees. The options vest over three years with
225,000 options vesting on the date of grant. The exercise price is the fair
market price on the date of issuance. On May 27, 2004, the Company issued
100,000 stock options to the Board of Directors. The options vested immediately
on the date of grant. The exercise price is the fair market price on the date of
issuance. On June 28, 2004, the Company issued 100,000 stock options to an
employee. The options vest over four years with 25,000 options vesting on the
date of grant. The exercise price is the fair market price on the date of
issuance.





On January 7, 2005, the Company issued
1,200,000 stock options to employees. The options vest over four years with no
options vesting on the date of grant. The exercise price is the fair market
price on the date of issuance. On May 19, 2005, the Company issued 100,000 stock
options to the Board of Directors. The options vested immediately on the date of
grant. The exercise price is the fair market price on the date of issuance. On
May 25, 2005, the Company issued 1,200,000 stock options to employees. The
options vest over three years with no options vesting on the date of grant. The
exercise price is $0.75 which is greater than the fair market price on the date
of issuance. On December 9, 2005, the Company issued 775,000 stock options to
employees. The options vest over three years with no options vesting on the date
of grant. The exercise price is the fair market price on the date of issuance.
During 2005, an employee of the Company exercised 26,516 options at an exercise
price of $1.10 per share of common stock for $29,167.





Two employees of the Company exercised
a total of 114,979 options during the three months ended March 31, 2006 at an
exercise price of $1.10 per share of common stock for $126,477. On June 23,
2006, the Company issued 4,000,000 stock options to employees. The options vest
over three years with no options vesting on the date of grant. The exercise
price is the fair market price on the date of issuance. On June 23, 2006, the
Company issued 200,000 stock options to its Members of the Board. The options
vested on the date of grant. The exercise price is the fair market price on the
date of issuance. One employee of the Company exercised a total of 7,166 options
during the three months ended June 30, 2006 at an exercise price of $1.10 per
share of common stock for $7,882 and another employee of the Company exercised a
total of 12,500 options during the three months ended June 30, 2006 at an
exercise price of $0.32 per share of common stock for $4,000. One employee of
the Company exercised a total of 14,000 options during the three months ended
September 30, 2006 at an exercise price of $1.10 per share of common stock for
$15,400 and another employee of the Company exercised a total of 3,125 options
during the three months ended September 30, 2006 at an exercise price of $0.32
per share of common stock for $1,000. One employee of the Company exercised a
total of 7,000 options during the three months ended December 31, 2006 at an
exercise price of $1.10 per share of common stock for $7,700.





One employee of the Company exercised a
total of 120,920 options during the three months ended March 31, 2007 at an
exercise price of $1.10 per share of common stock for
$133,012.  Another employee of the Company exercised a total of 9,375
options during the three months ended March 31, 2007 at an exercise price of
$0.32 per share of common stock for $3,000.   One employee of the
Company exercised a total of 100,000 options during the three months ended
September 30, 2007 at an exercise price of $0.64 per share of common stock for
$64,000.  Another employee of the Company exercised a total of 25,000
options during the three months ended September 30, 2007 at an exercise price of
$0.32 per share of common stock for $8,000.  One employee of the
Company exercised a total of 50,000 options during the three months ended
December 31, 2007 at an exercise price of $0.64 per share of common stock for
$32,000.  Another employee of the Company exercised a total of 6,250
options during the three months ended December 31, 2007 at an exercise price of
$0.32 per share of common stock for $2,000.  On June 21, 2007, the
Company issued 200,000 stock options to its Members of the Board.  The
options vested on the date of grant.  The exercise price is the fair
market price on the date of issuance.





46


One employee of the Company exercised a
total of 193,281 options during the three months ended June 30, 2008 at an
exercise price of $0.32 to $1.02 per share of common stock for
$109,600.  Another employee of the Company exercised a total of 44,795
options during the three months ended June 30, 2008 at an exercise price of
$1.10 per share of common stock for $49,275.  One employee of the
Company exercised a total of 66,666 options during the three months ended
December 31, 2008 at an exercise price of $0.94 per share of common stock for
$62,666.  On June 3, 2008, the Company issued 50,000 stock options to
a newly appointed member of the board of directors.  The options
vested on the date of grant.  The exercise price is the fair market
price on the date of issuance.  On June 27, 2008, the Company issued
200,000 stock options to its re-elected members of the board of
directors.  The options vested on the date of grant.  The
exercise price is the fair market price on the date of issuance.





The following table summarizes the
options granted, exercised and outstanding as of December 31, 2007 and
2008:




Shares
            
            
            Exercise
              Price
              Per
      Share
            
            
            Weighted
      Average
              Exercise
              PriceOutstanding
      at January 1, 2007
            
            
            9,014,714
            
            
            $
            0.32
      – 1.25
            
            
            $
            0.91Granted
            
            
            200,000
            
            
            $
            1.50
            
            
            $
            1.50Exercised
            
            
            (311,545
            )
            
            $
            0.32
      – 1.10
            
            
            $
            0.78Forfeited
            
            
            --
            
            
            
            --
            
            
            
            --Outstanding
      at December 31, 2007
            
            
            8,903,169
            
            
            $
            0.32
      – 1.50
            
            
            $
            0.93Options
      exercisable at December 31, 2007
            
            
            4,919,832
            
            
            $
            0.32
      – 1.50
            
            
            $
            0.93Outstanding
      at January 1, 2008
            
            
            8,903,169
            
            
            $
            0.32
      – 1.50
            
            
            $
            0.93Granted
            
            
            250,000
            
            
            $
            1.00
      – 1.16
            
            
            $
            1.03Exercised
            
            
            (304,742
            )
            
            $
            0.32
      – 1.10
            
            
            $
            0.73Forfeited
            
            
            --
            
            
            
            --
            
            
            
            --Outstanding
      at December 31, 2008
            
            
            8,848,427
            
            
            $
            0.32
      – 1.50
            
            
            $
            0.94Options
      exercisable at December 31, 2008
            
            
            7,215,091
            
            
            $
            0.32
      – 1.50
            
            
            $
            0.94








The following table summarizes
information about stock options outstanding at December 31, 2008.




Exercise
              Price
            
            
            Number
      Outstanding at December 31, 2008
            
            Weighted
              Average
              Remaining
              Contractual
              Life
            
            Outstanding
      Weighted Average Exercise price
            
            
            Number
      Exercisable at December 31, 2008
            
            
            Exercisable
      Weighted Average Exercise Price$
            0.32
            
            
            
            93,750
            
            4.58
      years
            
            $
            0.32
            
            
            
            93,750
            
            
            $
            0.32$
            0.60
            
            
            
            75,000
            
            4.58
      years
            
            $
            0.60
            
            
            
            75,000
            
            
            $
            0.60$
            1.10
            
            
            
            864,624
            
            5.17
      years
            
            $
            1.10
            
            
            
            864,624
            
            
            $
            1.10$
            0.95
            
            
            
            100,000
            
            5.42
      years
            
            $
            0.95
            
            
            
            100,000
            
            
            $
            0.95$
            1.25
            
            
            
            100,000
            
            5.50
      years
            
            $
            1.25
            
            
            
            100,000
            
            
            $
            1.25$
            0.64
            
            
            
            1,011,719
            
            6.00
      years
            
            $
            0.64
            
            
            
            711,719
            
            
            $
            0.64$
            0.75
            
            
            
            1,275,000
            
            6.42
      years
            
            $
            0.75
            
            
            
            1,275,000
            
            
            $
            0.75$
            0.94
            
            
            
            708,334
            
            6.92
      years
            
            $
            0.94
            
            
            
            708,334
            
            
            $
            0.94$
            1.02
            
            
            
            4,170,000
            
            6.50
      years
            
            $
            1.02
            
            
            
            2,836,664
            
            
            $
            1.02$
            1.50
            
            
            
            200,000
            
            8.50
      years
            
            $
            1.50
            
            
            
            200,000
            
            
            $
            1.50$
            1.16
            
            
            
            50,000
            
            9.42
      years
            
            $
            1.16
            
            
            
            50,000
            
            
            $
            1.16$
            1.00
            
            
            
            200,000
            
            9.50
      years
            
            $
            1.00
            
            
            
            200,000
            
            
            $
            1.008,848,427
            
            6.40
      years
            
            $
            0.94
            
            
            
            7,215,091
            
            
            $
            0.94







47


The weighted-average grant-date fair
value of options granted during 2008 was $0.94. The total intrinsic value of
options exercised during the year ended December 31, 2008 was
$109,430.





The weighted-average grant-date fair
value of options granted during 2007 was $1.40. The total intrinsic value of
options exercised during the year ended December 31, 2007 was
$291,219.





The following is a summary of nonvested
stock option activity for the year ended December 31, 2008:




Weighted
      AverageNumber
      of Shares
            
            
            Grant-Date
              Fair
      ValueNonvested
      at December 31, 2007
            
            
            3,983,337
            
            
            $
            0.87Granted
            
            
            250,000
            
            
            $
            0.94Vested
            
            
            (2,600,001
            )
            
            $
            0.86Canceled
            
            
            --
            
            
            
            --Nonvested
      at December 31, 2008
            
            
            1,633,336
            
            
            $
            0.90





As of December 31, 2008, there was
$640,000 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Plan. That cost is
expected to be recognized over a weighted-average period of 0.5 years. The total
fair value of shares vested during the year ended December 31, 2008 was
$2,228,499.





The following is a summary of the
aggregate intrinsic value of shares outstanding and exercisable at December 31,
2008. The aggregate intrinsic value of stock options outstanding and exercisable
is defined as the difference between the market value of the Company’s stock as
of the end of the period and the exercise price of the stock
options.




Number
      of
              Shares
            
            
            Aggregate
              Intrinsic
      ValueOutstanding
      at December 31, 2008
            
            
            8,848,427
            
            
            $
            78,935Exercisable
      at December 31, 2008
            
            
            7,215,091
            
            
            $
            79,269








The following table summarizes the
warrants granted, exercised and outstanding as of December 31, 2007 and
2008.




Warrants
            
            
            Exercise
      Price
              Per
      Warrant
            
            
            Weighted
      Average Exercise PriceOutstanding
      at January 1, 2007
            
            
            26,663,081
            
            
            $
            0.50
      – 2.16
            
            
            $
            0.96Granted
            
            
            305,000
            
            
            $
            0.75
      – 1.75
            
            
            $
            0.97Exercised
            
            
            (3,948,293
            )
            
            $
            0.75 -
      1.23
            
            
            $
            0.92Forfeited
            
            
            (20,000
            )
            
            $
            0.50
      – 0.94
            
            
            $
            0.72Outstanding
      at December 31, 2007
            
            
            22,999,788
            
            
            $
            0.75
      – 2.16
            
            
            $
            0.96Warrants
      exercisable at December 31, 2007
            
            
            22,999,788
            
            
            $
            0.75
      – 2.16
            
            
            $
            0.96Outstanding
      at January 1, 2008
            
            
            22,999,788
            
            
            $
            0.75
      – 2.16
            
            
            $
            0.96Granted
            
            
            801,555
            
            
            $
            0.90
      – 2.00
            
            
            $
            1.11Exercised
            
            
            (2,632,172
            )
            
            $
            0.75
      – 1.00
            
            
            $
            0.94Forfeited
            
            
            (143,999
            )
            
            
            1.00
            
            
            $
            1.00Outstanding
      at December 31, 2008
            
            
            21,025,172
            
            
            $
            0.75
      – 2.16
            
            
            $
            0.97Warrants
      exercisable at December 31, 2008
            
            
            21,025,172
            
            
            $
            0.75
      – 2.16
            
            
            $
            0.97









48


The following table summarizes
information about warrants outstanding at December 31, 2008.








Exercise
      Price
            
            Number
      Outstanding
              and
      Exercisable at
              December
      31, 2008
            
            
            Weighted
      Average
              Remaining
              Contractual
      Life
            
            
            Weighted
      Average
              Exercise
      Price$
            0.75
            
            
            
            65,000
            
            
            
            0.75
            
            
            $
            0.75$
            0.90
            
            
            
            2,000
            
            
            
            2.50
            
            
            $
            0.90$
            0.92
            
            
            
            1,500
            
            
            
            3.00
            
            
            $
            0.92$
            0.935
            
            
            
            14,909,559
            
            
            
            1.90
            
            
            $
            0.935$
            0.98
            
            
            
            400,000
            
            
            
            1.25
            
            
            $
            0.98$
            1.00
            
            
            
            4,107,234
            
            
            
            1.21
            
            
            $
            1.00$
            1.05
            
            
            
            706,555
            
            
            
            3.00
            
            
            $
            1.05$
            1.12
            
            
            
            10,000
            
            
            
            2.17
            
            
            $
            1.12$
            1.16
            
            
            
            10,000
            
            
            
            1.42
            
            
            $
            1.16$
            1.25
            
            
            
            675,000
            
            
            
            1.58
            
            
            $
            1.25$
            1.59
            
            
            
            1,500
            
            
            
            2.75
            
            
            $
            1.59$
            1.75
            
            
            
            10,000
            
            
            
            1.50
            
            
            $
            1.75$
            2.00
            
            
            
            50,000
            
            
            
            2.17
            
            
            $
            2.00$
            2.125
            
            
            
            55,147
            
            
            
            0.38
            
            
            $
            2.125$
            2.16
            
            
            
            21,677
            
            
            
            0.38
            
            
            $
            2.1621,025,172
            
            
            
            1.77
            
            
            $
            0.97








6.
Convertible Debt.





(a)           Pursuant
to a Convertible Secured Promissory Note and Warrant Purchase Agreement dated
November 26, 2002 (the “Purchase Agreement”) between the Company and Gryffindor
Capital Partners I, L.L.C., a Delaware limited liability company (“Gryffindor”),
Gryffindor purchased the Company's $1 million Convertible Secured Promissory
Note dated November 26, 2002 (the “Note”). The Note bore interest at 8% per
annum, payable quarterly in arrears, and was due and payable in full on November
26, 2004. Subject to certain exceptions, the Note was convertible into shares of
the Company's common stock on or after November 26, 2003, at which time the
principal amount of the Note was convertible into common stock at the rate of
one share for each $0.737 of principal so converted and any accrued but unpaid
interest on the Note was convertible at the rate of one share for each $0.55 of
accrued but unpaid interest so converted. The Company's obligations under the
Note were secured by a first priority security interest in all of the Company's
assets, including the capital stock of the Company's wholly owned subsidiary
Xantech Pharmaceuticals, Inc., a Tennessee corporation (“Xantech”). In addition,
the Company's obligations to Gryffindor were guaranteed by Xantech, and
Xantech's guarantee was secured by a first priority security interest in all of
Xantech's assets.





Pursuant to the Purchase Agreement, the
Company also issued to Gryffindor and to another individual Common Stock
Purchase Warrants dated November 26, 2002 (the “Warrants”), entitling these
parties to purchase, in the aggregate, up to 452,919 shares of common stock at a
price of $0.001 per share. Simultaneously with the completion of the
transactions described in the Purchase Agreement, the Warrants were exercised in
their entirety. The $1,000,000 in proceeds received in 2002 was allocated
between the long-term debt and the warrants on a pro-rata basis. The value of
the warrants was determined using a Black-Scholes option pricing model. The
allocated fair value of these warrants was $126,587 and was recorded as a
discount on the related debt and amortized over the life of the debt using the
effective interest method.





49


In 2003, an additional $25,959 of
principal was added to the 2002 convertible debt outstanding.





Pursuant to an agreement dated November
26, 2004 between the Company and Gryffindor, the Company issued Gryffindor a
Second Amended and Restated Senior Secured Convertible Note dated November 26,
2004 in the amended principal amount of $1,185,959 which included the original
note principal plus accrued interest. The second amended note bore interest at
8% per annum, payable quarterly in arrears, was due and payable in full on
November 26, 2005, and amended and restated the amended note in its entirety.
Subject to certain exceptions, the Note was convertible into shares of the
Company's common stock on or after November 26, 2004, at which time the
principal amount of the Note was convertible into common stock at the rate of
one share for each $0.737 of principal so converted and any accrued but unpaid
interest on the Note was convertible at the rate of one share for each $0.55 of
accrued but unpaid interest so converted. The Company issued warrants to
Gryffindor to purchase up to 525,000 shares of the Company's common stock at an
exercise price of $1.00 per share in satisfaction of issuing Gryffindor the
Second Amended and Restated Senior Secured Convertible Note dated November 26,
2004. The value of these warrants was determined to be $105,250 using a
Black-Scholes option-pricing model and was recorded as a discount on the related
debt and was amortized over the life of the debt using the effective interest
method. Amortization of $95,157 has been recorded as additional interest expense
as of December 31, 2005.





Emerging Issues Task Force Issue 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios” (“EITF 98-5”) requires the issuer to
determine the benefit of a nondetachable conversion feature in which the fair
value of the stock price is higher than the conversion amount at the commitment
date and to record this amount as additional interest expense.  As a
result, the Company recorded additional expense of $36,945 related to the
beneficial conversion feature of the interest on the Gryffindor convertible
debt.





On November 26, 2005 the Company
entered into a redemption agreement with Gryffindor to pay $1,185,959 of the
Gryffindor convertible debt and accrued interest of $94,877. Also on November
26, 2005 the Company issued a legal assignment attached to and made a part of
that certain Second Amended and Restated Senior Secured Convertible Note dated
November 26, 2004 in the original principal amount of $1,185,959 together with
interest of $94,877 paid to the order of eight investors dated November 26, 2005
for a total of $1,280,836. The Company subsequently entered into debt conversion
agreements with seven of the investors for an aggregate of $812,000 of
convertible debt which was converted into 1,101,764 shares of common stock at
$0.737 per share. As of December 31, 2005, the Company had $468,836 in principal
and $3,647 in accrued interest owed to holders of the convertible debentures due
on November 26, 2006. At December 31, 2005, the Company recorded additional
interest expense of $2,584 related to the beneficial conversion feature of the
interest on the November 2005 convertible debt. The $1,280,836 in principal was
issued when the conversion price was lower than the market value of the
Company's common stock on the date of issue. As a result, a discount of $404,932
was recorded for this beneficial conversion feature. The debt discount of
$404,932 is being amortized over the life of the debt using the effective
interest method. At December 31, 2005, $270,924 of the debt discount has been
amortized which includes $256,711 of the unamortized portion of the debt
discount related to the debt which was converted.





In conjunction with the November
26, 2005 financing, the Company incurred debt issuance costs consisting of cash
of $128,082, 356,335 shares of common stock valued at $345,645 and 1,000,000
warrants valued at $789,000. The warrants are exercisable over five years, have
an exercise price of $1.00, a fair market value of $0.79 and were valued using
the Black-Scholes option-pricing model. The total debt issuance costs of
$1,262,727 were recorded as an asset and amortized over the term of the debt. At
December 31, 2005, $835,294 of the debt issuance costs have been amortized which
includes $800,520 related to the debt that was converted as of December 31,
2005. The 356,335 shares of common stock were not issued as of December 31, 2005
and therefore have been recorded as an accrued liability at December 31,
2005.





In May 2006, the Company entered into a
debt conversion agreement with one of the November 2005 accredited investors for
$86,586 of its convertible debt which was converted into 117,483 shares of
common stock at $0.737 per share. In addition, accrued interest expense of
$3,078 due at the time of the debt conversion was paid in 5,597 shares of common
stock. In June 2006, the Company entered into a debt conversion agreement with
one of the November 2005 accredited investors for $382,250 of convertible debt
which was converted into 518,657 shares of common stock at $0.737 per share. In
addition, accrued interest expense of $15,800 due at the time of the debt
conversion was paid in 28,727 shares of common stock.





50


As of December 31, 2006, all principal
and accrued interest owed to holders of the November 2005 convertible debentures
had been converted. At March 31, 2006, the Company recorded additional interest
expense of $8,354 related to the beneficial conversion feature of the interest
on the November 2005 convertible debt. At June 30, 2006, the Company recorded
additional interest expense of $8,093 related to the beneficial conversion
feature of the interest on the November 2005 convertible debt. In 2006 the
remaining $417,886 of debt issuance costs have been amortized which includes
$189,948 of the unamortized portion of the deferred loan costs related to the
converted debt at the time of conversion. In 2006 the remaining debt discount of
$134,008 has been amortized.





(b)           On
November 19, 2003, the Company completed a short-term unsecured debt financing
in the aggregate amount of $500,000. The notes bear interest of 8% and were due
in full on November 19, 2004. The notes were convertible into common shares at a
conversion rate equal to the lower of (i) 75% of the average market price for
the 20 trading days ending on the 20th trading day subsequent to the effective
date or (ii) $0.75 per share. Pursuant to the note agreements, the Company also
issued warrants to purchase up to 500,000 shares of the Company's common stock
at an exercise price of $1.00 per share. During 2005, 52,000 of the warrants
were exercised and the remaining warrants expired on November 19,
2005.





The $500,000 proceeds received was
allocated between the debt and the warrants on a pro-rata basis. The value of
the warrants was determined using a Black-Scholes option-pricing model. The
allocated fair value of these warrants was $241,655 and was recorded as a
discount to the related debt. In addition, the conversion price was lower than
the market value of the Company's common stock on the date of issue. As a
result, an additional discount of $258,345 was recorded for this beneficial
conversion feature. The combined debt discount of $500,000 was being amortized
over the term of the debt using the effective interest method.





In conjunction with the debt financing,
the Company issued warrants to purchase up to 100,000 shares of the Company's
common stock at an exercise price of $1.25 per share in satisfaction of a
finder's fee. The value of these warrants was determined to be $101,000 using a
Black-Scholes option-pricing model. In addition, the Company incurred debt
issuance costs of $69,530 which were payable in cash. Total debt issuance costs
of $170,530 were recorded as an asset and amortized over the term of the debt.
In 2004, in conjunction with the June 25, 2004 transaction (Note 4(1)), the
Company entered into a redemption agreement for its $500,000 of short-term
convertible debt. Payments on the convertible debt corresponded to payments
received from the sale of common stock. As a result, the unamortized portion of
the debt discount at the date of extinguishment of $193,308 and the unamortized
portion of the deferred loan costs of $65,930 were recorded as a loss on
extinguishment of debt. In addition to principal payments, the redemption
payments included accrued interest and a premium payment of $100,519. This
premium payment has been recorded as a loss on extinguishment. As part of this
redemption, the Company repurchased the beneficial conversion feature amount of
$258,345 in 2004.





(c)           On
July 28, 2004, the Company entered into an agreement to issue 8% convertible
debentures to Cornell in the amount of $375,000 which was due together with
interest on July 28, 2007. This debt had a subordinated security interest in the
assets of the Company. The Company issued a second secured convertible debenture
on October 7, 2004 which had the same conversion terms as the prior debenture
and was issued on the date the Company filed a registration statement for the
shares underlying both debentures. This was due together with interest on
October 7, 2007 and had a subordinated security interest in the assets of the
Company. The debentures were convertible into common stock at a price per share
equal to the lesser of (a) an amount equal to 120% of the closing Volume Weighed
Average Price (VWAP) of the common stock as of the Closing Date ($1.88 on
Closing Date) or (b) an amount equal to 80% of the lowest daily VWAP of the
Company's common stock during the 5 trading days immediately preceding the
conversion date. There was a floor conversion price of $.75 until December 1,
2004.





EITF 98-5 requires the issuer to assume
that the holder will not convert the instrument until the time of the most
beneficial conversion. EITF 98-5 also requires that if the conversion terms are
based on an unknown future amount, which is the case in item (b) above, the
calculation should be performed using the commitment date which in this case is
July 28, 2004 and October 7, 2004, respectively. As a result, the beneficial
conversion amount was computed using 80% of the lowest fair market value for the
stock for the five days preceding July 28, 2004 and October 7, 2004,
respectively, which resulted in a beneficial conversion amount of $254,006 and
$106,250, respectively. The beneficial conversion amount was being amortized
over the term of the debt which was three years.





51


In conjunction with the debt financing,
the Company issued warrants to purchase up to 150,000 shares of the Company's
common stock at an exercise price of $1.00 per share in satisfaction of a
finder's fee. The value of warrants was determined to be $144,000 using a
Black-Scholes option-pricing model. In addition, the Company incurred debt
issuance costs of $162,500 which were payable in cash. Total debt issuance costs
of $306,500 were recorded as an asset and amortized over the term of the
debt.





In February 2005, the Company entered
into a redemption agreement with Cornell Capital Partners to pay $50,000 of the
Cornell convertible debt. As a result, the unamortized portion of the debt
discount of $27,715 and deferred loan costs of $20,702, which related to this
amount at the date of extinguishments, were recorded as a loss on extinguishment
of debt. The Company also paid a $5,000 prepayment penalty which has been
recorded as loss on extinguishment of debt. As part of this redemption, the
Company has repurchased the beneficial conversion feature related to the
redeemed amount of $16,449.





In March 2005, the Company entered into
a debt conversion agreement with Cornell Capital Partners for $50,000 of its
convertible debt which was converted into 66,667 shares of common stock at $0.75
per share. As a result of this conversion, the unamortized portion of the debt
discount of $24,890 and deferred loan costs of $18,779, which related to this
amount at the date of conversion, have been recorded as additional interest
expense.





In April 2005, the Company entered into
a redemption agreement with Cornell Capital Partners to pay $650,000 of the
Cornell convertible debt. As a result, the unamortized portion of the debt
discount of $233,425 and deferred loan costs of $205,741, which related to this
amount at the date of extinguishments, were recorded as a loss on extinguishment
of debt. The Company also paid a $65,000 prepayment penalty which has been
recorded as loss on extinguishment of debt. As part of this redemption, the
Company has repurchased the beneficial conversion feature related to the
redeemed amount of $127,679.





(d)           In
March 2005, the Company entered into agreements to issue Senior Convertible
Debentures to two (2) accredited investors with Network 1 Financial Securities,
Inc. in the aggregate amount of $450,000. This debt has a security interest in
the assets of the Company, a maturity date of March 30, 2007, and is convertible
into shares of the Company's common stock at a per share conversion price of
$0.75. In April 2005, the Company entered into agreements to issue Senior
Convertible Debentures to five (5) accredited investors in the aggregate amount
of $2,700,000. This debt has a security interest in the assets of the Company, a
maturity date of March 30, 2007, and is convertible into shares of the Company's
common stock at a per share conversion price of $0.75.





The Company shall be obligated to pay
the principal of the Senior Convertible Debentures in installments as follows:
Twelve (12) equal monthly payments of principal (the “Monthly Amount”) plus, to
the extent not otherwise paid, accrued but unpaid interest plus any other
obligations of the Company to the Investor under this Debenture, the Purchase
Agreement, or the Registration Rights Agreement, or otherwise. The first such
installment payment shall be due and payable on March 30, 2006, and subsequent
installments shall be due and payable on the thirtieth (30th) day of each
succeeding month thereafter (each a “Payment Date”) until the Company’s
obligations under this Debenture is satisfied in full. The Company shall have
the option to pay all or any portion of any Monthly Amount in newly issued,
fully paid and nonassessable shares of Common Stock, with each share of Common
Stock having a value equal to (i) eighty-five percent (85%) multiplied by (ii)
the Market Price as of the third (3rd) Trading Day immediately preceding the
Payment Date (the “Payment Calculation Date”).





Interest at the greater of (i) the
prime rate (adjust monthly), plus 4% and (ii) 8% is due on a quarterly basis. At
the time the interest is payable, upon certain conditions, the Company has the
option to pay all or any portion of accrued interest in either cash or shares of
the Company's common stock valued at 85% multiplied by the market price as of
the third trading date immediately preceding the interest payment
date.





The Company may prepay the Senior
Convertible Debentures in full by paying the holders the greater of (i) 125%
multiplied by the sum of the total outstanding principal, plus accrued and
unpaid interest, plus default interest, if any or (ii) the highest number of
shares of common stock issuable upon conversion of the total amount calculated
pursuant to (i) multiplied by the highest market price for the common stock
during the period beginning on the date until prepayment.





52


On or after any event or series of
events which constitutes a fundamental change, the holder may, in its sole
discretion, require the Company to purchase the debentures, from time to time,
in whole or in part, at a purchase price equal to 110% multiplied by the sum of
the total outstanding principal, plus accrued and unpaid interest, plus any
other obligations otherwise due under the debenture. Under the senior
convertible debentures, fundamental change means (i) any person becomes a
beneficial owner of securities representing 50% or more of the (a) outstanding
shares of common stock or (b) the combined voting power of the then outstanding
securities; (ii) a merger or consolidation whereby the voting securities
outstanding immediately prior thereto fail to continue to represent at least 50%
of the combined voting power of the voting securities immediately after such
merger or consolidation; (iii) the sale or other disposition of all or
substantially all or the Company's assets; (iv) a change in the composition of
the Board within two years which results in fewer than a majority of directors
are directors as of the date of the debenture; (v) the dissolution or
liquidation of the Company; or (vi) any transaction or series of transactions
that has the substantial effect of any of the foregoing.





The Purchasers of the $3,150,000 in
Senior Convertible Debentures also purchased Class A Warrants and Class B
Warrants under the Securities Purchase Agreement. Class A Warrants are
exercisable at any time between March 10, 2005 through and including March 30,
2010 depending on the particular Purchaser. Class B Warrants were exercisable
for a period through and including 175 days after an effective registration of
the common stock underlying the warrants, which began June 20, 2005 and ended
December 12, 2005. The range of the per share exercise price of a Class A
Warrant is $0.93 to $0.99 and the range of the per share exercise price of the
Class B Warrant was $0.8925 to $0.945.





The Purchasers of the Senior
Convertible Debentures received a total of 4,200,000 Class A Warrants and a
total of 2,940,000 Class B Warrants. 1,493,333 of the Class B Warrants were
exercised in December, 2005 for proceeds of $1,122,481. The warrant holders were
given an incentive to exercise their warrants due to the lowering of the
exercise price to $0.75. Interest expense of $236,147 was recorded to recognize
expense related to this conversion incentive. The remaining Class B Warrants
were forfeited in December, 2005 at the expiration of their exercise
period.





The $3,150,000 proceeds received in
March and April 2005 was allocated between the debt and the warrants on a
pro-rata basis. The value of the warrants was determined using a Black-Scholes
option-pricing model. The allocated fair value of these warrants was $1,574,900
and was recorded as a discount to the related debt. In addition, the conversion
prices were lower than the market value of the Company's common stock on the
date of issue. As a result, an additional discount of $1,228,244 was recorded
for this beneficial conversion feature. The combined debt discount of $2,803,144
was being amortized over the life of the debt using the effective interest
method.





In June 2005, the Company entered into
a debt conversion agreement with one of the April accredited investors for
$150,000 of its convertible debt which was converted into 200,000 shares of
common stock at $0.75 per share, and $2,833 of accrued interest was converted
into 3,777 shares of common stock at $0.75 per share. In July 2005, the Company
entered into a debt conversion agreement with two of the April accredited
investors for an aggregate of $350,000 of convertible debt which was converted
into 466,666 shares of common stock at $0.75 per share. In September 2005, the
Company entered into a debt conversion agreement with one of the March
accredited investors for $400,000 of its convertible debt which was converted
into 533,333 shares of common stock at $0.75 per share. In October 2005, the
Company entered into a debt conversion agreement with two of the March
accredited investors for an aggregate of $100,000 of convertible debt which was
converted into 133,334 shares of common stock at $0.75 per share. In November
2005, the Company entered into a debt conversion agreement with three of the
April accredited investors for an aggregate of $675,000 of convertible debt
which was converted into 900,000 shares of common stock at $0.75 per
share.





In conjunction with the financing, the
Company incurred debt issuance costs consisting of $387,500 in cash and 980,000
of warrants valued at $426,700. The warrants are exercisable over five years,
have exercise prices ranging from $0.98 - $1.23, fair market values ranging from
$0.42 - $0.44 and were valued using the Black-Scholes option pricing model. The
total debt issuance costs of $814,200 were recorded as an asset and amortized
over the term of the debt.





The Company chose to pay the quarterly
interest due at June 30, 2005, September 30, 2005 and December 31, 2005 in
common stock instead of cash. As a result, accrued interest at June 30, 2005 of
$78,904 was paid in 165,766 shares of common stock resulting in additional
interest expense of $28,843. 159,780 shares were issued July 11, 2005 and the
remaining 5,986 shares were issued November 7, 2005. The accrued interest due
September 30, 2005 of $72,985 was converted into 97,955 shares of common stock
resulting in additional interest expense of $15,299. 66,667 of these shares were
issued on September 30, 2005 and the remaining 31,288 shares were issued October
20, 2005. The interest due December 31, 2005 of $50,486 was converted into
65,742 shares of common stock resulting in additional interest expense of
$10,922. The 65,742 shares were not issued as of December 31, 2005 and were
recorded in accrued liabilities at December 31, 2005. The shares were issued
January 9, 2006.





53


In January 2006, the Company entered
into a debt conversion agreement with one of the March 2005 accredited investors
for $250,000 of its convertible debt which was converted into 333,333 shares of
common stock at $0.75 per share. In March 2006, the Company entered into a total
of three debt conversion agreements with two of the March 2005 accredited
investors for an aggregate of $500,000 of convertible debt which was converted
into 666,667 shares of common stock at $0.75 per share. In May 2006, the Company
entered into a debt conversion agreement with one of the March 2005 accredited
investors for $25,000 of its convertible debt which was converted into 33,333
shares of common stock at $0.75 per share. In September 2006, the Company
entered into a debt conversion agreement with one of the March 2005 accredited
investors for $112,500 of its convertible debt which was converted into 150,000
shares of common stock at $0.75 per share. In November 2006, the Company entered
into a debt conversion agreement with one of the March 2005 accredited investors
for $200,000 of its convertible debt which was converted into 266,666 shares of
common stock at $0.75 per share. In December 2006, the Company entered into a
debt conversion agreement with one of the March 2005 accredited investors for
$20,000 of its convertible debt which was converted into 26,667 shares of common
stock at $0.75 per share.





In 2006, $928,090 of the total debt
discount has been amortized which includes $386,451 of the unamortized portion
of the debt discount related to the converted debt at the time of the debt
conversions. In 2006, $287,493 of the deferred loan costs have been amortized
which includes $112,256 of the unamortized portion of the deferred loan costs
related to the converted debt at the time of the debt conversions.





The Company chose to pay the quarterly
interest due at March 31, 2006, June 30, 2006, September 30, 2006 and December
31, 2006 in common stock instead of cash. As a result, accrued interest due
March 31, 2006 of $33,274 was converted into 35,939 shares of common stock
resulting in additional interest expense of $4,975. 7,656 of these shares were
issued March 20, 2006 and the remaining shares of 28,283 were issued March 31,
2006. The accrued interest due June 30, 2006 of $21,305 was converted into
24,674 shares of common stock resulting in additional interest expense of
$3,650. These shares were issued June 30, 2006. The accrued interest due
September 30, 2006 of $21,010 was converted into 18,888 shares of common stock
resulting in additional interest expense of $2,167. These shares were issued
September 29, 2006. The accrued interest due December 31, 2006 of $15,086 was
converted into 14,760 shares of common stock resulting in additional interest
expense of $1,843. These shares were issued December 29, 2006.





In January 2007, the Company entered
into a separate debt conversion agreement with two of its March 2005 accredited
investors for $245,833 of convertible debt which was converted into 327,777
shares of common stock at $0.75 per share.  In February 2007, the
Company entered into a separate debt conversion agreement with two of its March
2005 accredited investors for $121,667 of convertible debt which was converted
into 162,223 shares of common stock at $0.75 per share.





In February 2007, the remaining total
debt discount has been amortized, which is $2,797.  In February 2007,
the remaining deferred loan costs have been amortized, which is
$3,713.





At December 31, 2007 the Company had no
remaining principal or accrued interest owed to holders of the March 2005
convertible debentures due on March 31, 2007.





The Company chose to pay a portion of
the quarterly interest due at February 28, 2007 in common stock instead of
cash.  The accrued interest not paid in cash that was due February 28,
2007 of $1,109 was converted into 1,141 shares of common stock resulting in
additional interest expense of $149.  358 of these shares were issued
on January 25, 2007 and the remaining shares of 783 were issued on February 28,
2007.





7.           Related
Party Transactions





During 2002, a shareholder who is also
an employee and member of the Company's board of directors loaned the Company
$109,000. During 2003, the same shareholder loaned the Company an additional
$40,000. During 2005, the same shareholder loaned the Company an additional
$25,000.





54


In December 2005, the Company approved
a request from the shareholder to exchange the total loan amount of $174,000
plus accrued interest of $24,529 for 264,705 shares of common stock at $0.75 per
share which were committed to be issued at December 31, 2005. These shares were
issued on January 3, 2006. In connection with this transaction which was based
on the same terms as the private placement conducted at the same time, the
Company also issued warrants to the shareholder to purchase up to 330,881 shares
of common stock at an exercise price of $0.935 per share.  In December
2007, the employee exercised all of these warrants.





8.           Income
Taxes





Reconciliations between the statutory
federal income tax rate and the Company’s effective tax rate
follow:




Years
      Ended December 31,
            2008
            
            2007Amount
            
            
            %
            
            Amount
            
            
            %Federal
      statutory rate
            
            $
            (3,491,000
            )
            
            
            (34.0
            )
            
            $
            (3,402,000
            )
            
            
            (34.0
            )Adjustment to valuation allowance
            
            
            3,491,000
            
            
            
            34.0
            
            
            
            3,402,000
            
            
            
            34.0Actual
      tax benefit
            
            $
            --
            
            
            
            --
            
            
            $
            --
            
            
            
            --





The components of the Company’s
deferred income taxes, pursuant to SFAS No. 109, are summarized:




December
      31,
            
            2008
            
            
            2007Deferred
      tax assetsNet
      operating loss carry-forwards
            
            $
            10,460,000
            
            
            $
            8,014,000Stock-based
      compensation
            
            
            2,091,000
            
            
            
            1,429,000Warrants
      for services
            
            
            1,785,000
            
            
            
            1,630,000Deferred
      tax asset
            
            
            14,336,000
            
            
            
            11,073,000Deferred
      tax liability – patent amortization
            
            
            (2,588,000
            )
            
            
            (2,816,000
            )Valuation
      allowance
            
            
            (11,748,000
            )
            
            
            (8,257,000
            )Net
      deferred taxes
            
            $
            --
            
            
            $
            --








SFAS No. 109 required a valuation
allowance against deferred tax assets if, based on the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
may not be realized. The Company is in the development stage and realization of
the deferred tax assets is not considered more likely than not. As a result, the
Company has recorded a valuation allowance for the net deferred tax
asset.





Since inception of the Company on
January 17, 2002, the Company has generated tax net operating losses of
approximately $30.8 million, expiring in 2022 through 2028. The tax loss
carry-forwards of the Company may be subject to limitation by Section 382 of the
Internal Revenue Code with respect to the amount utilizable each year. This
limitation reduces the Company’s ability to utilize net operating loss
carry-forwards. The amount of the limitation has not been quantified by the
Company. In addition, the Company acquired certain net operating losses in its
acquisition of Valley Pharmaceuticals, Inc. (Note 2). However, the amount of
these net operating losses has not been determined and even if recorded, the
amount would be fully reserved.





9.           Cash
Balance Defined Benefit Plan and Trust





In January 2007, the Company
established the Provectus Pharmaceuticals, Inc. Cash Balance Defined Benefit
Plan and Trust (the “Plan”), effective January 1, 2007, for the exclusive
benefit of its four employees and their beneficiaries.   The
Company accounts for the Plan in accordance with Statement of Financial
Accounting Standard No. 158, “Employers’ Accounting for Defined Benefit and
Other Postretirement Plans – an Amendment of FASB Statements No. 87, 88, 106 and
132(R)”.  Per the Plan, each employee has a hypothetical account which
consists of a yearly pay credit based on a defined percentage of the employee’s
current salary and an interest credit defined as 5% of the beginning or the year
hypothetical account balance.  Each year, the Company makes a
contribution to fully fund the Plan.  The Plan contributions vest
immediately after three years of service.  All four employees are
fully vested.





55


At December 31, 2008 and 2007, the
projected benefit obligation of $669,229 and $324,000, respectively,
approximated the fair value of the Plan assets at the respective
dates.  The accumulated benefit obligation also approximated the
projected benefit obligation.





The components of net periodic pension
cost recognized are as follows:





Year
      ended December 31,
            
            2008
            
            
            2007Service
      cost
            
            $
            331,200
            
            
            $
            324,000Interest
      cost
            
            
            14,029
            
            
            
            -Expected
      return on assets
            
            
            (26,618
            )
            
            
            (12,300
            )Net
      periodic pension cost
            
            $
            318,611
            
            
            $
            311,700





Employer contributions to the plan were
$331,200 and 324,000 in 2008 and 2007, respectively.  No benefits were
paid in either year.





The weighted-average assumptions used
to determine the benefit obligation at December 31, 2008 and 2007 and the
pension expense for the years ended December 31, 2008 and 2007 are as
follows:





Discount
rate                                                      4.33%


Compensation
increase                                     4.00%


Long-term
rate of return on
assets                  4.33%





The Plan’s long-term rate of return on
assets assumption is based on the types of investment classes in which the Plan
assets are invested and the expected compounded return the Plan can reasonably
be expected to earn over appropriate time periods.  The expected
return reflects forward-looking economic assumptions.  The assumptions
are also based on the investment returns the Company can reasonably expect its
active investment management program to achieve in excess of the returns
expected if investments were made strictly in indexed funds.





The Plan’s weighted-average asset
allocations by asset category are as follows:





December
      31,
            
            2008
            
            
            2007United
      States treasury bills
            
            
            66
            %
            
            
            55
            %Cash
      and cash equivalents
            
            
            34
            %
            
            
            45
            %





The Company’s investment objective is
to achieve investment earnings similar to the 5% interest credit defined by the
Plan.  To achieve this, the Company’s policy is to only invest in U.S.
treasury bills and cash and cash equivalents.  The Company will invest
in U.S. treasury bills whenever practical.





The Company expects to contribute
$352,800 to the Plan in 2009.














56







The estimated future benefit payments
are as follows:




Year
      ending December 31,2009
            
            $
            -2010
            
            
            -2011
            
            
            474,0002012
            
            
            573,0002013
            
            
            -Years
      2014 - 2018
            
            
            1,580,000







57


EXHIBIT
INDEX
   Exhibit
      No
              Description3.1(i)
              Restated
      Articles of Incorporation of Provectus, incorporated herein by reference
      to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the
      quarter ended June 30, 2003, as filed with the SEC on August 14,
      2003.3.1(ii)
              Bylaws,
      as amended, of Provectus Pharmaceuticals, Inc.4.1
              Specimen
      certificate for the common shares, $.001 par value per share, of Provectus
      Pharmaceuticals, Inc., incorporated herein by reference to Exhibit 4.1 to
      the Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2002, as filed with the SEC on April 15, 2003.10.1
              *Provectus
      Pharmaceuticals, Inc. amended and Restated 2002 Stock Plan, incorporated
      herein by reference to Exhibit 10.2 to the Company’s Quarterly Report on
      Form 10-QSB for the quarter ended June 30, 2003, as filed with the SEC on
      August 14, 2003.10.2
              *Confidentiality,
      Inventions and Non-competition Agreement between the Company and H. Craig
      Dees, incorporated herein by reference to Exhibit 10.8 to the Company’s
      Annual Report on Form 10-KSB for the year ended December 31, 2002, as
      filed with the SEC on April 15, 2004.10.2
              *Confidentiality,
      Inventions and Non-competition Agreement between the Company and Timothy
      C. Scott, incorporated herein by reference to Exhibit 10.8 to the
      Company’s Annual Report on Form 10-KSB for the year ended December 31,
      2002, as filed with the SEC on April 15, 2004.10.4
              *Confidentiality,
      Inventions and Non-competition Agreement between the Company and Eric A.
      Wachter, incorporated herein by reference to Exhibit 10.8 to the Company’s
      Annual Report on Form 10-KSB for the year ended December 31, 2002, as
      filed with the SEC on April 15, 2004.10.5
              Material
      Transfer Agreement dated as of July 31, 2003 between Schering-Plough
      Animal Health Corporation and Provectus, incorporated hereby by reference
      to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-QSB for the
      quarter ended June 30, 2003, as filed with the SEC on August 14,
      2003.10.6
              *Executive
      Employment Agreement by and between the Company and H. Craig Dees, Ph.D,
      dated January 4, 2005.10.7
              *Executive
      Employment Agreement by and between the Company and Eric Wachter, Ph.D,
      dated January 4, 2005.10.8
              *Executive
      Employment Agreement by and between the Company and Timothy C. Scott,
      Ph.D, dated January 4, 2005.10.9
              *Executive
      Employment Agreement by and between the Company and Peter Culpepper dated
      January 4, 2005.21.1
              List
      of Subsidiaries23.1+
              Consent
      of Independent Registered Public Accounting Firm31.1+
              Certification
      of CEO pursuant to Rules 13a - 14(a) of the Securities Exchange Act of
      193431.2+
              Certification
      of CFO pursuant to Rules 13a-14(a) of the Securities Exchange Act of
      1934.32.1+
              Certification
      Pursuant to 18 U.S.C. ss. 1350.
 ____________________________
 
 *Management
Compensation Plan
 +Filed
herewith.


58