----

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**United        States **

**Securities        And Exchange Commission**

**Washington,        DC 20549**

**FORM        10-KSB**

**Provectus        Pharmaceuticals, Inc.**

|   |  **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)                              |   |
|   |                                                                                                   |   |                                                           |   |

**865/769-4011**

**None**

** ****Common        shares, par value $.001        per share**

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**Provectus          Pharmaceuticals, Inc.**

**Annual        Report on Form 10-KSB**

**Table        of Contents**

|                                                                                                                                                      | **Page**      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|
| **Part                  I**                                                                                                                               |          |
| Item                  1A.  Risk                  Factors                                                                         |  3       |
| Item                  1B.  Unresolved                  Staff Comments                                                                           |  8       |
| Item                  1. Description of Business                                                                                                          |   8 |
|   History                                                                                                                                       |  8       |
|   Description                  Of Business                                                                                                 |  9       |
|   Intellectual                  Property                                                                                                   |  15      |
|   Competition                                                                                                                              |  16      |
|   Federal                  Regulation of Therapeutic Products                                                                              |  16      |
|  Personnel                                                                                                                                      |  18      |
|  Available                  Information                                                                                                         |  19      |
| Item                  2. Description of Property                                                                                                          |  19      |
| Item                  3. Legal Proceedings                                                                                                                |  20      |
| Item                  4. Submission of Matters to a Vote of Security                  Holders                                                             |  20      |
| **Part                  II**                                                                                                                              |          |
| Item                  5. Market for Common Equity and Related Stockholder                  Matters                                                        |  21      |
| Item                  6. Management's Discussion and Analysis or Plan of                  Operation                                                       |  22      |
| Plan                  of Operation                                                                                                                        |  23      |
| Item                  7. Financial Statements                                                                                                             |  26      |
| Forward-Looking                  Statements                                                                                                               |  26      |
| Item                  8. Changes in and Disagreements with Accountants on                  Accounting and Financial Disclosure                            |  26      |
| Item                  8A. Controls and Procedures                                                                                                         |  26      |
| Item                  8B. Other Information                                                                                                               |  26      |
| **Part                  III**                                                                                                                             |          |
| Item                  9. Directors, Executive Officers, Promoters and Control                  Persons; Compliance with Section 16(a) of the Exchange Act |  26      |
| Item                  10. Executive Compensation                                                                                                          |  27      |
| Item                  11. Security Ownership of Certain Beneficial Owners and                  Management and Related Stockholder Matters                 |  27      |
| Item                  12. Certain Relationships and Related                  Transactions                                                                 |  27      |
| Item                  13. Exhibits                                                                                                                        |  27      |
| Item                  14. Principal Accountant Fees and Services                                                                                          |  27      |
| Signatures                                                                                                                                                |  28      |
| Financial Statements                                                                                                                                      |  F-1     |
| Exhibit Index                                                                                                                                        |  X-1     |

----

*Our        technologies        are in early stages of development.*

*We        will need        additional capital to conduct our operations and develop our products beyond        2008, and our ability to obtain the necessary funding is uncertain. *

*Existing        shareholders may face dilution from our financing efforts.*

*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.*

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| ·   | 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. |
|--------------------|-------------------------------------------------------------------|

*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        or        that we will have adequate capital to further develop these products, if        necessary, which are an important factor in the future success of our        business.*

*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.*

----

| ·   | research                and development; |
|--------------------|------------------------------------------|
| ·   | manufacturing; |
|--------------------|----------------|
| ·   | preclinical                and clinical testing; |
|--------------------|--------------------------------------------------|
| ·   | obtaining                regulatory approvals;                and |
|--------------------|-------------------------------------------------------------------|
| ·   | marketing. |
|--------------------|------------|
| ·   | 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. |
|--------------------|-----------------------------------------------------------------------------------------------------------|

*Product        Competition*
| ·   | Purell                (owned by Johnson &Johnson), |
|--------------------|--------------------------------------------------------|
| ·   | Avagard D (manufactured by 3M) and |
|--------------------|------------------------------------|
| ·   | a large number of generic and private-label equivalents to these              market leaders. |
|--------------------|-----------------------------------------------------------------------------------------------|

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

----

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

*If        we lose any of        our key personnel, we may be unable to successfully execute our business        plan.*
| ·   | H.                Craig Dees, Ph.D., our Chief Executive Officer; |
|--------------------|-------------------------------------------------------------------|
| ·   | Timothy                C. Scott, Ph.D., our                President; |
|--------------------|-----------------------------------------------------------------------|
| ·   | Eric                A. Wachter, Ph.D. our Vice President - Pharmaceuticals;                and |
|--------------------|------------------------------------------------------------------------------------------------|
| ·   | Peter                R. Culpepper, CPA, our Chief Financial Officer. |
|--------------------|----------------------------------------------------------------------|
| ·   | Researching                diseases and possible therapies in the areas of                dermatology and skin care, oncology, and biotechnology; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | 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. |
|--------------------|---------------------------------------------------|

*Our        common stock        price can be volatile because of several factors, including a limited public        float which has increased significantly from 2005 to 2006.*
| ·   | 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                volatilitiy of the stock markers 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 frequently involve high selling costs.*

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

*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. *

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| ·   | 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 pennies stocks                held                in the customer’s account and information on the limited market in penny                stocks. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*History*
| ·   | 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. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Description        Of Business*
| ·   | Xantech                Pharmaceuticals, Inc. |
|--------------------|----------------------------------------------|
| ·   | Pure-ific                Corporation |
|--------------------|--------------------------------------|
| ·   | Provectus                Biotech, Inc. |
|--------------------|----------------------------------------|
| ·   | Provectus                Devicetech, Inc. |
|--------------------|-------------------------------------------|
| ·   | Provectus                Pharmatech, Inc. |
|--------------------|-------------------------------------------|
| ·   | Over-the-counter                products, which we refer to in this report                as "OTC products;" |
|--------------------|--------------------------------------------------------------------------------------------------------------|
| ·   | Prescription                drugs; and |
|--------------------|----------------------------------------|
| ·   | Medical                device systems |
|--------------------|---------------------------------------|

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| ·   | hand                irritation associated with use of disposable gloves |
|--------------------|-------------------------------------------------------------------------|
| ·   | eczema |
|--------------------|--------|
| ·   | mild                to moderate acne |
|--------------------|--------------------------------------|
| ·   | Airport                security personnel; |
|--------------------|--------------------------------------------|
| ·   | Food                handling and preparation                personnel; |
|--------------------|------------------------------------------------------------------------|
| ·   | Sanitation                workers; |
|--------------------|------------------------------------|
| ·   | Postal                and package delivery handlers and                sorters; |
|--------------------|---------------------------------------------------------------------------------|
| ·   | Laboratory                researchers; |
|--------------------|----------------------------------------|
| ·   | Health                care workers such as hospital and blood bank                personnel; and |
|--------------------|--------------------------------------------------------------------------------------------------|
| ·   | Police,                fire and emergency response                personnel. |
|--------------------|------------------------------------------------------------------------------|

----

----

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| ·   | cosmetic                treatments, such as reduction of wrinkles and                elimination of spider veins and other cosmetic blemishes;                and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | therapeutic                uses, including photoactivation of Xantryl other                prescription drugs and non-surgical destruction of certain skin                cancers. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

*Intellectual        Property*

| **U.S.                  Patent No** | **Title**                                                                                                                                                  | **Issue                  Date**     | **Expiration                  Date** |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|--------------------------------------|
| 5,829,448                           | Method                  for improved selectivity in -activation of molecular                  agents                                                       | November                  3, 1998   | October                  30, 2016    |
| 5,832,931                           | Method                  for improved selectivity in photo-activation and                  detection of diagnostic agents                                   | November                  10, 1998  | October                  30, 2016    |
| 5,998,597                           | Method                  for improved selectivity in -activation of molecular                  agents                                                       | December                  7, 1999   | October                  30, 2016    |
| 6,042,603                           | Method                  for improved selectivity in photo-activation of                  molecular agents                                                  | March                  28, 2000     | October                  30, 2016    |
| 6,331,286                           | Methods                  for high energy phototherapeutics                                                                                                 | December                  18, 2001  | December                  21, 2018   |
| 6,451,597                           | Method                  for enhanced protein stabilization and for production of                  cell lines useful production of such stabilized proteins | September                  17, 2002 | April                  6, 2020       |
| 6,468,777                           | Method                  for enhanced protein stabilization and for production of                  cell lines useful production of such stabilized proteins | October                  22, 2002   | April                  6, 2020       |
| 6,493,570                           | Method                  for improved imaging and photodynamic therapy                                                                                      | December                  10, 2002  | December                  10, 2019   |
| 6,495,360                           | Method                  for enhanced protein stabilization for production of                  cell lines useful production of such stabilized proteins     | December                  17, 2002  | April                  6, 2020       |
| 6,519,076                           | Methods                  and apparatus for optical imaging                                                                                                 | February                  11, 2003  | October                  30, 2016    |
| 6,525,862                           | Methods                  and apparatus for optical imaging                                                                                                 | February                  25, 2003  | October                  30, 2016    |
| 6,541,223                           | Method                  for enhanced protein stabilization and for production of                  cell lines useful production of such stabilized proteins | April                  1, 2003      | April                  6, 2020       |
| 6,986,740                           | Ultrasound                  contrast using halogenated xanthenes                                                                                           | January                  17, 2006   | September                  9, 2023   |
| 6,991,776                           | Improved                  intracorporeal medicaments for high energy                  phototherapeutic treatment of disease                                | January                  31, 2006   | May                  5, 2023         |
| 7,036,516                           | Treatment                  of pigmented tissues using optical energy                                                                                       | May                  2, 2006        | January                  28, 2020    |

----

*Competition*

*Federal        Regulation of Therapeutic Products*
| ·   | 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. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·   | Preclinical                laboratory and animal                testing; |
|--------------------|--------------------------------------------------------------------------|
| ·   | Submission                of an application that must become effective                before clinical trials may begin; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------|

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| ·   | 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. |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

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*ersonnel*

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*Available        Information*

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|                                                       | **High**   | **Low** |
|------------------------------------------------------------|------------|---------|
| **2005**                                                   |       |    |
| First                  Quarter (January 1 to March 31)     | $1.25      | 0.64    |
| Second                  Quarter (April 1 to June 30)       |  0.85 | 0.52    |
| Third                  Quarter (July 1 to September 30)    | 0.99       | 0.60    |
| Fourth                  Quarter (October 1 to December 31) | 1.14       | 0.77    |
| **2006**                                                   |       |    |
| First                  Quarter (January 1 to March 31)     | 1.20       | 0.83    |
| Second                  Quarter (April 1 to June 30)       | 1.97       | 1.01    |
| Third                  Quarter (July 1 to September 30)    | 1.47       | 0.94    |
| Fourth                  Quarter (October 1 to December 31) | 1.34       | 1.11    |
|                                                       |       |    |

----

----

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*Accounting for Servicing of        Financial Assets**Accounting for Transfers and Servicing of Financial Assets and        Extinguishments of Liabilities*

*Fair        Value Measurements,”*

*Employers’Accounting for Defined Benefit Pension and Postretirement Plans: an        amendment of        FASB Statements No. 87, 88, 106, and 132(R)*

*The Fair Value Option for Financial Assets and        Financial Liabilities—Including an amendment of FASB Statement No. 115,”**Fair Value        Measurements.” *

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|                                                                                                                                          | **Page**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------|-----------|
| Report                  of Independent Registered Public Accounting Firm                                                                      |  F-1 |
| Consolidated                  Balance Sheets as of December 31, 2006 and 2005                                                            |  F-2 |
| Consolidated                  Statements of Operations for the years December 31, 2006 and 2005                                               |  F-3 |
| Consolidated                  Statements of Shareholders' Equity for years ended December 31,                  2006 and                  2005 |  F-4 |
| Consolidated                  Statements of Cash Flows for the years ended December 31, 2006                  and 2005                        |  F-5 |
| Notes                  to Consolidated Financial Statements                                                                                   |  F-7 |

----

----

| **Signature**                                                                       | **Title**                                                                                                                                 | **Date**                        |
|-------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------|
| /s/                  H. Craig DeesH.                  Craig Dees, Ph.D.             | Chief                  Executive Officer (principal executive officer) and Chairman of                  the Board                    | March                  22, 2007 |
| /s/                  Peter R. CulpepperPeter                  R. Culpepper, CPA     | Chief                  Financial Officer (principal financial officer and principal accounting                  officer)                  | March                  22, 2007 |
| /s/                  Timothy C. ScottTimothy                  C. Scott, Ph.D.       | President                  and Director                                                                                                   | March                  22, 2007 |
| /s/                  Eric A. Wachter , Ph.D Eric                  A. Wachter, Ph.D. | Vice                  President - Pharmaceuticals and Director                                                                            | March                  22, 2007 |
| /s/                  Stuart FuchsStuart                  Fuchs                      | Director                                                                                                                                  | March                  22, 2007 |

----

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**PROVECTUS          PHARMACEUTICALS, INC.**

**(A          Development-Stage Company)**

**CONSOLIDATED          BALANCE SHEETS**

|                                                                                                                                                                                                             |    | December                    31, 2006 |    | December                    31, 2005 |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|--------------------------------------|---------|--------------------------------------|--------|
| Assets                                                                                                                                                                                                           |    |                                 |    |                                 |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Current                    Assets                                                                                                                                                                                |    |                                 |    |                                 |   |
| Cash                    and cash                    equivalents                                                                                                                                                  | $       | 638,334                              | $       | 6,878,990                            |   |
| United                    States                    Treasury Notes, total face value $6,507,019                                                                                                                  |    | 6,499,034                            |    | --                                   |   |
| Prepaid                    expenses                    and other current assets                                                                                                                                  |    | 173,693                              |    | 67,962                               |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Total                    Current Assets                                                                                                                                                                          |    | 7,311,061                            |    | 6,946,952                            |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Equipment                    and Furnishings, less accumulated depreciation of                    $372,721 and $368,279                                                                                          |    | 30,075                               |    | 12,287                               |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Patents,                    net of amortization of $2,762,777 and $2,091,657                                                                                                                                     |    | 8,952,668                            |    | 9,623,788                            |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Deferred                    loan costs, net of amortization of $103,018 and                    $161,004                                                                                                          |    | 3,713                                |    | 709,092                              |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Other                    assets                                                                                                                                                                                  |    | 27,000                               |    | 27,000                               |   |
|                                                                                                                                                                                                             |  $ | 16,324,517                           |  $ |  17,319,119                     |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Liabilities                    and Stockholders’ Equity                                                                                                                                                    |    |                                 |    |                                 |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Current                    Liabilities                                                                                                                                                                           |    |                                 |    |                                 |   |
| Accounts                    payable                    - trade                                                                                                                                                   | $       | 64,935                               | $       | 90,124                               |   |
| Accrued                    compensation                                                                                                                                                                          |    | 265,929                              |    | 179,170                              |   |
| Accrued                    common                    stock costs                                                                                                                                                 |    | 17,550                               |    | 964,676                              |   |
| Accrued                    consulting expense                                                                                                                                                                    |    | 42,500                               |    | 692,512                              |   |
| Other                    accrued                    expenses                                                                                                                                                     |    | 46,500                               |    | 61,500                               |   |
| Accrued                    interest                                                                                                                                                                              |    | --                                   |    | 65,055                               |   |
| March                    2005                    convertible debt, net of debt discount of  $2,797 and  $884,848                                                                                       |    | 364,703                              |    | 221,401                              |   |
| November                    2005                    convertible debt, net of debt discount of $134,008 in 2005                                                                                              |    | --                                   |    | 334,828                              |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Total                    Current Liabilities                                                                                                                                                                     |    | 802,117                              |    | 2,609,266                            |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| March                    2005 convertible debt, net of debt discount of                     $46,039 in 2005                                                                                                 |    | --                                   |    | 322,712                              |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Stockholders’Equity                                                                                                                                                                                        |    |                                 |    |                                 |   |
| Common                    stock; par value $.001 per share; 100,000,000 shares authorized;                    42,452,366 and 27,822,977 shares issued and outstanding,                    respectively |    | 42,452                               |    |  27,823                         |   |
| Paid-in                    capital                                                                                                                                                                               |    | 50,680,353                           |    | 40,689,144                           |   |
| Deficit                    accumulated during the development stage                                                                                                                                              |    | (35,200,405)                         |    | (26,329,826)                         |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
| Total                    Stockholders’ Equity                                                                                                                                                              |    | 15,522,400                           |    | 14,387,141                           |   |
|                                                                                                                                                                                                             |    |                                 |    |                                 |   |
|                                                                                                                                                                                                             | $       | 16,324,517                           | $       | 17,319,119                           |   |

----

**PROVECTUS          PHARMACEUTICALS, INC.**

**(A          Development-Stage Company)**

**CONSOLIDATED          STATEMENTS OF OPERATIONS**

|                                                                                                           |   | Year                    EndedDecember                    31, 2006 |   | Year                    EndedDecember                    31, 2005 |   | Cumulative                    Amounts from January 17, 2002 (Inception)                    ThroughDecember                    31, 2006 |
|----------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
| Revenues                                                                                                       |   |                                                              |   |                                                              |   |                                                                                                                                   |
|   OTC                    product revenue                                                             | $      | 1,368                                                             | $      | 5,552                                                             | $      | 25,648                                                                                                                                 |
|    Medical                    device revenue                                                    |   | --                                                                |   | 984                                                               |   | 14,109                                                                                                                                 |
| Total                    revenues                                                                              |   | 1,368                                                             |   | 6,536                                                             |   | 39,757                                                                                                                                 |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Cost                    of sales                                                                               |   | 875                                                               |   | 3,560                                                             |   | 15,216                                                                                                                                 |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Gross                    profit                                                                                |   | 493                                                               |   | 2,976                                                             |   | 24,541                                                                                                                                 |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Operating                    expenses                                                                          |   |                                                              |   |                                                              |   |                                                                                                                                   |
|    Research                    and development                                                  | $      | 3,016,361                                                         | $      | 2,044,391                                                         | $      | 7,128,207                                                                                                                              |
|    General                    and administrative                                                |   | 3,534,597                                                         |   | 2,999,334                                                         |   | 16,729,968                                                                                                                             |
|    Amortization                                                                                 |   | 671,120                                                           |   | 671,120                                                           |   | 2,762,777                                                                                                                              |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Total                    operating loss                                                                        |   | (7,221,585)                                                       |   | (5,711,869)                                                       |   | (26,596,411)                                                                                                                           |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Gain                    on sale of fixed assets                                                                |   | 75                                                                |   | --                                                                |   | 55,075                                                                                                                                 |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Loss                    on extinguishment of debt                                                              |   | --                                                                |   | (724,455)                                                         |   | (825,867)                                                                                                                              |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Investment                    income                                                                           |   | 253,393                                                           |   | --                                                                |   | 253,393                                                                                                                                |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Net                    interest expense                                                                        |   | (1,902,462)                                                       |   | (5,327,529)                                                       |   | (8,086,595)                                                                                                                            |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Net                    loss                                                                                    | $      | (8,870,579)                                                       | $      | (11,763,853)                                                      | $      | (35,200,405)                                                                                                                           |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Basic                    and diluted loss per common share                                                     | $      | (0.23)                                                            | $      | (0.62)                                                            |   |                                                                                                                                   |
|                                                                                                           |   |                                                              |   |                                                              |   |                                                                                                                                   |
| Weighted                    average number of common shares                    outstanding - basic and diluted |   | 37,973,403                                                        |   | 18,825,670                                                        |   |                                                                                                                                   |

----

**PROVECTUS          PHARMACEUTICALS, INC.**

**(A          Development-Stage Company)**

**CONSOLIDATED          STATEMENTS OF STOCKHOLDERS’EQUITY**

|                                                                                                                                                              |    |                                    | **Common                    Stock** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|-----------------------------------------|-------------------------------------|
|                                                                                                                                                              |    | **Number                    of Shares** |                                | **Par                    Value** |   | **Paid                    in capital** |   | **Accumulated                    Deficit** |   | **Total** |
| Balance,                    at January 17 2002                                                                                                                    | $  | --                                      | $                                   | -- | $ | -- | $ | -- | $ | -- |
|                                                                                                                                                              |    |                                    |                                |   |   |   |   |   |   |   |
| Issuance                    to founding shareholders                                                                                                              |    | 6,000,000                               |                                | 6,000 |   | (6,000) |   | -- |   | -- |
| Sale                    of stock                                                                                                                                  |    | 50,000                                  |                                | 50 |   | 24,950 |   | -- |   | 25,000 |
| Issuance                    of stock to employees                                                                                                                 |    | 510,000                                 |                                | 510 |   | 931,490 |   | -- |   | 932,000 |
| Issuance                    of stock for services                                                                                                                 |    | 120,000                                 |                                | 120 |   | 359,880 |   | -- |   | 360,000 |
| Net                    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) | $ | 802 |
|                                                                                                                                                              |    |                                    |                                |   |   |   |   |   |   |   |
| Shares                    issued in reverse merger                                                                                                                |    | 265,763                                 |                                | 266 |   | (3,911) |   | -- |   | (3,645) |
| Issuance                    of stock for services                                                                                                                 |    | 1,900,000                               |                                | 1,900 |   | 5,142,100 |   | -- |   | 5,144,000 |
| Purchase                    and retirement of stock                                                                                                               |    | (400,000)                               |                                | (400) |   | (47,600) |   | -- |   | (48,000) |
| Stock                    issued for acquisition of Valley Pharmaceuticals                                                                                         |    | 500,007                                 |                                | 500 |   | 12,225,820 |   | -- |   | 12,226,320 |
| Exercise                    of warrants                                                                                                                           |    | 452,919                                 |                                | 453 |   | -- |   | -- |   | 453 |
| Warrants                    issued in connection with convertible debt                                                                                            |    | --                                      |                                | -- |   | 126,587 |   | -- |   | 126,587 |
| Stock                    and warrants issued for acquisition of Pure-ific                                                                                         |    | 25,000                                  |                                | 25 |   | 26,975 |   | -- |   | 27,000 |
| Net 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) | $ | 11,723,580 |
|                                                                                                                                                              |    |                                    |                                |   |   |   |   |   |   |   |
| Issuance                    of stock for services                                                                                                                 |    | 764,000                                 |                                | 764 |   | 239,036 |   | -- |   | 239,800 |
| Issuance                    of warrants for services                                                                                                              |    | --                                      |                                | -- |   | 145,479 |   | -- |   | 145,479 |
| Stock                    to be issued for services                                                                                                                |    | --                                      |                                | -- |   | 281,500 |   | -- |   | 281,500 |
| Employee                    compensation from stock options                                                                                                       |    | --                                      |                                | -- |   | 34,659 |   | -- |   | 34,659 |
| Issuance                    of stock pursuant to Regulation S                                                                                                     |    | 679,820                                 |                                | 680 |   | 379,667 |   | -- |   | 380,347 |
| Beneficial                    conversion related to convertible debt                                                                                              |    | --                                      |                                | -- |   | 601,000 |   | -- |   | 601,000 |
| Net                    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 |   | -- |   | 449,923 |
| Issuance                    of warrants for services                                                                                                              |    | --                                      |                                | -- |   | 495,480 |   | -- |   | 495,480 |
| Exercise                    of warrants                                                                                                                           |    | 132,608                                 |                                | 133 |   | 4,867 |   | -- |   | 5,000 |
| Employee                    compensation from stock options                                                                                                       |    | --                                      |                                | -- |   | 15,612 |   | -- |   | 15,612 |
| Issuance                    of stock pursuant to Regulation S                                                                                                     |    | 2,469,723                               |                                | 2,469 |   | 790,668 |   | -- |   | 793,137 |
| Issuance                    of stock pursuant to Regulation D                                                                                                     |    | 1,930,164                               |                                | 1,930 |   | 1,286,930 |   | -- |   | 1,288,861 |
| Beneficial                    conversion related to convertible debt                                                                                              |    | --                                      |                                | -- |   | 360,256 |   | -- |   | 360,256 |
| Issuance                    of convertible debt with warrants                                                                                                     |    | --                                      |                                | -- |   | 105,250 |   | -- |   | 105,250 |
| Repurchase                    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 |   |
|                                                                                                                                                              |    |                                    |                                |   |   |   |   |   |   |   |   |
| Issuance                    of stock for services                                                                                                                 |    | 226,733                                 |                                | 227 |   | 152,058 |   | -- |   | 152,285 |   |
| Issuance                    of stock for interest payable                                                                                                         |    | 263,721                                 |                                | 264 |   | 195,767 |   | -- |   | 196,031 |   |
| Issuance                    of warrants for services                                                                                                              |    | --                                      |                                | -- |   | 1,534,405 |   | -- |   | 1,534,405 |   |
| Issuance                    of warrants for contractual obligations                                                                                               |    | --                                      |                                | -- |   | 985,010 |   | -- |   | 985,010 |   |
| Exercise                    of warrants and stock options                                                                                                         |    | 1,571,849                               |                                | 1,572 |   | 1,438,223 |   | -- |   | 1,439,795 |   |
| Employee                    compensation from stock options                                                                                                       |    | --                                      |                                | -- |   | 15,752 |   | -- |   | 15,752 |   |
| Issuance                    of stock pursuant to Regulation D                                                                                                     |    | 6,221,257                               |                                | 6,221 |   | 6,506,955 |   | -- |   | 6,513,176 |   |
| Debt                    conversion to common stock                                                                                                                |    | 3,405,541                               |                                | 3,405 |   | 3,045,957 |   | -- |   | 3,049,362 |   |
| Issuance                    of warrants with convertible debt                                                                                                     |    | --                                      |                                | -- |   | 1,574,900 |   | -- |   | 1,574,900 |   |
| Beneficial                    conversion related to convertible debt                                                                                              |    | --                                      |                                | -- |   | 1,633,176 |   | -- |   | 1,633,176 |   |
| Beneficial                    conversion related to interest expense                                                                                              |    | --                                      |                                | -- |   | 39,529 |   | -- | 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) | $ | 14,387,141 |   |
|                                                                                                                                                              |    |                                    |                                |   |   |   |   |   |   |   |   |
| Issuance                    of stock for services                                                                                                                 |    | 719,246                                 |                                | 719 |   | 676,024 |   | -- |   | 676,743 |   |
| Issuance                    of stock for interest payable                                                                                                         |    | 194,327                                 |                                | 195 |   | 183,401 |   | -- |   | 183,596 |   |
| Issuance                    of warrants for services                                                                                                              |    | --                                      |                                | -- |   | 370,023 |   | -- |   | 370,023 |   |
| Exercise                    of warrants and stock options                                                                                                         |    | 1,245,809                               |                                | 1,246 |   | 1,188,570 |   | -- |   | 1,189,816 |   |
| Employee                    compensation from stock options                                                                                                       |    | --                                      |                                | -- |   | 1,862,456 |   | -- |   | 1,862,456 |   |
| Issuance                    of stock pursuant to Regulation D                                                                                                     |    | 10,092,495                              |                                | 10,092 |   | 4,120,329 |   | -- |   | 4,130,421 |   |
| Debt                    conversion to common stock                                                                                                                |    | 2,377,512                               |                                | 2,377 |   | 1,573,959 |   | -- |   | 1,576,336 |   |
| Beneficial                    conversion related to interest expense                                                                                              |    | --                                      |                                | -- |   | 16,447 |   | -- |   | 16,447 |   |
| Net                    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) |  $ | 15,522,400 |   |

----

**PROVECTUS        PHARMACEUTICALS, INC.**

**(A        Development-Stage Company)**

**CONSOLIDATED        STATEMENTS OF CASH FLOW**

|                                                                                                         |   | Year                  EndedDecember                  31, 2006 |   | Year                  EndedDecember                  31, 2005 |   |   | CumulativeAmounts                  fromJanuary                  17, 2002(Inception)                  through December                  31, 2006 |   |
|--------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|---------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Cash                  Flows From Operating Activities                                                        |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
|    Net                  loss                                                                  | $      | (8,870,579)                                                   | $      | (11,763,853)                                                  |   | $      | (35,200,405)                                                                                                                                    |   |
| Adjustments                  to reconcile net loss to net cash used in operating                  activities |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
|    Depreciation                                                                               |   | 4,442                                                         |   | 1,708                                                         |   |   | 395,722                                                                                                                                         |   |
|    Amortization                  of patents                                                   |   | 671,120                                                       |   | 671,120                                                       |   |   | 2,762,777                                                                                                                                       |   |
|    Amortization                  of original issue                  discount                  |   | 1,062,098                                                     |   | 2,293,251                                                     |   |   | 3,842,924                                                                                                                                       |   |
|    Amortization                  of commitment fee                                            |   | --                                                            |   | 272,540                                                       |   |   | 310,866                                                                                                                                         |   |
|    Amortization                  of prepaid consultant                  expense               |   | 84,020                                                        |   | 274,337                                                       |   |   | 1,211,207                                                                                                                                       |   |
|    Amortization                  of deferred loan costs                                       |   | 705,379                                                       |   | 1,411,970                                                     |   |   | 2,257,871                                                                                                                                       |   |
|    Accretion                  of United States Treasury                  Bills                |   | (182,198)                                                     |   | --                                                            |   |   | (182,198)                                                                                                                                       |   |
|    Loss                  on extinguishment of debt                                            |   | --                                                            |   | 724,455                                                       |   |   | 825,867                                                                                                                                         |   |
|    Loss                  on exercise of warrants                                              |   | --                                                            |   | 236,146                                                       |   |   | 236,146                                                                                                                                         |   |
|    Beneficial                  conversion of convertible                  interest            |   | 16,447                                                        |   | 39,529                                                        |   |   | 55,976                                                                                                                                          |   |
|    Convertible                  interest                                                      |   | 122,188                                                       |   | 266,504                                                       |   |   | 388,692                                                                                                                                         |   |
|    Compensation                  through issuance of stock                  options           |   | 1,862,456                                                     |   | 15,752                                                        |   |   | 1,928,479                                                                                                                                       |   |
|    Compensation                  through issuance of                  stock                   |   | --                                                            |   | --                                                            |   |   | 932,000                                                                                                                                         |   |
|    Issuance                  of stock for services                                            |   | 26,100                                                        |   | 388,373                                                       |   |   | 5,995,031                                                                                                                                       |   |
|    Issuance                  of warrants for services                                         |   | 201,984                                                       |   | 318,704                                                       |   |   | 543,169                                                                                                                                         |   |
|    Issuance                  of warrants for contractual                  obligations         |   | --                                                            |   | 985,010                                                       |   |   | 985,010                                                                                                                                         |   |
|    Gain                  on sale of equipment                                                 |   | (75)                                                          |   | --                                                            |   |   | (55,075)                                                                                                                                        |   |
|    (Increase)                  decrease in assets                                             |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
|    Prepaid                  expenses and other current                  assets                |   | (21,712)                                                      |   | 46,762                                                        |   |   | (89,674)                                                                                                                                        |   |
|    Increase                  (decrease) in liabilities                                        |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
|    Accounts                  payable                                                          |   | (25,189)                                                      |   | (64,090)                                                      |   |   | 61,290                                                                                                                                          |   |
|    Accrued                  expenses                                                          |   | 68,743                                                        |   | 98,196                                                        |   |   | 533,226                                                                                                                                         |   |
|                                                                                                         |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
| Net                  cash used in operating activities                                                       |   | (4,274,776)                                                   |   | (3,783,586)                                                   |   |   | (12,261,099)                                                                                                                                    |   |
|                                                                                                         |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
| Cash                  Flows From Investing Activities                                                        |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
|    Proceeds                  from sale of fixed asset                                         |   | 75                                                            |   | --                                                            |   |   | 180,075                                                                                                                                         |   |
|    Capital                  expenditures                                                      |   | (22,230)                                                      |   | (13,995)                                                      |   |   | (39,922)                                                                                                                                        |   |
|    Proceeds                  from investments                                                 |   | 11,000,000                                                    |   | --                                                            |   |   | 11,000,000                                                                                                                                      |   |
|    Purchase                  of investments                                                   |   | (17,316,836)                                                  |   | --                                                            |   |   | (17,316,836)                                                                                                                                    |   |
|                                                                                                         |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
| Net                  cash used in investing activities                                                       |   | (6,338,991)                                                   |   | (13,995)                                                      |   |   | (6,176,683)                                                                                                                                     |   |
|                                                                                                         |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
| Cash                  Flows From Financing Activities                                                        |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
|    Net                  proceeds from loans from                  stockholder                 |   | --                                                            |   | 25,000                                                        |   |   | 174,000                                                                                                                                         |   |
|    Proceeds                  from convertible debt                                            |   | --                                                            |   | 4,430,836                                                     |   |   | 6,706,795                                                                                                                                       |   |
|    Net                  proceeds from sale of common                  stock                   |   | 3,183,295                                                     |   | 7,477,853                                                     |   |   | 13,148,493                                                                                                                                      |   |
|    Proceeds                  from exercise of warrants and stock                  options     |   | 1,189,816                                                     |   | 1,203,649                                                     |   |   | 2,398,918                                                                                                                                       |   |
|    Cash                  paid to retire convertible                  debt                     |   | --                                                            |   | (1,885,959)                                                   |   |   | (2,385,959)                                                                                                                                     |   |
|    Cash                  paid for deferred loan costs                                         |   | --                                                            |   | (515,582)                                                     |   |   | (747,612)                                                                                                                                       |   |
|    Premium                  paid on extinguishments of                  debt                  |   | --                                                            |   | (70,000)                                                      |   |   | (170,519)                                                                                                                                       |   |
|    Purchase                  and retirement of common                  stock                  |   | --                                                            |   | --                                                            |   |   | (48,000)                                                                                                                                        |   |
|                                                                                                         |   |                                                          |   |                                                          |   |   |                                                                                                                                            |   |
| Net                  cash provided by financing activities                                                   |   | 4,373,111                                                     |   | 10,665,797                                                    |   |   | 19,076,116                                                                                                                                      |   |

----

|                                                                                                    |   | Year                  EndedDecember                  31, 2006 |   |  Year                  EndedDecember                  31, 2005 |   | CumulativeAmounts                  fromJanuary                  17, 2002(Inception)                  through December 31, 2006 |   |
|---------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                    |   |                                                          |   |                                                                |   |                                                                                                                           |   |
| Net                  change in cash and cash equivalents                                                | $      | (6,240,656)                                                   | $      | 6,868,216                                                           | $      | 638,334                                                                                                                        |   |
|                                                                                                    |   |                                                          |   |                                                                |   |                                                                                                                           |   |
| Cash                  and cash equivalents, at beginning of period                                      | $      | 6,878,990                                                     | $      | 10,774                                                              | $      | --                                                                                                                             |   |
|                                                                                                    |   |                                                          |   |                                                                |   |                                                                                                                           |   |
| Cash                  and cash equivalents, at end of period                                            | $      | 638,334                                                       | $      | 6,878,990                                                           | $      | 638,334                                                                                                                        |   |
|                                                                                                    |   |                                                          |   |                                                                |   |                                                                                                                           |   |
| Supplemental                  Disclosure of Cash Flow Information                                       |   |                                                          |   |                                                                |   |                                                                                                                           |   |
|                                                                                                    |   |                                                          |   |                                                                |   |                                                                                                                           |   |
| December                  31, 2005                                                                      |   |                                                          |   |                                                                |   |                                                                                                                           |   |
| Interest                  paid of $127,444                                                              |   |                                                          |   |                                                                |   |                                                                                                                           |   |
|                                                                                                    |   |                                                          |   |                                                                |   |                                                                                                                           |   |
| Supplemental                  Disclosure of Noncash Investing and Financing                  Activities |   |                                                          |   |

----

----

----

|                                                                                                                                                                |   | Year                  ended December 31, 2005 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|
|                                                                                                                                                                |   |                                          |
| Net                  loss, as reported                                                                                                                              |   | $(11,763,853)                                 |
| Add                  stock-based employee compensation expense included in                  reported loss                                                           |   | 15,752                                        |
| Less                  total stock-based employee compensation expense determined                  under the fair value                  based method for all awards |   | (791,111)                                     |
|                                                                                                                                                                |   |                                          |
| Pro                  forma net loss                                                                                                                                 |   | $(12,539,212)                                 |
|                                                                                                                                                                |   |                                          |
| Basic                  and diluted loss per common share, as reported                                                                                               |   | $(0.62)                                       |
| Basic                  and diluted loss per common share, pro forma                                                                                                 |   | $(0.67)                                       |

----

*Accounting for Servicing of Financial Assets**Accounting for Transfers and Servicing of        Financial Assets and Extinguishments of Liabilities*

*Accounting for Uncertainty in Income Taxes: an Interpretation of FASB        Statement No. 109**Accounting for Income Taxes*

*Fair Value Measurements,”*

*Employers’Accounting for Defined Benefit Pension and Postretirement Plans: an        amendment of        FASB Statements No. 87, 88, 106, and 132(R)*

*The Fair Value        Option for Financial Assets and Financial Liabilities—Including an amendment of        FASB Statement No. 115,” **Fair Value Measurements.” *

----

----

----

----

----

----

|                                                                                                               | **2006**                     | **2005** |
|--------------------------------------------------------------------------------------------------------------------|------------------------------|----------|
| Weighted                  average fair value per options granted                                                   | $0.96                        | $0.66    |
| Significant                  assumptions (weighted average) risk-free interest                  rate at grant date | 4.0%                  - 5.0% | 4.0%     |
| Expected                  stock price volatility                                                                   | 116%                  - 130% | 130%     |
| Expected                  option life (years)                                                                      | 10                           | 10       |

----

|                                                      | **Shares** | **Exercise                  Price****Per                  Share** | **Weighted                  Average Exercise Price** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------|------------------------------------------------------|
|                                                      |       |                                                              |                                                 |
| Outstanding                  at January 1, 2005           | 1,725,000  | $0.32                  - 1.25                                     | $0.97                                                |
| Granted                                                   | 3,275,000  | $0.64                  - 0.94                                     | $0.75                                                |
| Exercised                                                 | (26,516)   | $                  1.10                                           | $1.10                                                |
| Forfeited                                                 | --         | --                                                                | --                                                   |
|                                                      |       |                                                              |                                                 |
| Outstanding                  at December 31, 2005         | 4,973,484  | $0.32                  - 1.25                                     | $0.83                                                |
|                                                      |       |                                                              |                                                 |
| Options                  exercisable at December 31, 2005 | 1,017,234  | $0.32                  - 1.25                                     | $0.88                                                |
|                                                      |       |                                                              |                                                 |
| Outstanding                  at January 1, 2006           | 4,973,484  | $0.32                  - 1.25                                     | $0.83                                                |
| Granted                                                   | 4,200,000  | $                  1.02                                           | $1.02                                                |
| Exercised                                                 | (158,770)  | $0.32                  - 1.10                                     | $1.02                                                |
| Forfeited                                                 | --         | --                                                                | --                                                   |
|                                                      |       |                                                              |                                                 |
| Outstanding                  at December 31, 2006         | 9,014,714  | $0.32                  - 1.25                                     | $0.91                                                |
|                                                      |       |                                                              |                                                 |
| Options                  exercisable at December 31, 2006 | 2,406,378  | $0.32                  - 1.25                                     | $0.86                                                |
|                                                      |       |                                                              |                                                 |

| **Exercise                  Price** | **Number                  Outstanding at December 31,                  2006** | **Weighted                  Average Remaining contractual                  Life** | **Outstanding                  Weighted Average Exercise                  price** | **Number                  Exercisable at December 31,                  2006** | **Exercisable                  Weighted Average Exercise                  Price** |
|-------------------------------------|-------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|-------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|
|                                |                                                                          |                                                                              |                                                                              |                                                                          |                                                                              |
| $0.32                               | 209,375                                                                       | 6.58                  years                                                       | $0.32                                                                             | 209,375                                                                       | $0.32                                                                             |
| $0.60                               | 100,000                                                                       | 6.58                  years                                                       | $0.60                                                                             | 100,000                                                                       | $0.60                                                                             |
| $1.10                               | 1,030,339                                                                     | 7.17                  years                                                       | $1.10                                                                             | 655,339                                                                       | $1.10                                                                             |
| $0.95                               | 100,000                                                                       | 7.42                  years                                                       | $0.95                                                                             | 100,000                                                                       | $0.95                                                                             |
| $1.25                               | 100,000                                                                       | 7.50                  years                                                       | $1.25                                                                             | 75,000                                                                        | $1.25                                                                             |
| $0.64                               | 1,200,000                                                                     | 8.00                  years                                                       | $0.64                                                                             | 300,000                                                                       | $0.64                                                                             |
| $0.75                               | 1,300,000                                                                     | 8.42                  years                                                       | $0.75                                                                             | 500,000                                                                       | $0.75                                                                             |
| $0.94                               | 775,000                                                                       | 8.92                  years                                                       | $0.94                                                                             | 266,664                                                                       | $0.94                                                                             |
| $1.02                               | 4,200,000                                                                     | 9.50                  years                                                       | $1.02                                                                             | 200,000                                                                       | $1.02                                                                             |
|                                | 9,014,714                                                                     | 8.68                  years                                                       | $0.91                                                                             | 2,406,378                                                                     | $0.86                                                                             |

| The                  following is a summary of nonvested stock option activity                  for the year ended December 31, 2006: |
|---------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                  |   |   |   | **Weighted                  Average** | ** ** |
| ** **                                                                                                                            | ** ** | **Number                  of Shares** | ** ** | **Grant-Date                  Fair Value** |   |
|                                                                                                                                  |   |   |   |   |   |
| Nonvested                  at December 31, 2005                                                                                       |   | 3,956,250 |   | $                  0.75 |   |
| Granted                                                                                                                               |   | 4,200,000 |   | $                  0.96 |   |
| Vested                                                                                                                                |   | (1,547,914) |   | $                  0.80 |   |
| Canceled                                                                                                                              |   | -- |   | -- |   |
| Nonvested                  at December 31, 2006                                                                                       |   | 6,608,336 |   | $                  0.87 |   |

----

|                                              |       |                                  |       | **Aggregate**                        | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **Number                  of Shares** | ** ** | **Intrinsic                  Value** |       |
|                                              |       |                                  |       |                                 |       |
| Outstanding                  at December 31, 2006 |       | 9,014,714                             |       | $                  2,491,637         |       |
|                                              |       |                                  |       |                                 |       |
| Exercisable                  at December 31, 2006 |       | 2,406,378                             |       | $                  805,303           |       |
|                                              |       |                                  |       |                                 |       |

|                                                       | **Warrants** | **Exercise                  Price****Per                  Warrant** | **Weighted                  Average Exercise Price** |
|------------------------------------------------------------|--------------|---------------------------------------------------------------------|------------------------------------------------------|
|                                                       |         |                                                                |                                                 |
| Outstanding                  at January 1, 2005            | 4,092,393    | $0.50                  - 1.25                                       | $0.99                                                |
| Granted                                                    | 26,179,565   | $0.50                  - 1.25                                       | $0.95                                                |
| Exercised                                                  | (1,545,333)  | $0.75                  - 1.00                                       | $0.76                                                |
| Forfeited                                                  | (1,894,667)  | $0.90                  - 1.00                                       | $0.92                                                |
|                                                       |         |                                                                |                                                 |
| Outstanding                  at December 31, 2005          | 26,831,958   | $0.50                  - 1.25                                       | $0.96                                                |
|                                                       |         |                                                                |                                                 |
| Warrants                  exercisable at December 31, 2005 | 26,831,958   | $0.50                  - 1.25                                       | $0.96                                                |
|                                                       |         |                                                                |                                                 |
| Outstanding                  at January 1, 2006            | 26,831,958   | $0.50                  - 1.25                                       | $0.96                                                |
| Granted                                                    | 1,023,657    | $0.75                  - 2.16                                       | $0.99                                                |
| Exercised                                                  | (1,092,534)  | $0.50                  - 1.00                                       | $0.94                                                |
| Forfeited                                                  | (100,000)    | $1.25                                                               | $1.25                                                |
|                                                       |         |                                                                |                                                 |
| Outstanding                  at December 31, 2006          | 26,663,081   | $0.50                  - 2.16                                       | $0.96                                                |
|                                                       |         |                                                                |                                                 |
| Warrants                  exercisable at December 31, 2006 | 26,663,081   | $0.50                  - 2.16                                       | $0.96                                                |

| **Exercise                  Price** | **Number                  Outstanding and Exercisable at December 31,                  2006** | **Weighted                  Average Remaining Contractual                  Life** | **Weighted                  Average Exercise Price** |
|-------------------------------------|-----------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|------------------------------------------------------|
|                                |                                                                                          |                                                                              |                                                 |
| $0.50                               | 10,000                                                                                        | 0.92                                                                              | $0.50                                                |
| $0.75                               | 664,275                                                                                       | 1.25                                                                              | $0.75                                                |
| $0.935                              | 17,934,939                                                                                    | 3.78                                                                              | $0.935                                               |
| $0.94                               | 20,000                                                                                        | 0.25                                                                              | $0.94                                                |
| $0.98                               | 525,000                                                                                       | 3.25                                                                              | $0.98                                                |
| $1.00                               | 6,482,043                                                                                     | 2.37                                                                              | $1.00                                                |
| $1.23                               | 275,000                                                                                       | 3.23                                                                              | $1.23                                                |
| $1.25                               | 675,000                                                                                       | 3.58                                                                              | $1.25                                                |
| $2.125                              | 55,147                                                                                        | 2.38                                                                              | $2.125                                               |
| $2.16                               | 21,677                                                                                        | 2.38                                                                              | $2.16                                                |
|                                | 26,663,081                                                                                    | 3.34                                                                              | $0.96                                                |

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| **Years                  Ended December 31,** | **2006**                                                                                                  |       | **2005** |
|-----------------------------------------------|-----------------------------------------------------------------------------------------------------------|------------|----------|
|                                          |                                                                                                      | **Amount** | **%**    |   | **Amount** | **%** |
| Federal                  statutory rate       | $                  (3,016,000)                                                                            | (34.0)     |     | $                  (3,894,000) | (34.0) |
|                                          | Adjustment                  to valuation allowance                                                        | 2,832,000  | 31.9     |   | 3,412,000 | 29.8 |
|                                          | Non-deductible                  financing costs                                                           | 184,000    | 2.1      |   | 475,000 | 4.1 |
|                                          | Other                                                                                                     | --         | --       |   | 7,000 | 0.1 |
|                                          |                                                                                                      |       |     |   |   |   |
| Actual                  tax benefit           | $                 -- | --         |     | $                                 -- | -- |

| **December                  31,**                                          | **2006**                                                                                                                          | **2005**                                                                                                        |
|----------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------|
|                                                                       |                                                                                                                              |                                                                                                            |   |
| Deferred                  tax assets                                       |                                                                                                                              |                                                                                                            |
|                                                                       | Net                  operating loss carryforwards                                                                                 | $   5,794,000                                                                                    | $   4,126,000 |
|                                                                       | Stock                  compensation                                                                                               | 633,000                                                                                                         | -- |
|                                                                       | Warrants                  for services                                                                                            | 1,472,000                                                                                                       | 1,169,000 |
| Deferred                  tax asset                                        | 7,899,000                                                                                                                         | 5,295,000                                                                                                       |
|                                                                       |                                                                                                                              |                                                                                                            |   |
| Deferred                tax liability                - patent amortization | (3,044,000)                                                                                                                       |  (3,272,000)                                                                                               |
| Valuation                  allowance                                       | (4,855,000)                                                                                                                       | (2,023,000)                                                                                                     |
| Net                  deferred taxes                                   | $                                                   -- | $                                 -- |

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**EXHIBIT        INDEX**

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