United
States


Securities
And Exchange Commission


Washington,
DC 20549





FORM
10-KSB


(Mark
One)





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





For
the fiscal year ended December 31, 2007; OR





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





For
the transition period from __________ to _______________





Commission
file number: 0-9410





Provectus
Pharmaceuticals, Inc.


(Name of
Small Business Issuer in Its Charter)





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


(Issuer's
Telephone Number, Including Area Code)





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


(Title of
Class)





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


Common shares, par value
$.001 per share


(Title
of Class)





Check whether the issuer is not
required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
o


Note -
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under
those Sections.





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




Check
if there is no disclosure  of  delinquent  filers
in response to Item 405
of  Regulation  S-B  contained  in  this  form,  and
no  disclosure  will be contained,  to
the  best
of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. x




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





The issuer’s revenues for the most recent fiscal year were $0.





The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the registrant as
of March 13, 2008, was $28.1 million (computed on the basis of $1.00 per
share).





The number of shares outstanding of the issuer's stock, $0.001 par value per
share, as of March 13, 2008 was 49,696,294.





Documents incorporated by reference in Part III hereof: Proxy Statement for 2008
Annual Meeting of Stockholders.





Transitional
Small Business Disclosure Format (check one): Yes o No x








Provectus
Pharmaceuticals, Inc.


Annual
Report on Form 10-KSB




Table
of Contents


PagePart
      IItem
      1A.
              Risk
      Factors
      .......................................................................................................................................................................................................................
            1Item
      1B.
              Unresolved
      Staff Comments............................................................................................................................................................................................
            6Item
      1.    Description of
      Business.........................................................................................................................................................................................
            7HistoryDescription
      Of BusinessIntellectual
      PropertyCompetitionFederal
      Regulation of Therapeutic ProductsPersonnelAvailable
      InformationItem
      2.    Description of Property  
      .......................................................................................................................................................................................
            19Item
      3.    Legal Proceedings  
      ................................................................................................................................................................................................
            19Item
      4.    Submission of Matters to a Vote of Security
      Holders.......................................................................................................................................
            19Part
      IIItem
      5.    Market for Common Equity and Related Stockholder
      Matters ....................................................................................................................
            20Item
      6.    Management's Discussion and Analysis or Plan of
      Operation.......................................................................................................................
            21Plan
      of OperationItem
      7.    Financial
      Statements..............................................................................................................................................................................................
            25Forward-Looking
      Statements..........................................................................................................................................................................................
            25Item
      8.    Changes in and Disagreements with Accountants on
      Accounting and Financial
      Disclosure..................................................................
            25Item
      8A(T).   Controls and
      Procedures............................................................................................................................................................................
            25Item
      8B.   Other
      Information..................................................................................................................................................................................................
            25Part
      IIIItem
      9.    Directors, Executive Officers, Promoters and
      Control Persons; Compliance with Section 16(a) of theExchange Act 
      ........................
            26Item
      10.   Executive Compensation 
      ....................................................................................................................................................................................
            26Item
      11.   Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder
      Matters................................................
            26Item
      12.   Certain Relationships and Related Transactions 
      ...........................................................................................................................................
            26Item
      13.   Exhibits 
      ..................................................................................................................................................................................................................
            26Item
      14.   Principal Accountant Fees and Services 
      .........................................................................................................................................................
            26Signatures 
      ..............................................................................................................................................................................................................................
            27Financial
      Statements 
      ............................................................................................................................................................................................................
            29Exhibit
      Index  
      .........................................................................................................................................................................................................................
            53





PART
I





Item
1A.  Risk Factors.





Risk
Factors





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




Our technologies are in early stages
of development.




We
generated minimal initial revenues from sales and operations in 2006 and 2005,
and we do not expect to generate revenues to enable us to be profitable for
several calendar quarters unless we sell and/or license our technologies. We
must raise substantial additional funds beyond 2008 in order to fully implement
our integrated business plan, including execution of the next phases in clinical
development of our pharmaceutical products. We estimate that our existing
capital resources will be sufficient to fund our current and planned
operations.




Ultimately,
we must achieve profitable operations if we are to be a viable entity, unless we
are acquired by another company. We intend to proceed as rapidly as possible
with the asset sale and licensure of OTC products that can be sold with a
minimum of regulatory compliance and with the development of revenue sources
through licensing of our existing intellectual property portfolio. We cannot
assure you that we will be able to raise sufficient capital to sustain
operations beyond 2008 before we can commence revenue generation or that we will
be able to achieve or maintain a level of profitability sufficient to meet our
operating expenses.




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




We
estimate that our existing capital resources will be sufficient to fund our
current and planned operations through 2008; however, we may need additional
capital. We have based this estimate on assumptions that may prove to be wrong,
and we cannot assure that estimates and assumptions will remain unchanged. For
example, we are currently assuming that we will continue to operate without any
significant staff or other resources expansion. We intend to acquire additional
funding through public or private equity financings or other financing sources
that may be available. Additional financing may not be available on acceptable
terms, or at all. As discussed in more detail below, additional equity financing
could result in significant dilution to stockholders. Further, in the event that
additional funds are obtained through licensing or other arrangements, these
arrangements may require us to relinquish rights to some of our technologies,
product candidates or products that we would otherwise seek to develop and
commercialize ourselves. If sufficient capital is not available, we may be
required to delay, reduce the scope of, or eliminate one or more of our
programs, any of which could have a material adverse effect on our business and
may impair the value of our patents and other intangible assets.




Existing stockholders may face
dilution from our financing efforts.




We must
raise additional capital from external sources to execute our business plan
beyond 2008. We plan to issue debt securities, capital stock, or a combination
of these securities, if necessary. We may not be able to sell these securities,
particularly under current market conditions. Even if we are successful in
finding buyers for our securities, the buyers could demand high interest rates
or require us to agree to onerous operating covenants, which could in turn harm
our ability to operate our business by reducing our cash flow and restricting
our operating activities. If we were to sell our capital stock, we might be
forced to sell shares at a depressed market price, which could result in
substantial dilution to our existing shareholders. In addition, any shares of
capital stock we may issue may have rights, privileges, and preferences superior
to those of our common shareholders.




1


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.


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




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




·
            a
      product may fail to receive necessary regulatory
  clearance;




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




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




·
            a
      product may not achieve broad market
acceptance;




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




·
            others
      may market equivalent or superior
products.




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




Our OTC products are at an early
stage of introduction, and we cannot be sure that they will be sold through a
combination of asset sale and licensure in the marketplace or that we will have
adequate capital to further develop these products, if we decide to do
so.




We have
previously focused on marketing Pure-ific, one of our OTC products, on a limited
basis to establish proof of concept, which we believe we have accomplished. We
have recognized minimal revenue from this product, as the sales of this product
have not been material. In order for this product, and our other OTC products,
to become commercially successful, unless we license and/or sell the underlying
assets, we must increase significantly our distribution of them which we do not
plan to do.




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




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




2


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




·
            research
      and development;




·
            manufacturing;




·
            preclinical
      and clinical testing;




·
            obtaining
      regulatory approvals; and




·
            marketing.




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




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




·
            product
      efficacy and safety;




·
            the
      timing and scope of regulatory
consents;




·
            availability
      of resources;




·
            reimbursement
      coverage;




·
            price;
      and




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




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




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




Our OTC
product Pure-ific competes in the market with other hand sanitizing products,
including in particular, the following hand sanitizers:




·
            Purell
      (owned by Johnson & Johnson);




·
            Avagard
      D (manufactured by 3M); and




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




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




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


3




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




We may
not be successful in securing or maintaining proprietary patent protection for
our products and technologies we develop or license. In addition, our
competitors may develop products similar to ours using methods and technologies
that are beyond the scope of our intellectual property protection, which could
reduce our anticipated sales. While some of our products have proprietary patent
protection, a challenge to these patents can be subject to expensive litigation.
Litigation concerning patents, other forms of intellectual property, and
proprietary technology is becoming more widespread and can be protracted and
expensive and can distract management and other personnel from performing their
duties.




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




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




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




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




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




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




Our
business is presently managed by four key employees:




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




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




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




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




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




4


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




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




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




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




·
            Marketing
      and selling developed products;




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




·
            Managing
      our business as it grows.




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




Our common stock price can be
volatile because of several factors, including a limited public float, which has
increased significantly from 2005 to 2007.




During
the year ended December 31, 2007, the sale price of our common stock fluctuated
from $1.04 to $3.07 per share. We believe that our common stock is subject to
wide price fluctuations because of several factors, including:




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




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




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




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




Financings
that may be available to us under current market conditions frequently involve
sales at prices below the prices at which our common stock trades on the OTC
Bulletin Board, as well as the issuance of warrants or convertible debt that
require exercise or conversion prices that are calculated in the future at a
discount to the then market price of our common stock.




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




5




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




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




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




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




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




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




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




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




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




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




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




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




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




Sales of our common stock in the public market following this offering could
lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at
all.





Item
1B.  Unresolved Staff Comments.




None.





6





Item
1.  Description of Business.





History





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





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





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





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





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





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





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





Overview




Provectus,
and its seven wholly owned subsidiaries:




·  Xantech
Pharmaceuticals, Inc.;




·  Pure-ific
Corporation;




·  Provectus
Biotech, Inc.;




·  Provectus
Devicetech, Inc.;




·  Provectus
Imaging, Inc.;




·  IP Tech,
Inc.; and




·  Provectus
Pharmatech, Inc.




7




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




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




·
            Prescription
      drugs; and




·
            Medical
      device systems.




We manage
Provectus and our subsidiaries on an integrated basis and when we refer to “we”
or “us” or “the company” in this Prospectus, we refer to all eight corporations
considered as a single unit. Our principal executive offices are located at 7327
Oak Ridge Highway, Suite A, Knoxville, Tennessee 37931, telephone (865)
769-4011.




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




·
            treatment
      of cancer;




·
            novel
      therapeutic medical devices;




·
            enhancing
      contrast in medical imaging;




·
            improving
      signal processing during biomedical imaging;
and




·
            enhancing
      production of biotechnology
products.




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




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








8


Over-the-Counter
Pharmaceuticals




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




·
            hand
      irritation associated with use of disposable
  gloves;




·
            eczema;
      and




·
            mild
      to moderate acne.




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




GloveAid




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




·
            Airport
      security personnel;




·
            Food
      handling and preparation personnel;




·
            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.




Accompanying
the increased use of disposable gloves is a mounting incidence of chronic skin
irritation. To address this market, we have developed GloveAid, a hand cream
with both antiperspirant and antibacterial properties, to increase the comfort
of users’ hands during and after the wearing of disposable gloves. During 2003,
we ran a pilot scale run at the manufacturer of GloveAid. We now intend to
license this product to a third party with experience in the institutional sales
market.




Pure-ific




Our
Pure-ific line of products includes two quick-drying sprays, Pure-ific and
Pure-ific Kids, that immediately kill up to 99.9% of germs on skin and prevent
regrowth for 6 hours. We have determined the effectiveness of Pure-ific based on
our internal testing and testing performed by Paratus Laboratories H.B., an
independent research lab. Pure-ific products help prevent the spread of germs
and thus complement our other OTC products designed to treat irritated skin or
skin conditions such as acne, eczema, dandruff and fungal infections. Our
Pure-ific sprays have been designed with convenience in mind and are targeted
towards mothers, travelers, and anyone concerned about the spread of
sickness-causing germs. During 2003 and 2004, we identified and engaged sales
and brokerage forces for Pure-ific. We emphasized getting sales in independent
pharmacies and mass (chain store) markets. The supply chain for Pure-ific was
established with the ability to support large-scale sales and a starting
inventory was manufactured and stored in a contract warehouse/fulfillment
center. In addition, a website for Pure-ific was developed with the ability for
supporting online sales of the antibacterial hand spray. During 2005 and 2006,
most of our sales were generated from customers accessing our website for
Pure-ific and making purchases online. We now intend to license the Pure-ific
product and sell the underlying assets.




9


Acne




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




Prescription
Drugs




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




Dermatology




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




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




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




10


Actinic Keratosis.
According to Schwartz and Stoll (Fitzpatrick’s Dermatology in General Medicine,
1999), actinic keratosis, or “AK” (also called solar keratosis or senile
keratosis), is the most common pre-cancerous skin lesion among fair-skinned
people and is estimated to occur in over 50% of elderly fair-skinned persons
living in sunny climates. These experts note that nearly half of the
approximately five million cases of skin cancer in the U.S. may have begun as
AK. The standard treatments for AK (primarily comprising excision, cryotherapy,
and ablation with topical 5-fluorouracil) are often painful and frequently yield
unacceptable cosmetic outcomes due to scarring. Building on our experience with
psoriasis, we are assessing the use of PH-10 with green-light activation as a
possible improvement in treatment of early and more advanced stages of AK. We
completed an initial Phase 1 clinical trial of the therapy for this indication
in 2001 with the predecessor company that was acquired in 2002. This study,
involving 24 subjects, examined the safety profile of a single treatment using
topical PH-10 with green light photoactivation and no significant safety
concerns were identified. We have decided to prioritize further clinical
development of PH-10 for treatment of psoriasis and eczema rather than AK at
this time since the market is much larger for psoriasis and eczema.




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




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




Oncology




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




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




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




11


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




Metastatic Melanoma.
Melanoma is expected to strike 60,000 people in the U.S. this year, leading to
8,100 deaths. The incidence of melanoma in Australia, where our expanded Phase 2
clinical study is currently underway, is up to 5X that of the U.S. There have
been no significant advances in the treatment of melanoma for approximately 30
years. We are continuing Phase 2 clinical studies in both Australia and the U.S.
of direct injection of PV-10 into melanoma lesions and we completed the expanded
Phase 1 clinical studies of our indication for PV-10 in Stage 3 and Stage 4
metastatic melanoma.




Medical
Devices




We have
medical device technologies to address two major markets:




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




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




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




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




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




12


Research
and Development




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




Production




We have
determined that the most efficient use of our capital in further developing our
OTC products is to license the products and sell the underlying assets for
upfront cash consideration.




Sales




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




We have
commenced limited sales of Pure-ific, our antibacterial hand spray. We sold
small amounts of this product during 2004, 2005 and 2006.  There were no
sales in 2007.  We will continue to seek additional markets for our
products through existing distributorships that market and distribute medical
products, ethical pharmaceuticals, and OTC products for the professional and
consumer marketplaces through licensure, partnership and asset sale
arrangements, and through potential merger and acquisition candidates.




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








13


Intellectual
Property




Patents




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




U.S.
      Patent No
            Title
            Issue
      Date
            Expiration
      Date5,829,448
            Method
      for improved selectivity in -activation of molecular
agents
            November
      3, 1998
            October
      30, 20165,832,931
            Method
      for improved selectivity in photo-activation and detection of  
      diagnostic agents
            November
      10, 1998
            October
      30, 20165,998,597
            Method
      for improved selectivity in -activation of molecular
agents
            December
      7, 1999
            October
      30, 20166,042,603
            Method
      for improved selectivity in photo-activation of molecular
      agents
            March
      28, 2000
            October
      30, 20166,331,286
            Methods
      for high energy phototherapeutics
            December
      18, 2001
            December
      21, 20186,451,597
            Method
      for enhanced protein stabilization and for production of cell lines useful
      production of such stabilized proteins
            September
      17, 2002
            April
      6, 20206,468,777
            Method
      for enhanced protein stabilization and for production of cell lines useful
      production of such stabilized proteins
            October
      22, 2002
            April
      6, 20206,493,570
            Method
      for improved imaging and photodynamic therapy
            December
      10, 2002
            December
      10, 20196,495,360
            Method
      for enhanced protein stabilization for production of cell lines useful
      production of such stabilized proteins
            December
      17, 2002
            April
      6, 20206,519,076
            Methods
      and apparatus for optical imaging
            February
      11, 2003
            October
      30, 20166,525,862
            Methods
      and apparatus for optical imaging
            February
      25, 2003
            October
      30, 20166,541,223
            Method
      for enhanced protein stabilization and for production of cell lines useful
      production of such stabilized proteins
            April
      1, 2003
            April
      6, 20206,986,740
            Ultrasound
      contrast using halogenated xanthenes
            January
      17, 2006
            September
      9, 20236,991,776
            Improved
      intracorporeal medicaments for high energy phototherapeutic treatment of
      disease
            January
      31, 2006
            May
      5, 20237,036,516
            Treatment
      of pigmented tissues using optical energy
            May
      2, 2006
            January
      28, 20207,201,914
            Combination
      antiperspirant and antimicrobial compositions
            April
      10, 2007
            May
      15, 2024




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




Trademarks




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




Material
Transfer Agreement




We have
entered into a Material Transfer Agreement dated as of July 31, 2003 with
Schering-Plough Animal Health Corporation, which we refer to as “SPAH”, the
animal-health subsidiary of Schering-Plough Corporation, a major international
pharmaceutical company. This Material Transfer Agreement is still in effect. We
refer to this agreement in this report as the “Material Transfer Agreement.”
Under the Material Transfer Agreement, we will provide SPAH with access to some
of our patented technologies to permit SPAH to evaluate those technologies for
use in animal-health applications. If SPAH determines that it can commercialize
our technologies, then the Material Transfer Agreement obligates us and SPAH to
enter into a license agreement providing for us to license those technologies to
SPAH in exchange for progress payments upon the achievement of goals. The
Material Transfer Agreement covers four U.S. patents that cover biological
material manufacturing technologies (i.e., biotech related). The Material
Transfer Agreement continues indefinitely, unless SPAH terminates it by giving
us notice or determines that it does not wish to secure from us a license for
our technologies. The Material Transfer Agreement can also be terminated by
either of us in the event the other party breaches the agreement and does not
cure the breach within 30 days of notice from the other party. We can give you
no assurance that SPAH will determine that it can commercialize our technologies
or that the goals required for us to obtain progress payments from SPAH will be
achieved.




14


Competition




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




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




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




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




Federal
Regulation of Therapeutic Products




All of
the prescription drugs and medical devices we currently contemplate developing
will require approval by the FDA prior to sales within the United States and by
comparable foreign agencies prior to sales outside the United States. The FDA
and comparable regulatory agencies impose substantial requirements on the
manufacturing and marketing of pharmaceutical products and medical devices.
These agencies and other entities extensively regulate, among other things,
research and development activities and the testing, manufacturing, quality
control, safety, effectiveness, labeling, storage, record keeping, approval,
advertising and promotion of our proposed products. While we attempt to minimize
and avoid significant regulatory bars when formulating our products, some degree
of regulation from these regulatory agencies is unavoidable. Some of the things
we do to attempt to minimize and avoid significant regulatory bars include the
following:




·
            Using
      chemicals and combinations already allowed by the
  FDA;




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




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




·
            Using
      chemical compounds with known safety profiles;
  and




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




15


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




·
            Preclinical
      laboratory and animal testing;




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




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




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




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




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




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




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




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




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




16


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




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




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




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




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




Employees




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





17


Personnel





Our
executive officers and directors are:




H. Craig
Dees, Ph.D., 56, has served as our Chief Executive Officer and as a member of
our Board of Directors since we acquired PPI, a privately held Tennessee
Corporation on April 23, 2002. Before joining us, from 1997 to 2002 he served as
senior member of the management team of Photogen Technologies, Inc., including
serving as a member of the Board of Directors of Photogen from 1997 to 2000.
Prior to joining Photogen, Dr. Dees served as a Group Leader at the Oak Ridge
National Laboratory and as a senior member of the management teams of LipoGen
Inc., a medical diagnostic company which used genetic engineering technologies
to manufacture and distribute diagnostic assay kits for auto-immune diseases,
and TechAmerica Group Inc., now a part of Boehringer Ingelheim Vetmedica, Inc.,
the U.S. animal health subsidiary of Boehringer Ingelhem GmbH, an international
chemical and pharmaceutical company headquartered in Germany. He earned a Ph.D.
in Molecular Virology from the University of Wisconsin–Madison in
1984.




Timothy
C. Scott, Ph.D., 49, has served as our President and as a member of our Board of
Directors since we acquired PPI on April 23, 2002. Prior to joining us, Dr.
Scott was a senior member of the Photogen management team from 1997 to 2002,
including serving as Photogen’s Chief Operating Officer from 1999 to 2002, as a
director of Photogen from 1997 to 2000, and as interim CEO for a period in 2000.
Before joining Photogen, he served as senior management of Genase LLC, a
developer of enzymes for fabric treatment and held senior research and
management positions at Oak Ridge National Laboratory. Dr. Scott earned a Ph.D.
in Chemical Engineering from the University of Wisconsin–Madison in
1985.




Eric A.
Wachter, Ph.D., 45, has served as our Vice President – Pharmaceuticals and as a
member of our Board of Directors since we acquired PPI on April 23, 2002. Prior
to joining us, from 1997 to 2002 he was a senior member of the management team
of Photogen, including serving as Secretary and a director of Photogen since
1997 and as Vice President and Secretary and a director of Photogen since 1999.
Prior to joining Photogen, Dr. Wachter served as a senior research staff member
with Oak Ridge National Laboratory. He earned a Ph.D. in Chemistry from the
University of Wisconsin–Madison in 1988.




Peter R.
Culpepper, 48, was appointed to serve as our Chief Financial Officer in February
2004. Previously, Mr. Culpepper served as Chief Financial Officer for Felix
Culpepper International, Inc. from 2001 to 2004; was a Registered Representative
with AXA Advisors, LLC from 2002 to 2003; has served as Chief Accounting Officer
and Corporate Controller for Neptec, Inc. from 2000 to 2001; has served in
various Senior Director positions with Metromedia Affiliated Companies from 1998
to 2000; has served in various Senior Director and other financial positions
with Paging Network, Inc. from 1993 to 1998; and has served in a variety of
financial roles in public accounting and industry from 1982 to 1993. He earned a
Masters in Business Administration in Finance from the University of
Maryland–College Park in 1992. He earned an AAS in Accounting from the Northern
Virginia Community College–Annandale, Virginia in 1985. He earned a B.A. in
Philosophy from the College of William and Mary–Williamsburg, Virginia in 1982.
He is a licensed Certified Public Accountant in both Tennessee and
Maryland.




Stuart
Fuchs, 60, has served as a member of our Board of Directors since January 23,
2003. He is the co-founder and has been a managing principal of Gryffindor, a
Chicago-based venture capital firm, since January 2000. Before joining
Gryffindor, he was a founding stockholder of several biotech companies,
including Angiogen LLC (since 1998), which develops combinations of drugs to
stimulate in vivo production of factors that inhibit the growth of blood vessels
in tumors, and Nace Pharma LLC (since 1996), which develops drugs that employ
novel drug delivery technologies. Through Nace Resources Inc., a Delaware
corporation providing strategic and financial advice to companies in the
technology sector, Mr. Fuchs has formed or participated in groups of investors
on behalf of several companies, including Miicro Inc., Celsion Corp. and
Photogen. Before founding Nace Resources Inc., he served for 19 years as an
investment banker with Goldman, Sachs & Co., where he co-managed the firm’s
public finance activities for the Midwest region. Before joining Goldman, Sachs
& Co., Mr. Fuchs was a lawyer in private practice with Barrett Smith
Schapiro & Simon in New York. Mr. Fuchs holds an A.B. degree from Harvard
College and a J.D. from Harvard Law School and is a member of the Association of
the Bar of the City of New York.




18





Available
Information




Provectus
Pharmaceuticals, Inc. is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange
Act.” To comply with those requirements, we file annual reports, quarterly
reports, periodic reports and other reports and statements with the Securities
and Exchange Commission, which we refer to as the “SEC.” You may read and copy
any materials that we file with the SEC at the SEC’s Public Reference Room, at
100 F. Street, N.E., Washington, D.C. 20549. You can obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site at http://www.sec.gov, from which
you can access electronic copies of materials we file with the SEC.




Our
Internet address is http://www.pvct.com. We have made available, through a link
to the SEC’s website, electronic copies of the materials we file with the SEC
(including our annual reports on Form 10-KSB, our quarterly reports on Form
10-QSB, our current reports on Form 8-K, the Section 16 reports filed by our
executive officers, directors and 10% shareholders and amendments to those
reports). To receive paper copies of our SEC materials, please contact us by
U.S. mail, telephone, facsimile or electronic mail at the following
address:




Provectus
Pharmaceuticals, Inc.




Attention:
President




7327 Oak
Ridge Highway, Suite A




Knoxville,
TN 37931




Telephone:
865/769-4011




Facsimile:
865/769-4013




Electronic
mail: info@pvct.com










Item
2. Description of Property.





We currently lease approximately 6,000
square feet of space outside of Knoxville, Tennessee for our corporate office
and operations. Our monthly rental charge for these offices is approximately
$4,300 per month, and the lease is renewed on an annual basis. We believe that
these offices generally are adequate for our needs currently and in the
immediate future.





Item
3. Legal Proceedings.





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





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





During the three months ended December
31, 2007, we did not submit any matters to a vote of our
stockholders.


19





Part
II





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





Market
Information and Holders





Quotations for our common stock are
reported on the OTC Bulletin Board under the symbol “PVCT." The following table
sets forth the range of high and low bid information for the periods indicated
since January 1, 2006:





High
            
            
            Low2006First
      Quarter (January 1 to March 31)
            
            $
            1.20
            
            
            $
            0.83Second
      Quarter (April 1 to June 30)
            
            
            1.97
            
            
            
            1.01Third
      Quarter (July 1 to September 30)
            
            
            1.47
            
            
            
            0.94Fourth
      Quarter (October 1 to December 31)
            
            
            1.34
            
            
            
            1.112007First
      Quarter (January 1 to March 31)
            
            
            1.64
            
            
            
            1.04Second
      Quarter (April 1 to June 30)
            
            
            1.94
            
            
            
            1.29Third
      Quarter (July 1 to September 30)
            
            
            3.07
            
            
            
            1.44Fourth
      Quarter (October 1 to December 31)
            
            
            2.49
            
            
            
            1.55








The closing price for our common stock
on March 13, 2008 was $1.00.  High and low quotation information was
obtained from data provided by Yahoo!  Inc. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not reflect actual transactions.





As of March 13, 2008, we had 1,817
shareholders of record of our common stock.





Dividend
Policy





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





Recent
Sales of Unregistered Securities





During the quarter
ended  December 31, 2007, we did not sell any securities which were
not registered under the Securities Act of 1933, as amended, which we refer to
as the  "Securities  Act".





20


Item
6. Management's Discussion and Analysis or Plan of Operation.








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




Critical
Accounting Policies




Long-Lived
Assets





We review
the carrying values of our long-lived assets for possible impairment whenever an
event or change in circumstances indicates that the carrying amount of the
assets may not be recoverable. Any long-lived assets held for disposal are
reported at the lower of their carrying amounts or fair value less cost to
sell.





Patent
Costs




Internal
patent costs are expensed in the period incurred. Patents purchased are
capitalized and amortized over the remaining life of the patent. The patents are
being amortized over the remaining lives of the patents, which range from 11-14
years. Annual amortization of the patents is expected to be approximately
$671,000 per year for the next five years.




Stock-Based
Compensation




We
adopted Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised
2004), “Share-Based Payment" (FASB 123R), effective January 1, 2006 under the
modified prospective method, which recognizes compensation cost beginning with
the effective date (a) based on the requirements of FASB 123R for all
share-based payments granted after the effective date and to awards modified,
repurchased, or cancelled after that date and (b) based on the requirements of
FASB 123 for all awards granted to employees prior to the effective date of FASB
123R that remain unvested on the effective date. There was no cumulative effect
of our initially applying this Statement. At December 31, 2007 we have estimated
that an additional $430,152 will be expensed over the applicable remaining
vesting periods for all share-based payments granted to employees on or before
December 31, 2005 which remained unvested on January 1, 2006.




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





Research
and Development





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





21




Contractual
Obligations - Leases




We lease
office and laboratory space in Knoxville, Tennessee, on an annual basis,
renewable for one year at our option. We are committed to pay a total of $25,800
in lease payments over six months, which is the remainder of our current lease
term at December 31, 2007.




Capital
Structure




Our
ability to continue as a going concern is assured due to our financing completed
during 2006 and warrants exercised in 2007. At the current rate of expenditures,
we will not plan to raise additional capital until late 2008, although our
existing funds are sufficient to meet anticipated needs throughout 2008 and well
into 2009.




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




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




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




Plan of
Operation




With the
reorganization of Provectus and PPI and the acquisition and integration into the
Company of Valley and Pure-ific, we believe we have obtained a unique
combination of core intellectual properties and OTC and other non-core products.
This combination represents the foundation for an operating company that we
believe will provide both profitability and long-term growth.  In
2007, we continued to carefully control expenditures in preparation for the
asset sale and licensure or spin out of our OTC products, medical device and
biotech technologies, and we will issue equity only when it makes sense and
primarily for purposes of attracting strategic investors.




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




We have
continued to make significant progress with the major research and development
projects expected to be ongoing in the next 12 months.  Our expanded
Phase 1 metastatic melanoma clinical trial and the second group of our expanded
Phase 1 breast carcinoma clinical trial was completed in April 2007 for
approximately $1,000,000 in the aggregate, most of which has been expended in
2005 and 2006.  The planning phase for the expected Phase 2 trial in
metastatic melanoma has been completed which will cost approximately $3,000,000
through 2008.  This includes expenditures in 2007 to significantly
advance the Phase 2 trial in metastatic melanoma that commenced in August 2007
and which may provide pivotal efficacy.  Additionally, we planned
$1,000,000 of expenditures in 2007 and 2008 to substantially advance our work
with other oncology indications which included the initiation of the third group
of our expanded Phase 1 breast carcinoma clinical trial.  Our Phase 2
psoriasis trial commenced in November 2007 and will cost approximately
$1,500,000 over 12 months.  Our Phase 1- 2 liver cancer trial is
expected to cost approximately $500,000 in total and is expected to commence in
early 2008.  Total research and development project expense in 2007
was approximately $3,000,000.  We anticipate expending the same amount
in 2008.  The remaining research and development expense in 2007 does
not specifically relate to the above project expense in 2007.




22


Comparison
of the Years Ended December 31, 2007 and 2006




Revenues




OTC
Product Revenue decreased by $1,368 in 2007 to $-0- from $1,368 in 2006. The
decrease in OTC Product Revenue resulted from no online sales. We have
discontinued our proof of concept program in November 2006 and have, therefore,
ceased selling our OTC products. There was no Medical Device Revenue in 2007 or
2006. The lack of Medical Device Revenue resulted due to no emphasis on selling
in 2007 or 2006 versus the sales of devices in prior years.  The
Company has designated the OTC and Medical Device products as non-core and is
considering the sale of the underlying assets in conjunction with the planned
spin out of the respective wholly owned subsidiaries.




Research
and development




Research
and development costs totaling $4,404,958 for 2007 included depreciation expense
of $9,256, consulting and contract labor of $661,655, lab supplies and
pharmaceutical preparations of $400,687, insurance of $124,244, legal of
$297,846, payroll of $2,846,890, and rent and utilities of $64,380. Research and
development costs totaling $3,016,361 for 2006 included depreciation expense of
$4,442, consulting and contract labor of $481,400, lab supplies and
pharmaceutical preparations of $259,198, insurance of $43,361, legal of
$202,044, payroll of $1,969,474, and rent and utilities of $56,442. The
approximately $180,000 increase in consulting and contract labor is the result
of the consulting costs for the beginning of the Phase 2 clinical trial programs
for both metastatic melanoma and psoriasis. The approximately $141,000 increase
in lab supplies and pharmaceutical preparations is primarily the result of
materials necessary to provide for the Phase 2 clinical trials that commenced in
2007. Approximately $699,000 of the increase in payroll is the result of raises
and bonuses and approximately $178,000 is the result of the impact of stock
option expense for stock options issued at the end of June 2006 which vest over
a three-year period.  The remaining increase in research and
development expense of $191,000 is primarily due to increases in insurance and
legal expenses related to the furtherance of clinical trial
development.




General
and administrative




General
and administrative expenses increased by $1,701,464 in 2007 to $5,236,061 from
$3,534,597 in 2006. The increase resulted primarily from higher payroll expenses
for general corporate purposes due to raises and bonuses totaling approximately
$720,000 and as a result of the impact of stock option expense for stock options
issued at the end of June 2006 which vest over a three-year period totaling
approximately $300,000.  The remaining increase of approximately
$681,000 is due to higher external accounting expense, Sarbanes-Oxley Section
404 implementation expense, financial, investor and public relations expense,
and legal expenses for non-core spinout preparation.





Cash
Flow




As of
December 31, 2007, we held approximately $7,300,000 in cash and short-term
United States Treasury Notes.  At our current cash expenditure rate,
this amount will be sufficient to meet our current and planned needs in 2008 and
into 2009. We have been increasing our expenditure rate by accelerating some of
our research programs for new research initiatives; in addition, we are seeking
to improve our cash flow through the asset sale and licensure of our OTC
products as well as other non-core assets.  However, we cannot assure
you that we will be successful in selling the OTC and other non-core assets and
licensing our existing OTC products.  Moreover, even if we are
successful in improving our current cash flow position, we nonetheless plan to
require additional funds to meet our long-term needs in 2009 and
beyond.  We anticipate these funds will come from the proceeds of
private placements, the exercise of existing warrants outstanding, or public
offerings of debt or equity securities.





23


Capital
Resources




As noted
above, our present cash flow is currently sufficient to meet our short-term
operating needs.  Excess cash will be used to finance the current and
next phases in clinical development of our pharmaceutical
products.  We anticipate that any required funds for our operating and
development needs beyond 2008 will come from the proceeds of private placements,
the exercise of existing warrants outstanding, or public offerings of debt or
equity securities.  While we believe that we have a reasonable basis
for our expectation that we will be able to raise additional funds, we cannot
assure you that we will be able to complete additional financing in a timely
manner.  In addition, any such financing may result in significant
dilution to shareholders. For further information on funding sources, please see
the notes to our financial statements included in this report.





Recent
Accounting Pronouncements




The
Financial Accounting Standards Board (“FASB”) released SFAS No. 156, “Accounting
for Servicing of Financial Assets,” to simplify accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” SFAS No. 156 permits an entity to choose either
the amortization method or the fair value measurement method for measuring each
class of separately recognized servicing assets and servicing liabilities after
they have been initially measured at fair value. SFAS No. 156 applies to all
separately recognized servicing assets and liabilities acquired or issued after
the beginning of an entity’s fiscal year that begins after September 15, 2006.
SFAS No. 156 was effective for the Company as of January 1, 2007, the beginning
of the Company’s fiscal-2007 year. The adoption of SFAS No. 156 did not have an
impact on the Company’s consolidated financial position or results of
operations.





On July
13, 2006, the FASB issued Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income
Taxes: an Interpretation of FASB Statement No. 109.” This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”
FIN No. 48 clarifies what criteria must be met prior to recognition of the
financial statement benefit of a position taken in a tax return. FIN No. 48
requires companies to include additional qualitative and quantitative
disclosures within their financial statements. The disclosures include potential
tax benefits from positions taken for tax return purposes that have not been
recognized for financial reporting purposes and a tabular presentation of
significant changes during each period. The disclosures also include a
discussion of the nature of uncertainties, factors that could cause a change,
and an estimated range of reasonable possible changes in tax uncertainties, FIN
No. 48 also requires a company to recognize a financial statement benefit for a
position taken for tax return purposes when it will be more likely-than-not that
the position will be sustained. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006.  The Company adopted FIN No. 48 in
the first quarter of fiscal 2007, effective as of January 1, 2007, the beginning
of the company’s 2007 fiscal year. The adoption of FIN No. 48 did not have a
material impact on the Company’s consolidated financial position or results of
operations.





The FASB
released SFAS No. 157, “Fair Value Measurements,” to define fair value,
establish a framework for measuring fair value in accordance with generally
accepted accounting principles, and expand disclosures about fair value
measurements. SFAS No. 157 is effective as of the beginning of an entity’s first
fiscal year that begins after December 15, 2007.  SFAS No. 157 will be
adopted by the Company as of January 1, 2008, the beginning of the Company’s
fiscal-2008 year. We are assessing the impact the adoption of SFAS No. 157 will
have on the Company’s consolidated financial position and results of
operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115,” which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the long-term measurement objectives for
accounting for financial instruments. This Statement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS No. 157, “Fair Value Measurements.” SFAS No. 159 will be
adopted by the Company as of January 1, 2008, the beginning of the Company’s
fiscal-2008 year. We are assessing the impact the adoption of SFAS No. 159 will
have on the Company’s consolidated financial position and results of
operations.


24


Item
7. Financial Statements.





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





PageReport
      of Independent Registered Public Accounting Firm
            28Consolidated
      Balance Sheets as of December 31, 2007 December 31, 2006
            29Consolidated
      Statements of Operations for the years December 31, 2007 and 2006, and
      cumulative amounts from  January 17, 2002 (Inception) through
      December 31, 2007
            30Consolidated
      Statements of Shareholders' Equity for years ended December 31, 2007 and
      2006, and cumulative amounts from January 17, 2002 (Inception) through
      December 31, 2007
            31Consolidated
      Statements of Cash Flows for the years ended December 31, 2007 and 2006,
      cumulative amounts from January 17, 2002 (Inception) through December 31,
      2007
            33Notes
      to Consolidated Financial Statements
            35





Forward-Looking
Statements





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





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





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





None.





Item 8A(T).  Controls and
Procedures





Evaluation of Disclosure Controls
and Procedures. We have carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including our subsidiary) required to be included in our periodic
Securities and Exchange Commission filings. No significant changes were made in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.





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


- Pertain
  to the maintenance of records that in reasonable detail accurately and fairly
  reflectthe
  transactions and disposition of our assets;
- Provide
  reasonable assurance that transactions are recorded as necessary to permit
  preparationof
  financial statements in accordance with generally accepted accounting
  principles, andthat
  our receipts and expenditures are being made only in accordance with
  authorizationsof our
  management and directors; and
- Provide
  reasonable assurance regarding prevention or timely detection of unauthorizedacquisition,
  use or disposition of our assets that could have a material effect on
  the
          financial
  statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
  Our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control – Integrated
Framework.
  Based
on our assessment, management believes that, as of December 31, 2007, our
internal control over financial reporting is effective based on those
criteria.
  This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
 Changes in Internal Control Over
Financial Reporting.
 Item
8B.   Other Information


None.






25




Part
III





Item
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.





Except as set forth  below,
the information called for by this item with respect to our executive officers
as of March 20, 2008 is furnished in Part I of this report under the
heading  "Personnel--Executive  Officers." The information
called for by this item, to the extent it relates to our directors or to certain
filing obligations of our directors and executive officers under the federal
securities laws, is incorporated herein by reference to the Proxy Statement for
our Annual Meeting of Stockholders to be held on June 19, 2008, which will be
filed with the SEC pursuant to Regulation 14A under the Exchange
Act.





Audit
Committee Financial Expert





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





Code of
Ethics





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





Item
10. Executive Compensation.





The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 19, 2008, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.





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





The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 19, 2008, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.





Item
12. Certain Relationships and Related Transactions.





The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 19, 2008, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.





Item
13. Exhibits





Exhibits required by Item 601 of
Regulation S-B are incorporated herein by reference and are listed on the
attached Exhibit Index, which begins on page 53 of this Annual Report on
Form 10-KSB.





Item
14.  Principal Accountant Fees and Services.





The information called for by this item
is incorporated herein by reference to the Proxy Statement for our Annual
Meeting of Stockholders to be held on June 19, 2008, which will be filed with
the SEC pursuant to Regulation 14A under the Exchange Act.


26




Signatures





In accordance with Section 13 or 15(d)
of the Exchange Act, the Registrant caused this annual report on From 10-KSB for
the year ended December 31, 2007 to be signed on its behalf by the undersigned,
thereunto duly authorized.





Provectus
Pharmaceuticals, Inc.





By: /s/ H. Craig
Dees


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





Date:    March
20, 2008





Signature
            Title
            Date/s/  H.
      Craig
      Dees
              H. Craig Dees,
      Ph.D.
            Chief
      Executive Officer (principal executive officer) and Chairman of the
      Board
            March
      20, 2008/s/  Peter R.
      Culpepper
              Peter
      R. Culpepper, CPA
            Chief
      Financial Officer (principal financial officer and principal accounting
      officer)
            March
      20, 2008/s/  Timothy
      C.
      Scott
              Timothy
      C. Scott, Ph.D.
            President
      and Director
            March
      20, 2008/s/  Eric A.
      Wachter , Ph.D
              Eric
      A. Wachter, Ph.D.
            Vice
      President - Pharmaceuticals and Director
            March
      20, 2008/s/ Stuart
      Fuchs
              Stuart
      Fuchs
            Director
            March
      20, 2008





27





Report
of Independent Registered Public Accounting Firm











Board
of Directors


Provectus
Pharmaceuticals, Inc.


Knoxville,
Tennessee





We
have  audited  the  accompanying  consolidated  balance  sheets
of  Provectus Pharmaceuticals,  Inc., a
development  stage company, as of December 31, 2007 and
2006  and
the  related  consolidated  statements  of  operations,  stockholders'
equity,  and cash flows for the
period  from  January
17,  2002  (inception)  to December 31, 2007 and
for each of the two years in the period ended December 31,
2007.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material   respects,   the financial
position of Provectus Pharmaceuticals, Inc.  at
December  31,  2007 and 2006, and the results of its
operations  and its cash flows for the period from January 17,
2002  (inception) to December 31, 2007 and for each of the two years
in the period ended  December 31, 2007 in
conformity  with  accounting  principles  generally  accepted
in the United States of America.










/s/BDO Seidman,
LLP





Chicago,
Illinois


March 20,
2008





28


PROVECTUS
PHARMACEUTICALS, INC.


(A
Development-Stage Company)




CONSOLIDATED
BALANCE SHEETS





December
      31, 2007
            
            
            December
      31, 2006AssetsCurrent
      AssetsCash
      and cash equivalents
            
            $
            352,389
            
            
            $
            638,334United States Treasury Notes,
      total face value of $6,910,157 and $6,507,019
            
            
            6,907,837
            
            
            
            6,499,034Prepaid expenses and other
      current assets
            
            
            99,460
            
            
            
            173,693Total
      Current Assets
            
            
            7,359,686
            
            
            
            7,311,061Equipment
      and Furnishings, less accumulated depreciation of $381,977 and
      $372,721
            
            
            42,946
            
            
            
            30,075Patents,
      net of amortization of $3,433,897 and $2,762,777
            
            
            8,281,548
            
            
            
            8,952,668Deferred
      loan costs, net of amortization of $103,018 in 2006
            
            
            --
            
            
            
            3,713Other
      assets
            
            
            27,000
            
            
            
            27,000$
            15,711,180
            
            
            $
            16,324,517Liabilities
      and Stockholders’ EquityCurrent
      LiabilitiesAccounts payable –
      trade
            
            $
            455,192
            
            
            $
            64,935Accrued compensation and payroll
      taxes
            
            
            274,011
            
            
            
            265,929Accrued common stock
      costs
            
            
            --
            
            
            
            17,550Accrued consulting
      expense
            
            
            102,037
            
            
            
            42,500Other accrued
      expenses
            
            
            48,430
            
            
            
            46,500March 2005 convertible debt, net
      of debt discount of $2,797 in 2006
            
            
            --
            
            
            
            364,703Total
      Current Liabilities
            
            
            879,670
            
            
            
            802,117Stockholders’
      EquityPreferred stock; par value $.001 per share; 25,000,000 shares authorized,
      no shares issued and outstanding
            
            
            --
            
            
            
            --Common
      stock; par value $.001 per share; 100,000,000 shares authorized;49,399,281
      and 42,452,366 shares issued and outstanding, respectively
            
            
            49,399
            
            
            
            42,452Paid-in capital
            
            
            59,988,147
            
            
            
            50,680,353Deficit accumulated during the
      development stage
            
            
            (45,206,036
            )
            
            
            (35,200,405)Total
      Stockholders’ Equity
            
            
            14,831,510
            
            
            
            15,522,400$
            15,711,180
            
            
            $
            16,324,517


See
accompanying notes to consolidated financial statements.





29





PROVECTUS
PHARMACEUTICALS, INC.


(A
Development-Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS







Year
      Ended
              December
      31,
              2007
            
            
            Year
      Ended
              December
      31,
              2006
            
            
            Cumulative
              Amounts
      from
              January
      17, 2002
              (Inception)
      Through
              December
      31, 2007RevenuesOTC
      product revenue
            
            $
            --
            
            
            $
            1,368
            
            
            $
            25,648Medical
      device revenue
            
            
            --
            
            
            
            --
            
            
            
            14,109Total
      revenues
            
            
            --
            
            
            
            1,368
            
            
            
            39,757Cost
      of sales
            
            
            --
            
            
            
            875
            
            
            
            15,216Gross
      profit
            
            
            --
            
            
            
            493
            
            
            
            24,541Operating
      expensesResearch
      and development
            
            
            4,404,958
            
            
            
            3,016,361
            
            
            
            11,533,165General
      and administrative
            
            
            5,236,061
            
            
            
            3,534,597
            
            
            
            21,966,029Amortization
            
            
            671,120
            
            
            
            671,120
            
            
            
            3,433,897Total
      operating loss
            
            
            (10,312,139
            )
            
            
            (7,221,585
            )
            
            
            (36,908,550
            )Gain
      on sale of fixed assets
            
            
            --
            
            
            
            75
            
            
            
            55,075Loss
      on extinguishment of debt
            
            
            --
            
            
            
            --
            
            
            
            (825,867
            )Investment
      income
            
            
            317,917
            
            
            
            253,393
            
            
            
            571,310Net
      interest expense
            
            
            (11,409
            )
            
            
            (1,902,462
            )
            
            
            (8,098,004
            )Net
      loss
            
            $
            (10,005,631
            )
            
            $
            (8,870,579
            )
            
            $
            (45,206,036
            )Basic
      and diluted loss per  common share
            
            $
            (0.22
            )
            
            $
            (0.23
            )Weighted
      average number of common
              shares
      outstanding –   basic and diluted
            
            
            46,350,056
            
            
            
            37,973,403





See
accompanying notes to consolidated financial statements.





30


PROVECTUS
PHARMACEUTICALS, INC.


(A
Development-Stage Company)





CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY





Common
      StockNumber
      of Shares
            
            Par
      Value
            
            Paid
      in capital
            
            Accumulated
      Deficit
            
            TotalBalance,
      at January 17, 2002
            
            --
            $
            --
            $
            --
            $
            --
            $
            --Issuance
      to founding shareholders
            
            6,000,000
            
            6,000
            
            (6,000
            )
            --
            
            --Sale
      of stock
            
            50,000
            
            50
            
            24,950
            
            --
            
            25,000Issuance
      of stock to employees
            
            510,000
            
            510
            
            931,490
            
            --
            
            932,000Issuance
      of stock for services
            
            120,000
            
            120
            
            359,880
            
            --
            
            360,000Net
      loss for the period from January 17, 2002 (inception) to April 23, 2002
      (date of reverse merger)
            
            --
            
            --
            
            --
            
            (1,316,198
            )
            (1,316,198)Balance,
      at April 23, 2002
            
            6,680,000
            $
            6,680
            $
            1,310,320
            $
            (1,316,198
            )  
      $
            802Shares
      issued in reverse merger
            
            265,763
            
            266
            
            (3,911
            )
            --
            
            (3,645)Issuance
      of stock for services
            
            1,900,000
            
            1,900
            
            5,142,100
            
            --
            
            5,144,000Purchase
      and retirement of stock
            
            (400,000
            )
            (400
            )
            (47,600
            )
            --
            
            (48,000)Stock
      issued for acquisition of ValleyPharmaceuticals
            
            500,007
            
            500
            
            12,225,820
            
            --
            
            12,226,320Exercise
      of warrants
            
            452,919
            
            453
            
            --
            
            --
            
            453Warrants
      issued in connection withconvertible
      debt
            
            --
            
            --
            
            126,587
            
            --
            
            126,587Stock
      and warrants issued for acquisitionof
      Pure-ific
            
            25,000
            
            25
            
            26,975
            
            --
            
            27,000Net
      loss for the period from April 23, 2002 (date of reverse
      merger)   to December 31,2002
            
            --
            
            --
            
            --
            
            (5,749,937
            )
            (5,749,937)Balance,
      at December 31, 2002
            
            9,423,689
            $
            9,424
            $
            18,780,291
            $
            (7,066,135
            )  
      $
            11,723,580Issuance
      of stock for services
            
            764,000
            
            764
            
            239,036
            
            --
            
            239,800Issuance
      of warrants for services
            
            --
            
            --
            
            145,479
            
            --
            
            145,479Stock
      to be issued for services
            
            --
            
            --
            
            281,500
            
            --
            
            281,500Employee
      compensation from stock options
            
            --
            
            --
            
            34,659
            
            --
            
            34,659Issuance
      of stock pursuant to Regulation S
            
            679,820
            
            680
            
            379,667
            
            --
            
            380,347Beneficial
      conversion related to convertibledebt
            
            --
            
            --
            
            601,000
            
            --
            
            601,000Net
      loss for the year ended December 31, 2003
            
            --
            
            --
            
            --
            
            (3,155,313
            )
            (3,155,313)Balance,
      at December 31, 2003
            
            10,867,509
            $
            10,868
            $
            20,461,632
            $
            (10,221,448
            )  
      $
            (10,251,052)Issuance
      of stock for services
            
            733,872
            
            734
            
            449,190
            
            --
            
            449,923Issuance
      of warrants for services
            
            --
            
            --
            
            495,480
            
            --
            
            495,480Exercise
      of warrants
            
            132,608
            
            133
            
            4,867
            
            --
            
            5,000Employee
      compensation from stock options
            
            --
            
            --
            
            15,612
            
            --
            
            15,612Issuance
      of stock pursuant to Regulation S
            
            2,469,723
            
            2,469
            
            790,668
            
            --
            
            793,137Issuance
      of stock pursuant to Regulation D
            
            1,930,164
            
            1,930
            
            1,286,930
            
            --
            
            1,288,861Beneficial
      conversion related to convertibledebt
            
            --
            
            --
            
            360,256
            
            --
            
            360,256Issuance
      of convertible debt with warrants
            
            --
            
            --
            
            105,250
            
            --
            
            105,250Repurchase
      of beneficial conversion feature
            
            --
            
            --
            
            (258,345
            )
            --
            
            (258,345)Net
      loss for the year ended  December 31, 2004
            
            --
            
            --
            
            --
            
            (4,344,525
            )
            (4,344,525)Balance,
      at December 31, 2004
            
            16,133,876
            $
            16,134
            $
            23,711,540
            $
            (14,565,973
            )  
      $
            9,161,701






31






Issuance
      of stock for services
            
            226,733
            
            227
            
            152,058
            
            --
            
            152,285Issuance
      of stock for interest payable
            
            263,721
            
            264
            
            195,767
            
            --
            
            196,031Issuance
      of warrants for services
            
            --
            
            --
            
            1,534,405
            
            --
            
            1,534,405Issuance
      of warrants for contractualobligations
            
            --
            
            --
            
            985,010
            
            --
            
            985,010Exercise
      of warrants and stock options
            
            1,571,849
            
            1,572
            
            1,438,223
            
            --
            
            1,439,795Employee
      compensation from stock options
            
            --
            
            --
            
            15,752
            
            --
            
            15,752Issuance
      of stock pursuant to Regulation D
            
            6,221,257
            
            6,221
            
            6,506,955
            
            --
            
            6,513,176Debt
      conversion to common stock
            
            3,405,541
            
            3,405
            
            3,045,957
            
            --
            
            3,049,362Issuance
      of warrants with convertible debt
            
            --
            
            --
            
            1,574,900
            
            --
            
            1,574,900Beneficial
      conversion related to convertibledebt
            
            --
            
            --
            
            1,633,176
            
            --
            
            1,633,176Beneficial
      conversion related to interestexpense
            
            --
            
            --
            
            39,529
            
            --
            
            39,529Repurchase
      of beneficial conversion feature
            
            --
            
            --
            
            (144,128
            )
            --
            
            (144,128)Net
      loss for the year ended 2005
            
            --
            
            --
            
            --
            
            (11,763,853
            )
            (11,763,853)Balance,
      at December 31, 2005
            
            27,822,977
            $
            27,823
            $
            40,689,144
            $
            (26,329,826
            )
            $            
           14,387,141Issuance
      of stock for services
            
            719,246
            
            719
            
            676,024
            
            --
            
            676,743Issuance
      of stock for interest payable
            
            194,327
            
            195
            
            183,401
            
            --
            
            183,596Issuance
      of warrants for services
            
            --
            
            --
            
            370,023
            
            --
            
            370,023Exercise
      of warrants and stock options
            
            1,245,809
            
            1,246
            
            1,188,570
            
            --
            
            1,189,816Employee
      compensation from stock options
            
            --
            
            --
            
            1,862,456
            
            --
            
            1,862,456Issuance
      of stock pursuant to Regulation D
            
            10,092,495
            
            10,092
            
            4,120,329
            
            --
            
            4,130,421Debt
      conversion to common stock
            
            2,377,512
            
            2,377
            
            1,573,959
            
            --
            
            1,576,336Beneficial
      conversion related to interestexpense
            
            --
            
            --
            
            16,447
            
            --
            
            16,447Net
      loss for the year ended 2006
            
            --
            
            --
            
            --
            
            (8,870,579
            )
            (8,870,579)Balance,
      at December 31, 2006
            
            42,452,366
            $
            42,452
            $
            50,680,353
            $
            (35,200,405
            )
            $15,522,400Issuance
      of stock for services
            
            150,000
            
            150
            
            298,800
            
            --
            
            298,950Issuance
      of stock for interest payable
            
            1,141
            
            1
            
            1,257
            
            --
            
            1,258Issuance
      of warrants for services
            
            --
            
            --
            
            472,635
            
            --
            
            472,635Exercise
      of warrants and stock options
            
            3,928,957
            
            3,929
            
            3,981,712
            
            --
            
            3,985,641Employee
      compensation from stock options
            
            --
            
            --
            
            2,340,619
            
            --
            
            2,340,619Issuance
      of stock pursuant to Regulation D
            
            2,376,817
            
            2,377
            
            1,845,761
            
            --
            
            1,848,138Debt
      conversion to common stock
            
            490,000
            
            490
            
            367,010
            
            --
            
            367,500Net
      loss for the year ended 2007
            
            --
            
            --
            
            --
            
            (10,005,631
            )
            (10,005,631)Balance,
      at December 31, 2007
            
            49,399,281
            $
            49,399
            $
            59,988,147
            $
            (45,206,036
            )
            $   
                    14,831,510








See
accompanying notes to consolidated financial statements.





32


PROVECTUS
PHARMACEUTICALS, INC.


(A
Development-Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOW





Year
      Ended
              December
      31,
              2007
            
            
            Year
      Ended
              December
      31,
              2006
            
            
            Cumulative
              Amounts
      from
              January
      17, 2002
              (Inception)
      through
              December
      31, 2007Cash
      Flows From Operating ActivitiesNet
      loss
            $
            (10,005,631
            )
            $
            (8,870,579
            )
            $
            (45,206,036
            )Adjustments
      to reconcile net loss to net cash used in
              operating
      activitiesDepreciation
            
            9,256
            
            
            4,442
            
            
            404,978Amortization
      of patents
            
            671,120
            
            
            671,120
            
            
            3,433,897Amortization
      of original issue discount
            
            2,797
            
            
            1,062,098
            
            
            3,845,721Amortization
      of commitment fee
            
            --
            
            
            --
            
            
            310,866Amortization
      of prepaid consultant expense
            
            84,019
            
            
            84,020
            
            
            1,295,226Amortization
      of deferred loan costs
            
            3,713
            
            
            705,379
            
            
            2,261,584Accretion
      of United States Treasury Bills
            
            (174,646
            )
            
            (182,198
            )
            
            (356,844
            )Loss
      on extinguishment of debt
            
            --
            
            
            --
            
            
            825,867Loss
      on exercise of warrants
            
            --
            
            
            --
            
            
            236,146Beneficial
      conversion of convertible interest
            
            --
            
            
            16,447
            
            
            55,976Convertible
      interest
            
            1,258
            
            
            122,188
            
            
            389,950Compensation
      through issuance of stock options
            
            2,340,619
            
            
            1,862,456
            
            
            4,269,098Compensation
      through issuance of stock
            
            --
            
            
            --
            
            
            932,000Issuance
      of stock for services
            
            327,617
            
            
            26,100
            
            
            6,322,648Issuance
      of warrants for services
            
            472,635
            
            
            201,984
            
            
            1,015,804Issuance
      of warrants for contractual obligations
            
            --
            
            
            --
            
            
            985,010Gain
      on sale of equipment
            
            --
            
            
            (75
            )
            
            (55,075
            )(Increase)
      decrease in assetsPrepaid expenses and other current assets
            
            (9,786
            )
            
            (21,712
            )
            
            (99,460
            )Increase
      (decrease) in liabilitiesAccounts payable
            
            390,257
            
            
            (25,189
            )
            
            451,547Accrued expenses
            
            40,882
            
            
            68,743
            
            
            574,108Net
      cash used in operating activities
            
            (5,845,890
            )
            
            (4,274,776
            )
            
            (18,106,989
            )Cash
      Flows From Investing ActivitiesProceeds
      from sale of fixed assets
            
            --
            
            
            75
            
            
            180,075Capital
      expenditures
            
            (22,127
            )
            
            (22,230
            )
            
            (62,049
            )Proceeds
      from investments
            
            19,481,644
            
            
            11,000,000
            
            
            30,481,644Purchase
      of investments
            
            (19,715,801
            )
            
            (17,316,836
            )
            
            (37,032,637
            )Net
      cash used in investing activities
            
            (256,284
            )
            
            (6,338,991
            )
            
            (6,432,967
            )Cash
      Flows From Financing ActivitiesNet
      proceeds from loans from stockholder
            
            --
            
            
            --
            
            
            174,000Proceeds
      from convertible debt
            
            --
            
            
            --
            
            
            6,706,795Net
      proceeds from sale of common stock
            
            1,830,588
            
            
            3,183,295
            
            
            14,979,081Proceeds
      from exercise of warrants and stock options
            
            3,985,641
            
            
            1,189,816
            
            
            6,384,559Cash
      paid to retire convertible debt
            
            --
            
            
            --
            
            
            (2,385,959
            )Cash
      paid for deferred loan costs
            
            --
            
            
            --
            
            
            (747,612
            )Premium
      paid on extinguishments of debt
            
            --
            
            
            --
            
            
            (170,519
            )Purchase
      and retirement of common stock
            
            --
            
            
            --
            
            
            (48,000
            )Net
      cash provided by financing activities
            
            5,816,229
            
            
            4,373,111
            
            
            24,892,345







33







Year
      Ended
              December
      31,
              2007
            
            
            Year
      Ended
              December
      31,
              2006
            
            
            Cumulative
              Amounts
      from
              January
      17, 2002
              (Inception)
      through December 31, 2007Net
      change in cash and cash equivalents
            $
            (285,945
            )
            $
            (6,240,656
            )
            $
            352,389Cash
      and cash equivalents, at beginning of period
            $
            638,334
            
            $
            6,878,990
            
            $
            --Cash
      and cash equivalents, at end of period
            $
            352,389
            
            $
            638,334
            
            $
            352,389





Supplemental
Disclosure of Noncash Investing and Financing Activities




Year ended
December 31, 2007





1. Debt
converted to common stock of $367,500


2. Payment of
accrued interest through the issuance of stock of $1,258


3. Issuance
of stock for stock issuance costs of $17,550 incurred in 2006


4. Stock
committed to be issued for services of $28,667 accrued at December 31, 2007 and
issued in 2008





Year ended
December 31, 2006





1. Issuance
of warrants in exchange for prepaid services of $168,039


2. Debt
converted to common stock of $1,576,336


3. Payment of
accrued interest through the issuance of stock of $183,596


4. Issuance
of stock for stock issuance costs of $964,676 incurred in 2005


5. Stock
committed to be issued for services of $650,643 accrued at December 31, 2005 and
issued in 2006


6. Accrual of
$17,550 for stock committed to be issued for stock issuance costs





See
accompanying notes to consolidated financial statement.





34


PROVECTUS
PHARMACEUTICALS, INC.


(A
Development-Stage Company)


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.           Organization
and Significant Accounting Policies





Nature of
Operations




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




Principles of
Consolidation




Intercompany
balances and transactions have been eliminated in consolidation.




Estimates




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




Cash and cash
equivalents




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




United States Treasury
Notes




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




Deferred Loan Costs and Debt
Discounts




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




Equipment and
Furnishings




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




Long-Lived
Assets




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




35


Patent
Costs




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




Patents
at December 31, 2007 were acquired as a result of the merger with Valley
Pharmaceuticals, Inc. (“Valley”) (Note 2). The majority shareholders of
Provectus also owned all of the shares of Valley and therefore the assets
acquired from Valley were recorded at their carryover basis. The patents are
being amortized over the remaining lives of the patents, which range from 9-14
years. Annual amortization of the patents is expected to be approximately
$671,000 per year for the next five years.




Revenue
Recognition




The
Company recognizes revenue when product is shipped. When advance payments are
received, these payments are recorded as deferred revenue and recognized when
the product is shipped.




Research and
Development




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




Income
Taxes




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




Basic and Diluted Loss Per
Common Share




Basic and
diluted loss per common share is computed based on the weighted average number
of common shares outstanding.  Included as of December 31, 2007 and
2006 were 330,881 and 165,000 shares committed to be issued.  Loss per
share excludes the impact of outstanding options, warrants, and convertible debt
as they are antidilutive. Potential common shares excluded from the calculation
for the years ended December 31, 2007 and 2006 are 22,999,788 and 26,663,081
warrants, and 8,903,169 and 9,014,714 options.  Potential common
shares also excluded from the year ended December 31, 2006 are 490,000 shares
issuable upon conversion of convertible debt and interest.




Financial
Instruments




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




Stock Based
Compensation




On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) released
FASB Statement No. 123 (revised 2004), “Share-Based Payment, (“FASB 123R”).”
These changes in accounting replace existing requirements under FASB Statement
No. 123, “Accounting for Stock-Based Compensation” (“FASB 123”), and eliminates
the ability to account for share-based compensation transaction using APB
Opinion No.25, “Accounting for Stock Issued to Employees” (“APB 25”). The
compensation cost relating to share-based payment transactions will be measured
based on the fair value of the equity or liability instruments issued. This
Statement did not change the accounting for similar transactions involving
parties other than employees.




The
Company adopted FASB 123R effective January 1, 2006 under the modified
prospective method, which recognizes compensation cost beginning with the
effective date (a) based on the requirements of FASB 123R for all share-based
payments granted after the effective date and to awards modified, repurchased,
or cancelled after that date and (b) based on the requirements of FASB 123 for
all awards granted to employees prior to the effective date of FASB 123R that
remain unvested on the effective date. There was no cumulative effect of
initially applying this Statement for the Company. At December 31, 2007 the
Company has estimated that an additional $430,152 will be expensed over the
applicable remaining vesting periods for all share-based payments granted to
employees on or before December 31, 2005 which remained unvested on January 1,
2006.




36


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




Recent Accounting
Pronouncements




The
Financial Accounting Standards Board (“FASB”) released SFAS No. 156, “Accounting
for Servicing of Financial Assets,” to simplify accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 amends SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities.” SFAS No. 156 permits an entity to choose either
the amortization method or the fair value measurement method for measuring each
class of separately recognized servicing assets and servicing liabilities after
they have been initially measured at fair value. SFAS No. 156 applies to all
separately recognized servicing assets and liabilities acquired or issued after
the beginning of an entity’s fiscal year that begins after September 15, 2006.
SFAS No. 156 was effective for the Company as of January 1, 2007, the beginning
of the Company’s fiscal-2007 year. The adoption of SFAS No. 156 did not have an
impact on the Company’s consolidated financial position or results of
operations.





On July
13, 2006, the FASB issued Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income
Taxes: an Interpretation of FASB Statement No. 109.” This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”
FIN No. 48 clarifies what criteria must be met prior to recognition of the
financial statement benefit of a position taken in a tax return. FIN No. 48
requires companies to include additional qualitative and quantitative
disclosures within their financial statements. The disclosures include potential
tax benefits from positions taken for tax return purposes that have not been
recognized for financial reporting purposes and a tabular presentation of
significant changes during each period. The disclosures also include a
discussion of the nature of uncertainties, factors that could cause a change,
and an estimated range of reasonable possible changes in tax uncertainties, FIN
No. 48 also requires a company to recognize a financial statement benefit for a
position taken for tax return purposes when it will be more likely-than-not that
the position will be sustained. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006.  The Company adopted FIN No. 48 in
the first quarter of fiscal 2007, effective as of January 1, 2007, the beginning
of the company’s 2007 fiscal year. The adoption of FIN No. 48 did not have a
material impact on the Company’s consolidated financial position or results of
operations.





The FASB
released SFAS No. 157, “Fair Value Measurements,” to define fair value,
establish a framework for measuring fair value in accordance with generally
accepted accounting principles, and expand disclosures about fair value
measurements. SFAS No. 157 is effective as of the beginning of an entity’s first
fiscal year that begins after December 15, 2007.  SFAS No. 157 will be
adopted by the Company as of January 1, 2008, the beginning of the Company’s
fiscal-2008 year.  The Company is assessing the impact the adoption of
SFAS No. 157 will have on the Company’s consolidated financial position and
results of operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115,” which permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is expected to expand the use of fair value
measurement, which is consistent with the long-term measurement objectives for
accounting for financial instruments. This Statement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provisions of SFAS No. 157, “Fair Value Measurements.” SFAS No. 159 will be
adopted by the Company as of January 1, 2008, the beginning of the Company’s
fiscal-2008 year.  The Company is assessing the impact the adoption of
SFAS No. 159 will have on the Company’s consolidated financial position and
results of operations.




37


2.           Recapitalization
and Merger




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




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




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




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




3.           Commitments




Leases




The
Company leases office and laboratory space in Knoxville, Tennessee, on an annual
basis, renewable for one year at the option of the Company. The Company is
committed to pay a total of $25,800 in lease payments over six months, which is
the remainder of its current lease term at December 31, 2007. The Company plans
to renew the lease at the end of the current lease term. Rent expense was
approximately $51,000 and $49,000 in 2007 and 2006, respectively.




Employee
Agreements




On July
1, 2007, we entered into executive employment agreements with each of H. Craig
Dees. Ph.D., Timothy C. Scott, Ph.D., Eric A. Wachter, Ph.D., and Peter R.
Culpepper, CPA, to serve as our Chief Executive Officer, President, Executive
Vice President and Chief Financial Officer, respectively. Each agreement
provides that such executive will be employed for a one-year term with automatic
one-year renewals unless previously terminated pursuant to the terms of the
agreement or either party gives notice that the term will not be extended. The
Company is committed to pay a total of $800,000 over six months, which is the
remainder of the current employment agreements at December 31, 2007. Executives
are also entitled to participate in any incentive compensation plan or bonus
plan adopted by us without diminution of any compensation or payment under the
agreement. Executives are further entitled to reimbursement for all reasonable
out-of-pocket expenses incurred during his performance of services under the
agreement.




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




38


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




4.           Equity
Transactions




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




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




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




(d) In
June 2002, the Company issued a warrant to a consultant for the purchase of
100,000 shares at $2.29 per share. The warrant is only exercisable upon the
successful introduction of the Company to a designated pharmaceutical company.
The warrant was forfeited in 2004.




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




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




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




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




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




39


In May
2004, the Company issued 20,000 warrants to consultants in exchange for services
rendered. Consulting costs charged to operations were $18,800. In August 2004,
the Company issued 350,000 warrants to consultants in exchange for services
valued at $329,000. In December 2004, the Company issued 10,000 warrants to
consultants in exchange for services valued at $3,680. Fair market value for the
warrants issued in 2004 ranged from $0.37 to $0.94.




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




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




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




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




40


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




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




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




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




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




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




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




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




41


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




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




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




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




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




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




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




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




42


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




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




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




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




5.           Stock
Incentive Plan and Warrants




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




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




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




For stock
options granted to employees during 2007 and 2006, the Company has estimated the
fair value of each option granted using the Black-Scholes option pricing model
with the following assumptions:




2007
            2006Weighted
      average fair value per options granted
            $           1.40
            $           0.96Significant
      assumptions (weighted average) risk-free interest rate at grant
      date
            4.0%
      - 5.0%
            4.0%
      - 5.0%Expected
      stock price volatility
            105%
      - 116%
            116%
      - 130%Expected
      option life (years)
            10
            10






43





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




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




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




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





The
following table summarizes the options granted, exercised and outstanding as of
December 31, 2006 and 2007, respectively:




Shares
            
            
            Exercise
      Price
              Per
      Share
            
            
            Weighted
      Average Exercise PriceOutstanding
      at January 1, 2006
            4,973,484
            
            $
            0.32
      – 1.25
            
            $
            0.83Granted
            4,200,000
            
            $
            1.02
            
            $
            1.02Exercised
            (158,770)
            
            $
            0.32 – 1.10
            
            $
            1.02Forfeited
            --
            
            
            --
            
            
            --Outstanding
      at December 31, 2006
            9,014,714
            
            $
            0.32
      – 1.25
            
            $
            0.91Options
      exercisable at December 31, 2006
            2,406,378
            
            $
            0.32
      – 1.25
            
            $
            0.86Outstanding
      at January 1, 2007
            9,014,714
            
            $
            0.32
      – 1.25
            
            $
            0.91Granted
            200,000
            
            $
            1.50
            
            $
            1.50Exercised
            (311,545)
            
            $
            0.32
      – 1.10
            
            $
            0.78Forfeited
            --
            
            
            --
            
            
            --Outstanding
      at December 31, 2007
            8,903,169
            
            $
            0.32
      – 1.50
            
            $
            0.93Options
      exercisable at December 31, 2007
            4,919,832
            
            $
            0.32
      – 1.50
            
            $
            0.93





44




The
following table summarizes information about stock options outstanding at
December 31, 2007.




Exercise
              Price
            Number
              Outstanding
              at
              December31,
      2007
            Weighted
              Average
              Remaining
      contractual
              Life
            Outstanding
              Weighted
              Average
              Exercise
      price
            Number
              Exercisable
              at
              December31,
      2007
            Exercisable
      Weighted Average Exercise Price$0.32
            168,750
            5.58
      years
            $0.32
            168,750
            $0.32$0.60
            100,000
            5.58
      years
            $0.60
            100,000
            $0.60$1.10
            909,419
            6.17
      years
            $1.10
            834,419
            $1.10$0.95
            100,000
            6.42
      years
            $0.95
            100,000
            $0.95$1.25
            100,000
            6.50
      years
            $1.25
            100,000
            $1.25$0.64
            1,050,000
            7.00
      years
            $0.64
            450,000
            $0.64$0.75
            1,300,000
            7.42
      years
            $0.75
            900,000
            $0.75$0.94
            775,000
            7.92
      years
            $0.94
            533,331
            $0.94$1.02
            4,200,000
            8.50
      years
            $1.02
            1,533,332
            $1.02$1.50
            200,000
            9.50
      years
            $1.50
            200,000
            $1.508,903,169
            7.77
      years
            $0.93
            4,919,832
            $0.93





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




The
following is a summary of nonvested stock option activity for the year ended
December 31, 2007:




Weighted
      AverageNumber
      of Shares
            Grant-Date
      Fair ValueNonvested
      at December 31, 2006
            6,608,336
            $      
      0.87Granted
            200,000
            $      
      1.40Vested
            (2,824,999)
            $       0.91Canceled
            --
            --Nonvested
      at December 31, 2007
            3,983,337
            $      
      0.87





As of
December 31, 2007, there was $2,350,153 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted average period of
1.3 years. The total fair value of shares vested during the year ended December
31, 2007 was $2,572,982.




The
following is a summary of the aggregate intrinsic value of shares outstanding
and exercisable at December 31, 2007. The aggregate intrinsic value of stock
options outstanding and exercisable is defined as the difference between the
market value of the Company’s stock as of the end of the period and the exercise
price of the stock options.




Number
      of Shares
            Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2007
            8,903,169
            $                 
      7,019,590Exercisable
      at December 31, 2007
            4,919,832
            $                 
      3,881,920







45


The
following table summarizes the warrants granted, exercised and outstanding as of
December 31, 2006 and 2007, respectively.




Warrants
            Exercise
      Price
              Per
      Warrant
            Weighted
      Average
              Exercise
      PriceOutstanding
      at January 1, 2006
            26,831,958
            $0.50
      – 1.25
            $0.96Granted
            1,023,657
            $0.75
      – 2.16
            $0.99Exercised
            (1,092,534)
            $0.50—1.00
            $0.94Forfeited
            (100,000)
            $1.25
            $1.25Outstanding
      at December 31, 2006
            26,663,081
            $0.50
      – 2.16
            $0.96Warrants
      exercisable at December 31, 2006
            26,663,081
            $0.50
      – 2.16
            $0.96Outstanding
      at January 1, 2007
            26,663,081
            $0.50
      – 2.16
            $0.96Granted
            305,000
            $0.75
      – 1.75
            $0.97Exercised
            (3,948,293)
            $0.75—1.23
            $0.95Forfeited
            (20,000)
            $0.50
      – 0.94
            $0.72Outstanding
      at December 31, 2007
            22,999,788
            $0.75
      – 2.16
            $0.96Warrants
      exercisable at December 31, 2007
            22,999,788
            $0.75
      – 2.16
            $0.96





The
following table summarizes information about warrants outstanding at December
31, 2007.




Exercise
      Price
            Number
      Outstanding
              and
      Exercisable at
              December
      31, 2007
            Weighted
      Average
              Remaining
      Contractual
              Life
            Weighted
      Average
              Exercise
      Price$0.75
            228,581
            0.96
            $0.75$0.935
            16,527,781
            2.84
            $0.935$0.98
            400,000
            2.25
            $0.98$1.00
            5,081,602
            1.84
            $1.00$1.25
            675,000
            2.58
            $1.25$1.75
            10,000
            2.50
            $1.75$2.125
            55,147
            1.38
            $2.125$2.16
            21,677
            1.38
            $2.1622,999,788
            2.58
            $0.96








6.
Convertible Debt.




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




46


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




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




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




During
2005, the Company recorded additional interest expense of $36,945 related to the
beneficial conversion feature of the interest on the Gryffindor convertible
debt.




On
November 26, 2005 the Company entered into a redemption agreement with
Gryffindor to pay $1,185,959 of the Gryffindor convertible debt and accrued
interest of $94,877. Also on November 26, 2005 the Company issued a legal
assignment attached to and made a part of that certain Second Amended and
Restated Senior Secured Convertible Note dated November 26, 2004 in the original
principal amount of $1,185,959 together with interest of $94,877 paid to the
order of 8 investors dated November 26, 2005 for a total of $1,280,836. The
Company subsequently entered into debt conversion agreements with 7 of the
investors for an aggregate of $812,000 of convertible debt which was converted
into 1,101,764 shares of common stock at $0.737 per share. As of December 31,
2005, the Company had $468,836 in principal and $3,647 in accrued interest owed
to holders of the convertible debentures due on November 26, 2006. At December
31, 2005, the Company recorded additional interest expense of $2,584 related to
the beneficial conversion feature of the interest on the November 2005
convertible debt. The $1,280,836 in principal was issued when the conversion
price was lower than the market value of the Company's common stock on the date
of issue. As a result, a discount of $404,932 was recorded for this beneficial
conversion feature. The debt discount of $404,932 is being amortized over the
life of the debt using the effective interest method. At December 31, 2005,
$270,924 of the debt discount has been amortized which includes $256,711 of the
unamortized portion of the debt discount related to the debt which was
converted.




At
December 31, 2005, the November 2005 convertible debentures totaled $334,828,
net of debt discount of $134,008. The entire principal, net of debt discount,
was recorded as a current liability.




In
conjunction with the November 26, 2005 financing, the Company incurred debt
issuance costs consisting of cash of $128,082, 356,335 shares of common stock
valued at $345,645 and 1,000,000 warrants valued at $789,000. The warrants are
exercisable over 5 years, have an exercise price of $1.00, a fair market value
of $0.79 and were valued using the Black-Scholes option-pricing model. The total
debt issuance costs of $1,262,727 were recorded as an asset and amortized over
the term of the debt. At December 31, 2005, $835,294 of the debt issuance costs
have been amortized which includes $800,520 related to the debt that was
converted as of December 31, 2005. The 356,335 shares of common stock were not
issued as of December 31, 2005 and therefore have been recorded as an accrued
liability at December 31, 2005.




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




47


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




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




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




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




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




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




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




48


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




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




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




At
December 31, 2005, there was no amount outstanding related to the Cornell
debt.




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




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




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




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




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




49


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




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




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




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




At
December 31, 2005, $1,872,257 of the total debt discount had been amortized
which included $1,454,679 of the unamortized portion of the debt discount
related to the converted debt at the time of the debt conversions.




In
conjunction with the financing, the Company incurred debt issuance costs
consisting of $387,500 in cash and 980,000 of warrants valued at $426,700. The
warrants are exercisable over 5 years, have exercise prices ranging from $0.98 -
$1.23, fair market values ranging from $0.42 - $0.44 and were valued using the
Black-Scholes option pricing model. The total debt issuance costs of $814,200
were recorded as an asset and amortized over the term of the debt.




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




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




50


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




At
December 31, 2006, the March 2005 convertible debentures totaled $364,703, net
of debt discount of $2,797. The full amount is current at December 31,
2006.




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




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





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





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





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







7.           Related
Party Transactions




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




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




8.           Income
Taxes




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




Years
      Ended December 31,
            2007
            2006Amount
            %
            Amount
            %Federal
      statutory rate
            $                
      (3,402,000)
            (34.0)
            $             
      (3,016,000)
            (34.0)Adjustment
      to valuation allowance
            3,402,000
            34.0
            2,832,000
            31.9Non-deductible
      financing costs
            --
            --
            184,000
            2.1Actual
      tax expense (benefit)
            $                                
      --
            --
            $                             --
            --





51


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




December
      31,
            2007
            2006Deferred
      tax assetsNet
      operating loss carryforwards
            $
            8,014,000
            $
            5,794,000Stock
      compensation
            
            1,429,000
            
            633,000Warrants
      for services
            
            1,630,000
            
            1,472,000Deferred
      tax asset
            
            11,073,000
            
            7,899,000Deferred
      tax liability – patent amortization
            
            (2,816,000)
            
            (3,044,000)Valuation
      allowance
            
            (8,257,000)
            
            (4,855,000)Net
      deferred taxes
            $
            --
            $
            --







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




Since
inception of the Company on January 17, 2002, the Company has generated tax net
operating losses of approximately $23.6 million, expiring in 2022 through 2027.
The tax loss carryforwards of the Company may be subject to limitation by
Section 382 of the Internal Revenue Code with respect to the amount utilizable
each year. This limitation reduces the Company’s ability to utilize net
operating loss carryforwards. The amount of the limitation has not been
quantified by the Company. In addition, the Company acquired certain net
operating losses in its acquisition of Valley Pharmaceuticals, Inc. (Note 2).
However, the amount of these net operating losses has not been determined and
even if recorded, the amount would be fully reserved.




9.           Cash
Balance Defined Benefit Plan and Trust





In
January 2007, the Company established the Provectus Pharmaceuticals, Inc. Cash
Balance Defined Benefit Plan and Trust (the “Plan”), effective January 1, 2007,
for the exclusive benefit of its four employees and their
beneficiaries.  In January 2007, the Plan was fully funded for 2007
totaling $324,000 or $81,000 per employee.  The Plan contributions
vest immediately after three years of service.  All four employees are
fully vested as of January 1, 2007.  The Plan will be funded at
approximately the same level each year in accordance with the provisions of the
Plan.






52











EXHIBIT
INDEX








Exhibit
      No
            Description3.1(i)
            Restated
      Articles of Incorporation of Provectus, incorporated herein by reference
      to Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the
      fiscal quarter ended June 30, 2003, as filed with the SEC on August 14,
      2003.3.1(ii)+
            Bylaws,
      as amended, of Provectus Pharmaceuticals, Inc.4.1
            Specimen
      certificate for the common shares, $.001 par value per share, of Provectus
      Pharmaceuticals, Inc., incorporated herein by reference to Exhibit 4.1 to
      the Company's Annual Report on Form 10-KSB for the fiscal year ended
      December 31, 2002, as filed with the SEC on April 15,
    2003.10.1
            *
      Provectus Pharmaceuticals, Inc. Amended and Restated 2002 Stock Plan,
      incorporated herein by reference to Exhibit 10.2 to the Company's
      Quarterly Report on Form 10QSB for the fiscal quarter ended June 30, 2003,
      as filed with the SEC on August 14, 2003.10.2
            *
      Confidentiality, Inventions and Non-competition Agreement between the
      Company and H. Craig Dees, incorporated herein by reference to Exhibit
      10.8 to the Company's Annual Report on Form 10-KSB for the fiscal year
      ended December 31, 2002, as filed with the SEC on April 15,
      2004.10.3
            *
      Confidentiality, Inventions and Non-competition Agreement between the
      Company and Timothy C. Scott, incorporated herein by reference to Exhibit
      10.9 to the Company's Annual Report on Form 10-KSB for the fiscal year
      ended December 31, 2002, as filed with the SEC on April 15,
      2004.10.4
            *
      Confidentiality, Inventions and Non-competition Agreement between the
      Company and Eric A. Wachter, incorporated herein by reference to Exhibit
      10.10 to the Company's Annual Report on Form 10-KSB for the fiscal year
      ended December 31, 2002, as filed with the SEC on April 15,
      2004.10.5
            *
      Material Transfer Agreement dated as of July 31, 2003 between
      Schering-Plough Animal Health Corporation and Provectus, incorporated
      herein by reference to Exhibit 10.15 to the Company's Quarterly Report on
      Form 10-QSB for the fiscal quarter ended June 30, 2003, as filed with the
      SEC on August 14, 2003.10.6
            *
      Executive Employment Agreement by and between the Company and H. Craig
      Dees, Ph.D, dated January 4, 2005.10.7
            *
      Executive Employment Agreement by and between the Company and Eric
      Wachter, Ph.D, dated January 4, 2005.10.8
            *
      Executive Employment Agreement by and between the Company and Timothy C.
      Scott, Ph.D, dated January 4, 2005.10.9
            *
      Executive Employment Agreement by and between the Company and Peter
      Culpepper dated January 4, 2005.21.1+
            List
      of Subsidiaries23.1     +
            Consent
      of Independent Registered Public Accounting Firm31.1    
      +
            Certification  of  CEO
      pursuant to Rules 13a - 14(a) of the Securities Exchange Act of
      193431.2     +
            Certification  of  CFO  pursuant  to
      Rules 13a-14(a) of the Securities Exchange Act of 1934.32.1    
      +
            Certification
      Pursuant to 18 U.S.C. ss. 1350.





*
Management Compensation Plan


+ Filed
herewith


53