UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
DC 20549
 
 FORM
10-K
 
 FOR
ANNUAL AND TRANSITION REPORTS
 PURSUANT
TO SECTIONS 13 OR 15(d) OF
THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 (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
 [  ]
              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 01-21617
 
 THE QUIGLEY
CORPORATION
 (Exact
Name of Registrant as Specified in Its Charter)
  NEVADA
                
                23-2577138(State
      or Other Jurisdiction
                
                (I.R.S.
      Employerof
      Incorporation or Organization)
                
                Identification
      No.)
 
 KELLS BUILDING, 621
      SHADY RETREAT ROAD, P.O. BOX 1349, DOYLESTOWN, PA
                18901(Address
      of Principal Executive Offices)
                (Zip
      Code)
 Registrant’s
telephone number, including area code (215)
345-0919
 
 Securities
registered pursuant to Section 12(b) of the Act:  None
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 Title
      of each class
              
              Name
      of each exchange on which registeredCOMMON
      STOCK, $.0005 PAR VALUE PER SHARE
              
              NASDAQ
      GLOBAL MARKETCOMMON
      SHARE PURCHASE RIGHTS
              
              NOT
      APPLICABLE
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.       Yes
[   ] No [X]
 
 Indicate
by check mark
if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.   Yes [   ]
No [X]
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
[   ]
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  [   ]
 
 
 
 Table of Contents
 
 
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
  Large
      accelerated filer  [   ]
                
                Accelerated
      filer  [   ]Non-accelerated
      filer [X]
                
                Smaller
      reporting
  company  [   ]
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
 Yes
[   ] No [X]
 
 The
aggregate market value of the
registrant’s common stock held by non-affiliates was $40,871,138 as of June 30,
2007, based on the closing price of the common stock on The NASDAQ Global
Market.
 
 Number of
shares of each of the
registrant’s classes of securities outstanding on December 31,
2007:
 
 Common
stock, $.0005 par value per
share:                                                                           12,853,133.
 Common
share purchase
rights:                                                      0
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 
 Information
set forth in Part III of this report is incorporated by reference from the
registrant’s proxy statement for the 2007 annual meeting of
stockholders.
 
  
 Table of Contents
 
 TABLEOF
CONTENTS
   Part
      I
                
                
                
                PageItem
                1.
                Business
                2
      –121A.
                Risk Factors
                12–
      191B.
                Unresolved Staff Comments
                192.
                Properties
                193.
                Legal Proceedings
                19
      – 254.
                Submission of Matters to a Vote of Security
      Holders
                26Part
      II5.
                Market for Registrant’s Common Equity,
      Related Stockholder Matters and Issuer Purchases of Equity
      Securities
                26
      – 286.
                Selected Financial Data
                297.
                Management’s Discussion and Analysis of Financial Condition
      and Results of Operation
                30 –
      367A.
                Quantitative and Qualitative
      Disclosures About Market Risk
                378.
                Financial Statements and Supplementary
      Data
                389.
                Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure
                399A.
                Controls and Procedures
                399B.
                Other Information
                39Part
      III10.
                Directors and Executive Officers and Corporate
      Governance
                4011.
                Executive Compensation
                4012.
                Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
                4013.
                Certain Relationships and Related
      Transactions, and Director Independence
                4014.
                Principal Accountant Fees and
      Services
                40Part
      IV15.
                Exhibits and Financial Statement
      Schedules
                41
      – 42Signatures
                
                
                43
 
   1
 Table of Contents
 
 Forward-Looking
Statements
 
 In
addition to historical information, this Report contains forward-looking
statements. These forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in these forward-looking statements. Factors that might cause such a
difference include, but are not limited to, management of growth, competition,
pricing pressures on the Company’s products, industry growth and general
economic conditions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements.
 
 Certain Risk
Factors
 
 The
Quigley Corporation makes no representation that the United States Food and Drug
Administration (“FDA”) or any other regulatory agency will grant an
Investigational New Drug (“IND”) or take any other action to allow its
formulations to be studied or marketed.  Furthermore, no claim is made
that potential medicine discussed herein is safe, effective, or approved by the
Food and Drug Administration.  Additionally, data that demonstrates
activity or effectiveness in animals or in vitro tests do not necessarily mean
such formula test compound, referenced herein, will be effective in
humans.  Safety and effectiveness in humans will have to be
demonstrated by means of adequate and well controlled clinical studies before
the clinical significance of the formula test compound is
known.  Readers should carefully review the risk factors described in
other sections of the filing as well as in other documents the Company files
from time to time with the Securities and Exchange Commission
(“SEC”).
 
 PART I
 
 ITEM
1.                      BUSINESS
 
 Business
Development
 
 The
Company, headquartered in Doylestown, Pennsylvania, is a leading manufacturer,
marketer and distributor of a diversified range of homeopathic and health
products which comprise the Cold Remedy, Health and Wellness and Contract
Manufacturing segments.  The Company is also involved in the research
and development of potential prescription products that comprise the Ethical
Pharmaceutical segment.
 
 The
Company’s business is the development, manufacture, sale and distribution of
over the counter (OTC) cold remedy products, proprietary health and wellness
products through its direct selling subsidiary and the research and development
of natural-source derived pharmaceuticals.
 
 Cold-Eeze® is one of the
Company’s key cold remedy OTC products whose benefits are derived from its
proprietary zinc formulation.  The product’s effectiveness has been
substantiated in two double-blind clinical studies proving that Cold-Eeze® reduces the
duration and severity of the common cold symptoms by nearly half. The Cold
Remedy segment, where Cold-Eeze® is
represented, is reviewed regularly to realize any new consumer opportunities in
flavor, convenience and packaging to help improve market share for the
Cold-Eeze®
product.   Additionally, the Company is constantly active in
exploring and developing new products consistent with its brand image and
standard of proven consumer benefit.
 
 Effective
October 1, 2004, the Company acquired substantially all of the assets of JoEl,
Inc., the previous manufacturer of the Cold-Eeze® lozenge
product assuring a future manufacturing capability necessary to support the
business of the Cold Remedy segment.  This manufacturing entity, now
called Quigley Manufacturing Inc. (“QMI”), a wholly owned subsidiary of the
Company, will continue to produce lozenge product along with performing such
operational tasks as warehousing and shipping the Company’s Cold-Eeze®
products.  In addition, QMI produces a variety of hard and organic
candy for sale to third party customers in addition to performing contract
manufacturing activities for non-related entities.
 
 The
Health and Wellness segment is operated through Darius International Inc.
(“Darius”), a wholly owned subsidiary of the Company which was formed in January
2000 to introduce new products to the marketplace through a network of
independent distributor representatives.  Darius is a direct selling
organization specializing in proprietary nutritional and dietary supplement
based health and wellness products.  The formation of Darius has
provided diversification to the Company in both the method of product
distribution and the broader range of products available to the marketplace,
serving as a balance to the seasonal revenue cycles of the Cold-Eeze® branded
products.
 
 
 2
 Table of Contents
 
 On
February 29, 2008, the Company sold its wholly owned subsidiary, Darius
International Inc. (“Darius”) to InnerLight Holdings, Inc., whose major
shareholder is Mr. Kevin P. Brogan, the current president of
Darius.  The terms of the agreement include a cash purchase price of
$1,000,000 by InnerLight Holdings, Inc. for the stock of Darius and its
subsidiaries without guarantees, warranties or
indemnifications.  Darius markets health and wellness products through
its wholly owned subsidiary, Innerlight Inc., that constituted the Health and
Wellness segment of the Company.  Losses from this segment in recent
times have reduced the resources available for the research and development
activities of the Company’s Ethical Pharmaceutical
segment.  Additionally, the divestiture of Darius will provide clarity
to the Company’s strategic plan to focus its future endeavors in a
pharmaceutical entity with OTC products and a pipeline of potential formulations
that may lead to prescription products.  (See Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operation” and
Note 17 “Subsequent Events” for additional information.)
 
 In
January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley
Pharma Inc. (“Pharma”), that is under the
direction of its Executive Vice President and Chairman of its Medical Advisory
Committee.  Pharma was formed for the purpose of developing naturally
derived prescription drugs.  Pharma is currently
undergoing  research  and  development  activity  in  compliance  with
regulatory  requirements. At this time, eight U.S. and ten foreign
patents have been issued and assigned to the Company resulting from research
activity of Pharma.  In certain instances where a critical mass of
positive scientific data has been established for compounds that the Company
does not envision bringing to market, or is unable to fund ongoing research, it
may decide to sell or license its technology.
 
 Description of Business
Operations
 
 Since its
inception, the Company has continued to conduct research and development into
various types of health-related supplements and homeopathic cold
remedies.  Initially, the Company’s business was the marketing and
distribution of a line of nutritious health supplements (hereinafter
“Nutri-Bars”).  During 1995, the Company reduced the marketing
emphasis of Nutri-Bars and commenced focusing its research and development and
marketing resources on the Company’s patented Cold-Eeze® zinc gluconate
glycine cold relief products.
 
 Prior to
the fourth quarter 1996, the Company had minimal revenues and as a result
suffered continued losses due to ongoing research and development and operating
expenses. However, 1997 resulted in significant revenue increases as a result of
the Company’s nationwide marketing campaign and the increased public awareness
through media public service announcements of the Cold-Eeze® lozenge
product.
 
 Since
June 1996, the Cold Remedy segment has concentrated its business operations on
the manufacturing, marketing and development of its proprietary Cold-Eeze®
cold-remedy lozenge products and on development of various product
extensions.  These products are based upon a proprietary zinc
gluconate glycine formula, which has been proven to reduce the duration and
severity of common cold symptoms.  The Quigley Corporation acquired
worldwide  manufacturing  and  distribution  rights  to  this
formulation in 1992 and commenced national marketing in 1996.  The
demand for the Company’s cold-remedy products is seasonal, where the third and
fourth quarters generally represent the largest sales volume.  Prior
to October 1, 2004, the manufacture of the lozenge form of Cold-Eeze® was
outsourced.  Since that date, the lozenge form of Cold-Eeze® has been
manufactured by a subsidiary of the Company.
 
 Darius is
a direct selling organization specializing in proprietary health and wellness
products, which commenced shipping product to customers in the third quarter of
2000. On February 29, 2008, the Company sold Darius to InnerLight Holdings,
Inc.  (See Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” and Note 17 “Subsequent Events” for
additional information.)
 
 Pharma is
currently involved in the lengthy process of conducting research and development
on certain of its patented  formulations in compliance with FDA
regulations required for bringing prescriptions and botanical drugs to
market.  The Company is in the initial stages of what may be a lengthy
process to develop these patent applications into potential commercial
products.
 
 In 2007,
2006 and 2005, approximately 11%, 9% and 8%, respectively, of the Company’s net
sales were related to international markets.
 
 Financial
information regarding the Company’s operating segments is set forth in Item 8,
Notes to Financial Statements, Note 15 – Segment Information.
    3
 Table of Contents
 
 Products
 
 Cold-Remedy
Products
 
 In May
1992, the Company entered into an exclusive agreement for worldwide
representation, manufacturing, marketing of
Cold-Eeze® products
in the United States.  Cold-Eeze®, a zinc
gluconate glycine formulation (ZIGGTM), is an over-the-counter consumer product
used to reduce the duration and severity of the common cold and is available in
lozenge, sugar-free tablet and gum form.  The Company has
substantiated the effectiveness of Cold-Eeze® through a
variety of studies.  A randomized double-blind placebo-controlled
study, conducted at Dartmouth College of Health Science, Hanover, New Hampshire,
concluded that the lozenge formulation treatment, initiated within 48 hours of
symptom onset, resulted in a significant reduction in the total duration of the
common cold.
 
 On May 22, 1992,“Zinc and the Common
Cold, a Controlled Clinical Study,”was published in England in the
“Journal of International Medical Research,” Volume 20, Number 3, Pages
234-246.  According to this publication, (a) flavorings used in other
Zinc lozenge products (citrate, tartrate, separate, orotate, picolinate,
mannitol or sorbitol) render the Zinc inactive and unavailable to the patient’s
nasal passages, mouth and throat where cold symptoms have to be treated, (b)
this patented formulation delivers approximately 93% of the active Zinc to the
mucosal surfaces and (c) the patient has the same sequence of symptoms as in the
absence of treatment but goes through the phases at an accelerated rate and with
reduced symptom severity.
 
 On July
15, 1996, results of a new randomized double-blind placebo-controlled study on
the common cold, which commenced at the Cleveland Clinic Foundation
on October 3, 1994, were published.  The study called “Zinc Gluconate Lozenges for Treating
the Common Cold”was completed and published in the Annals of Internal Medicine –
Vol. 125 No. 2.Using a 13.3mg lozenge (almost half the
strength of the lozenge used in the Dartmouth Study), the result still showed a
42% reduction in the duration of common cold symptoms.
 
 In April
2002, the Company announced the statistical results of a retrospective clinical
adolescent study at the Heritage School facility in Provo, Utah that suggests
that Cold-Eeze® is also an
effective means of preventing the common cold and statistically (a) lessens the
number of colds an individual suffers per year, reducing the median from 1.5 to
zero and (b) reduces the use of antibiotics for respiratory illnesses from 39.3%
to 3.0% when Cold-Eeze® is
administered as a first line treatment approach to the common cold.
 
 In April
2002, the Company was assigned a Patent Application which was filed with the
Patent Office of the United States Commerce Department for the use of
Cold-Eeze® as a
prophylactic for cold prevention.  The new patent application follows
the results of the adolescent study at the Heritage School
facility.
 
 In May
2003, the Company announced the findings of a prospective study, conducted at
the Heritage School facility in Provo, Utah, in which 178 children, ages 12 to
18 years, were given Cold-Eeze® lozenges
both symptomatically and prophylactically from October 5, 2001 to May 30, 2002.
The study found a 54% reduction in the most frequently observed cold duration.
Those subjects not receiving treatment most frequently experienced symptom
duration of 11 days compared with 5 days when Cold-Eeze® lozenges
were administered, a reduction of 6 days.
 
 The
business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company’s products. Cold-Eeze®
is a homeopathic remedy that is subject to regulations by various federal, state
and local agencies, including the United States Food and Drug Administration
(“FDA”) and the Homeopathic Pharmacopoeia of the United States.
 
 Health And
Wellness
 
 Darius,
through Innerlight Inc., its wholly owned subsidiary, is a direct selling
company specializing in the development and distribution of proprietary health
and wellness products, including herbal vitamins and dietary supplements for the
human condition, primarily within the United States and since the second quarter
of 2003, internationally.
 
 The
continued success of this segment is dependent, among other things, on the
Company’s ability:
 
 ·
              To
      maintain existing independent distributor representatives and recruit
      additional successful independent distributor
      representatives.  Additionally, the loss of key high-level
      distributors or business contributors as a result of business
      disagreements, litigation or otherwise could negatively impact future
      growth and revenues;
 
 ·
              To
      continue to develop and make available new and desirable products at an
      acceptable cost;
 
 ·
              To
      maintain safe and reliable multiple-location sources for product and
      materials;
 
 ·
              To
      maintain a reliable information technology system and internet
      capability.  The Company
has
   4
 Table of Contents
   ·
              expended
      significant resources on systems enhancements in the past and will
      continue to do so to ensure prompt customer response times, business
      continuity and reliable reporting capabilities.  Any
      interruption to computer systems for an extended period of time could be
      harmful to the business;
 
 ·
              To
      execute conformity with various federal, state and local regulatory
      agencies both within the United States and abroad.  With the
      growth of international business, difficulties with foreign regulatory
      requirements could have a significant negative impact on future
      growth.  Any inquiries from government authorities relating to
      the Company’s business and compliance with laws and regulations could be
      harmful to the Company;
 
 ·
              To
      compete with larger more mature organizations operating within the same
      market and to remain competitive in terms of product relevance and
      business opportunity;
 
 ·
              To
      successfully implement methods for progressing the direct selling
      philosophy internationally; and
 
 ·
              To
      plan strategically for general economic
  conditions.
 
 Any or
all of the above risks could result in significant reductions in revenues and
profitability of the Health and Wellness segment.
 
 On
February 29, 2008, the Company sold Darius to InnerLight Holdings,
Inc.  (See Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” and Note 17 “Subsequent Events” for
additional information.)
 
 Contract
Manufacturing
 
 From
October 1, 2004, QMI has continued to produce lozenge product along with
performing such operational tasks as warehousing and shipping the Company’s
Cold-Eeze®
products.  In addition to that function, QMI produces a variety of
hard and organic candy for sale to third party customers in addition to
performing contract manufacturing activities for non-related
entities.  QMI is an FDA-approved facility.
 
 Ethical
Pharmaceutical
 
 Pharma’s
current activity is the research and development of naturally-derived
prescription drugs with the goal of improving the quality of life and health of
those in need.  Research and development will focus on the
identification, isolation and direct use of active medicinal
substances.  One aspect of Pharma’s research will focus on the
potential synergistic benefits of combining isolated active constituents and
whole plant components. The Company will search for new natural sources of
medicinal substances from plants and fungi from around the world while also
investigating the use of traditional and historic medicinals and
therapeutics.
 
 The
pre-clinical development, clinical trials, product manufacturing and marketing
of Pharma's
potential new products are subject to federal and state regulation in the United
States and other countries. Obtaining FDA regulatory approval for these
pharmaceutical products can require substantial resources and take several
years.  The length of this process depends on the type, complexity and
novelty of the product and the nature of the disease or other indications to be
treated. If the Company cannot obtain regulatory approval of these new products
in a timely manner or if the patents are not granted or if the patents are
subsequently challenged, these possible events could have a material effect on
the business and financial condition of the Company.  The strength of
the Company’s patent position may be important to its long-term
success.  There can be no assurance that these patents and patent
applications will effectively protect the Company’s products from duplication by
others.   Additionally, the operations of the Company contribute
to the current research and development expenditures of the Ethical
Pharmaceutical segment.   In addition to the funding from
operations, the Company may in the short and long term raise capital through the
issuance of equity securities or secure other financing resources to support
such research.  As research progresses on certain formulations,
expenditures of the Pharma segment will require substantial financial support
and would necessitate the consideration of other approaches such as, licensing
or partnership arrangements that meet the Company’s long term goals and
objectives.  Ultimately, should internal working capital or internal
funding be insufficient, there is no guarantee that other financing resources
will become available, thereby deferring future growth and development of
certain formulations.
 
 
 5
 Table of Contents
   Patents
and chronological summary of QR formulations, which may or may not be areas of
current focus, are:
 
 ·
              A
      Patent (No. 6,555,573 B2) entitled “Method and Composition for the Topical
      Treatment of Diabetic Neuropathy.” The patent extends through March 27,
      2021.
 
 ·
              A
      Patent (No. 6,592,896 B2) entitled “Medicinal Composition and Method of
      Using It” (for Treatment of Sialorrhea and other Disorders) for a product
      to relieve sialorrhea (drooling) in patients suffering from Amyotrophic
      Lateral Sclerosis (ALS), otherwise known as Lou Gehrig’s
      Disease.  The patent extends through August 5,
    2021.
 
 ·
              A
      Patent (No. 6,596,313 B2) entitled “Nutritional Supplement and Method of
      Using It” for a product to relieve sialorrhea (drooling) in patients
      suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou
      Gehrig’s Disease.  The patent extends through April 14,
      2022.
 
 ·
              A
      Patent (No. 6,753,325 B2) entitled “Composition and Method for Prevention,
      Reduction and Treatment of Radiation Dermatitis,” a composition for
      preventing, reducing or treating radiation dermatitis.  The
      patent extends through November 5,
2021.
 
 ·
              A
      Patent (No. 6,827,945 B2) entitled “Nutritional Supplements and Method of
      Using Same” for a method for treating at least one symptom of
      arthritis.  The patent extends through April 22,
      2023.
 
 ·
              A
      Patent (No. 7,083,813 B2) entitled “Methods for The Treatment of
      Peripheral Neural and Vascular Ailments.”  The patent extends
      through August 4, 2023.
 
 ·
              A
      Patent (No. 7,166,435 B2) entitled “Compositions and Methods for Reducing
      the Tranmissivity of Illnesses.”   This patent will provide
      additional protection to an existing composition patent (number
      6,592,896), which the Company received in July 2003 and will support
      on-going investigations and potential commercialization opportunities. The
      Company will be continuing its studies to test the effects of the
      referenced compound against avian flu and human influenza. The patent
      extends through November 5, 2021.
 
 ·
              A
      Patent (No. 7,175,987 B2) entitled “Compositions and Methods for The
      Treatment of Herpes.”  The patent extends through November 5,
      2021.
 
 ·
              A
      Mexican Patent (No. 236311) entitled “Method and Composition for the
      Treatment of Diabetic Neuropathy.”  The patent extends through
      December 18, 2020.
 
 ·
              A
      New Zealand Patent (No. 533439) entitled “Methods for The Treatment of
      Peripheral Neural and Vascular Ailments.”  The patent extends
      through November 6, 2022.
 
 ·
              A
      New Zealand Patent (No. 526041) entitled “Method and Composition for the
      Treatment of Diabetic Neuropathy.” The patent extends through December 18,
      2021.
 
 ·
              A
      New Zealand Patent (No. 530187) entitled “Nutritional Supplements and
      Methods of Using Same.” The patent extends through August 6,
      2022.
 
 ·
              A
      New Zealand Patent (No. 537821) entitled “Anti-Microbial Compositions and
      Methods of Using Same.” The patent extends through July 23,
      2023.
 
 ·
              An
      Australian Patent (No. 2002231095) entitled “Method and Composition for
      the Treatment of Diabetic Neuropathy.”    The patent
      extends through December 18, 2021.
 
 ·
              An
      Australian Patent (No. 2002352501) entitled “Method for The Treatment of
      Peripheral Neural and Vascular Ailments.”    The
      patent extends through November 5,
2022.
 
 ·
              An
      Australian Patent (No. 2002232464) entitled “Nutritional Supplements and
      Methods of Using Same.”    The patent extends through
      August 5, 2022.
 
 ·
              A
      South African Patent (No. 2003/4247) entitled “Methods and Composition for
      the Treatment of Diabetic Neuropathy.”    The patent
      extends through December 18, 2021.
 
 
 6
 Table of Contents
  ·
              A
      South African Patent (No. 2003/9802) entitled “Nutritional Supplements and
      Methods of Using Same” for a method for treating at least one symptom of
      arthritis.  The patent extends through August 5,
      2022.
 
 ·
              A
      South African Patent (No. 2004/4614) entitled “Methods for The Treatment
      of Peripheral Neural and Vascular Ailments.”  The patent extends
      through November 5, 2022.
 
 ·
              A
      South African Patent (No. 2005/0517) entitled “Anti-Microbial Compositions
      & Methods for Using Same,” the patent extends through July 23,
      2023.
 
 ·
              A
      South African Patent (No. 2004/3365) “Topical Compositions and Methods for
      Treatment of Adverse Effects of Ionizing Radiation,” the patent extends
      through November 5, 2022.
  ·
              A
      South African Patent (No. 2004/3364) “Nutritional Supplements and Methods
      for Prevention, Reduction and Treatment of Radiation Injury” the patent
      extends through May 1, 2022.
 
 ·
              An
      Israeli Patent (No. 159357) entitled “Nutritional Supplements and Methods
      of Using Same,” the patent extends through August 6,
  2022.
 
 QR-333 – In April 2002, the
Company initiated a Proof of Concept Study in France for treatment of diabetic
neuropathy, which was concluded in 2003.  In April 2003, the Company
announced that an independently monitored analysis of the
Proof  of  Concept  Study  concluded  that  subjects  using
this  formulation  had  67%  of their
symptoms improve, suggesting efficacy.  In March 2004, the Company
announced that it had completed its first meeting at the FDA prior to submitting
the Company’s IND application for the relief of symptoms of diabetic symmetrical
peripheral neuropathy.  The FDA’s pre-IND meeting programs are
designed to provide sponsors with advance guidance and input on drug development
programs.  In September 2005, the Company announced that a preliminary
report of its topical compound for the treatment of diabetic neuropathy was
recently featured in the Journal of Diabetes and Its
Complication.  Authored by Dr. C. LeFante and Dr. P. Valensi,
the article appeared in the June 1, 2005 issue, and included findings that
showed the compound reduced the severity of numbness, and irritation from
baseline values.  In October 2005, the Company announced the results
of  pre-clinical toxicology studies that showed no irritation, photo
toxicity, contact hypersensitivity or photo allergy when applied topically to
hairless guinea pigs and another study that showed no difference in the dermal
response of the compound or placebo when applied to Gottingen Minipigs. (Both
animal models are suggested for the evaluation of  topical drugs, by
the FDA).  In March 2006, the Company announced the filing of an IND
application with the FDA for its topical compound for
the  treatment  of  Diabetic  Peripheral  Neuropathy.  This
filing allowed the Company to begin human clinical trials following a 30-day
review period.  If no further comments were forthcoming from the FDA,
studies with human subjects could commence pending the availability of study
drug.  This application included a compilation of all of the
supporting development data and regulatory documentation required to file an IND
application with the FDA. In April 2006, upon FDA approval for its IND, the
Company announced its intent to commence human studies on its
formulation.
 
 The
Company also announced that in anticipation of receiving this IND, it had
previously held its investigators meeting to organize its multi-center Phase II
(b) trials. This would allow the Company to begin these trials as soon as study
drug is available.
 
 In May
2006, the Company announced that it had begun screening patients to start
testing their investigational new drug QR-333 and patients suffering from
diabetic peripheral neuropathy would be given doses in an escalating fashion to
provide pharmacokinetics data.
 
 In
September 2006, the Company announced that the results from its human study,
titled "Single Center, Dose Escalating, Safety, Tolerability, And
Pharmacokinetics Study Of QR-333 In Subjects With Diabetic Peripheral
Neuropathy", demonstrated that QR-333 can be administered safely to patients
suffering from diabetic peripheral neuropathy and it would proceed to conducting
Phase II (b) clinical trials.  The essential CMC (Chemistry
Manufacturing and Controls) stage would provide the Company with the necessary
information needed to produce larger quantities of drug for the Phase II (b)
trial involving approximately 180 patients.
 
 The
pharmacokinetics trial was the first study in the U.S. conducted under the FDA
issued IND. The positive data showed that QR-333 is safe, it is not systemically
absorbed and it is well tolerated after multiple doses. These findings are
consistent with prior animal toxicity data and the human proof of concept study
performed in France.
    7
 Table of Contents
 
 In
November 2006, the Company announced that patient enrollment in a Phase II (b)
multi center clinical study of QR-333 for the treatment of symptomatic Diabetic
Peripheral Neuropathy (DPN) had commenced.  The Phase II (b) trial
will evaluate
the safety and efficacy of QR-333 applied three times daily compared to
placebo-treated patients over 12 weeks. Efficacy will be determined by Symptom
Assessment Scores, a Visual Analogy Scale (VAS), Quality of Life and Sleep
Questionnaires. Safety will be determined by medical history, physical
examination, vital signs, 12-lead ECG, laboratory tests and nerve conduction
studies. The study will involve 150-180 randomized male and female patients with
Type 1 & 2 diabetes, as defined by the ADA (American Diabetes Association)
and distal symmetric diabetic polyneuropathy.
 
 The Study
Chairman is Dr. Philip Raskin, Professor of Medicine University of Texas
Southwestern Medical Center at Dallas Texas. The study protocol was approved by
the FDA as a part of Quigley Pharma’s IND submission and has been approved by
the required Investigational Review Boards. The completion of the study is
dependent upon enrollment rates that may affect the overall length of the study
and the communication of its results.
 
 In
September 2007, the Company issued an update on a Phase II (b) Clinical Study of
QR-333 on Diabetic Peripheral Neuropathy.  The update on the study
noted that over 100 subjects have been enrolled, 52 subjects have completed
treatment and over 225 subjects have been screened for the Phase II (b) study
designed to evaluate the safety and efficacy of the topical formulation on
subjects with diabetic peripheral neuropathy.  Subject screening and
enrollment will continue to ensure a 140 evaluable patient study
population.  Once enrolled, subject treatment time is 12
weeks.  To date the in-progress safety profile for this study has been
consistent with the findings from the favorable safety results of the previous
human proof of concept study conducted in France.  Subsequently, in
March 2008, the Company indicated that the number of subjects increased in the
study.
 
 QR-336 – In April 2004, the
Company announced the results of a preliminary, pre-clinical animal study which
measured the effect of its proprietary patent applied for formulation against
ionizing (nuclear) radiation.  This study determined that parenteral
(injection) administration of the study compound was protective against the
effects of a lethal, whole body ionizing radiation dose in a mouse
model.  This compound is being investigated to potentially reduce the
effects of radiation exposure on humans.
 
 In April
2006, the Company announced that it signed an agreement with Dr. William H.
McBride, the Vice Chair of Research, Department of Oncology at UCLA to help
develop an appropriate animal model radio protective research program for QR-336
to comply with New Food and Drug Administration animal efficacy rules for
radio-protective pharmacological compounds.
 
 In
October 2006, the Company announced that it had received significant data
identifying 50 microliters as the least toxic and  most effective
radiation protection dose in mice when administered ip (intraperitoneal), po (by
mouth) or sc (under the skin) prior to radiation exposure. These experiments
were essential for providing the Company with data to optimize
 the
formulation for efficacy and route of administration, which is required for
filing under the FDA’s "Animal Efficacy Rule".
 
 QR-337 – In September 2003,
the Company announced its intention to file for permission to study its patent
pending potential treatment for psoriasis and other skin
disorders.  Continued testing will therefore have to be conducted
under an IND application following positive preliminary results.
 
 QR-435 – In May 2004, the
Company announced that an intranasal spray application of the anti-viral test
compound demonstrated efficacy by significantly reducing the severity of illness
in ferrets that had been infected with the Influenza A virus. In pre-clinical
studies, the antiviral formulation demonstrates antiviral activity against
Ocular and Genital Herpes, indicating a new research and development path for
the versatile compound. The Company is pleased with the progress and indicated
that continued research is required to confirm the compound's safety and
efficacy profiles.
  In May
2006, the Company announced that it would begin a series of studies to evaluate
the ocular antiviral efficacy and toxicity of its naturally-derived topical
compound QR-435. Studies will be completed at The Campbell Ophthalmic
Microbiology Laboratory at the University of Pittsburgh in the same lab where
previous successful in vitro studies of QR-435 were performed.
  In
December 2006, the Company announced that a series of studies were conducted on
the advice of Campbell Laboratories, University of Pittsburgh, to assess QR-435
(Quigley Pharma’s broad spectrum anti-viral) potential for treating Herpes
Keratitis.
 
 While the
in-vitro studies were very successful at killing the herpes virus on direct
contact, the HSV-1/NZW rabbit keratitis model study showed that the compound, in
its aqueous form, did not remain in the eye long enough to penetrate the corneal
epithelial cells where the virus resides in an infection. The HSV-1/NZW rabbit
keratitis model is a recognized standard for evaluating potential therapeutic
agents in this class and is only utilized based on prior positive
experimentation, as was the case.
 
 
 8
 Table of Contents
  Quigley
Pharma may continue to pursue research and development objectives of this
compound in the treatment of respiratory viruses on the strength of prior
successful in-vitro and ferret model in-vivo studies. The Company's naturally
derived formula has shown significant antiviral properties against various
strains of H3N2 and H5N1 Influenza viruses in these studies.
 QR-437 – In January 2004, the
Company reported that its compound, which was demonstrating antiviral activity,
had shown virucidal and virustatic activity against the strain 3B of the Human
Immunodeficiency Virus Type 1 (HIV-1) in an in-vitro
study.   Additionally, the Company decided that the derivative
compound of the anti-viral formulation previously found to be effective for
treating Sialorrhea would probably postpone further development on the
Sialorrhea indication and concentrate on further qualification and development
of the anti-viral capabilities of the compound in humans.
 
 QR-439 – In December 2003, the
Company announced positive test results of a preliminary independent in vitro
study indicating that a test compound of the Company previously tested on the
Influenza virus showed “significant virucidal activity against a strain of the
Severe Acute Respiratory Syndrome (SARS) virus.”
 
 In
January 2004, the Company announced that it would conduct two further studies
evaluating the compound which had shown activity against Influenza and
SARS.  The first study was intended to repeat the previously announced
results, which demonstrated the compound to be 100 percent effective in
preventing non-infected ferrets in close proximity to an infected ferret from
becoming infected with the Influenza A virus.  The second study was a
dose ranging study on the test compound. Upon dosage determination and
confirmation results from these forthcoming animal model studies, a human proof
of concept study using a virus challenge with Influenza A virus in a quarantine
unit would be a viable next step.
 
 QR-440 (a) –The Companyreceived an additional
Investigational New Animal Drug (INAD) number from the Center for Veterinary
Medicine of the FDA. In previous studies, QR-440 has been shown to reduce
inflammation and also suggests possible disease-modifying
potential.
  QR-441(a) – In November 2005,
the Company was assigned nine INADs for a broad anti-viral agent by the Center
for Veterinary Medicine of the FDA. Eight of the INADs are for investigating the
compound use against avian flu H5N1 virus in chickens, turkeys, ducks, pigs,
horses, dogs, cats and non-food birds.  In January 2006, a ninth INAD
was assigned for investigating its compound for treating arthritis in dogs. In
March 2006, the Company announced that it is planning a series of controlled
experiments designed to test its all natural broad spectrum anti-viral compound
in poultry stocks.  The Company also announced that Dr. Timothy S.
Cummings, MS, DVM, ACPV Clinical Poultry Professor at the College of Veterinary
Medicine at Mississippi State University and Thomas G. Voss, Ph.D. Assistant
Professor Tulane University School of Medicine will be assisting the Company in
the development of the INAD bird challenge studies.
  In July
2006, the Company announced that it has obtained positive results that support
Quigley Pharma's continued progress in developing the natural broad spectrum
anti-viral QR441(a) for use in preventing the spread of avian flu in poultry
stocks. The results of the healthy chicken medical feed study confirmed that
food or water dose forms provide an opportunity for potential commercialization
if the compound demonstrates efficacy within these dose forms.  The
results clearly showed that the chickens tolerated and consumed all
concentrations of QR441 (a) in the medicated feed. They also tolerated and
consumed the low concentration of drug in the medicated water.
  In
January 2007, the Company announced positive results from a study evaluating its
anti-viral compound QR-441(a) in embryonating egg and VERO E6 cell test models.
The preliminary study demonstrated QR-441(a) as a potential antiviral agent in
reducing Infectious Bronchitis and New Castle Disease, two viral poultry
diseases that have a significant economic impact to the poultry industry on an
annual basis. Previous in vitro studies have demonstrated that QR-441(a) to be a
potent antiviral agent against H5N1 (Avian Flu).
  In
February 2007, the Company announced that it had signed an agreement with the
State of Israel Ministry of Agriculture & Rural Development (MOAG) and the
Kimron Veterinary Institute to conduct a clinical trial testing the anti-viral
capacity of the Quigley compound QR-441(a) administered as a medical feed and
water to chickens exposed to HPAI (Highly Pathogenic Avian Influenza)
H5N1.
  If
successful this study could potentially provide data on the efficacy of
QR-441(a) in preventing the infection of food grade poultry through the use of
formulated feed and water. Positive data could be used to continue the
development of the compound in the U.S with guidance from the FDA under the
INAD’s issued to Quigley in 2005 and might also be useful for development
outside the United States, where the impact of disease has already been
felt.
 QR-443 – In August 2006, the
Company announced that it had obtained positive results for its QR-443 compound
for the treatment of Cachexia.  Cachexia is an extremely debilitating
and life threatening, wasting syndrome associated with chronic diseases such as
cancer, AIDS, chronic renal failure, COPD and rheumatoid arthritis, where
inflammation has a significant impact
and patients experience loss of weight, muscle atrophy, fatigue, weakness and
decreased appetite. The results of an animal study found a 75% efficacy rate in
the treatment of mice with this condition.
   9
 Table of Contents
  In
January 2007, the Company announced that it had completed a preliminary follow
up Cachexia study, evaluating weight loss in mice. The tumor burden Cachexia
model study concluded that QR-443 was as effective in delaying the progression
of Cachexia when given orally as it had been shown to be when administered
intra-peritoneally in a previous study.
  The new
data compliments the previous study results demonstrating a correlation between
effectiveness and the frequency of administration of the QR-443
compound.
  On June
20, 2007, the Company announced that it had completed a follow-up study to
evaluate the impact of QR-443 on levels of a pro-inflammatory cytokine
Interleukin-6 (IL-6) in a cachexia model. This new data concluded that
responding mice had lower levels of serum IL-6 when administered QR-443 orally
than mice that received placebo. This reduction in IL-6 suggests a method of
action for the delayed onset and reduced severity of cachexia observed in this
study as well as the previously conducted cachexia model study.
  
 Patents, Trademarks, Royalty
and Commission Agreements
 
 The
Company currently owns no patents for cold-remedy products.  However,
the Company has been assigned patent applications which are hereinafter
discussed and has been granted an exclusive agreement for worldwide
representation, manufacturing, marketing and distribution rights to a zinc
gluconate glycine lozenge formulation, which are patented as
follows:
 
  United
      States:
                No.
      4 684 528 (August 4, 1987, expired August 2004)No.
      4 758 439 (July 19, 1988, expired August 2004)Canada:
                No.
      1 243 952 (November 1, 1988, expired June 2005)Great
      Britain:
                No.
      2 179 536 (December 21, 1988, expired June 2005)Germany:
                No.
      3,587,766 (March 2, 1994, expired June 2005)Sweden:
                No.
      0 183 840 (March 2, 1994, expired June 2005)France
      & Italy:
                No.
      EP 0 183 840 B1 (March 2, 1994, expired June 2005)    Japan:   Pending
 The
following patents have been assigned to the Company in relation to Pharma, together with issue
date:
  United
      States:
                No.
      6 555 573 B2 (April 29, 2003)
                No.
      6 592 896 B2 (July 15, 2003)No.
      6 596 313 B2 (July 22, 2003)
                No.
      6 753 325 B2 (June 22, 2004)No.
      6 827 945 B2 (December 7, 2004)
                No.
      7,083,813 B2 (August 1, 2006)No.
      7,166,435 B2 (January 23, 2007)
                No.
      7,175,987 B2 (February 13, 2007)
 Mexico
                No.
      236311 (April 28, 2006)
                South
      Africa
                No.
      2003/4247 (July 28, 2004)South
      Africa
                No.
      2003/9802 (July 28, 2004)New
      Zealand
                No.
      533439 (October 12, 2006)
                South
      Africa
                No.
      2004/4614 (October 28, 2005)New
      Zealand
                No.
      526041 (May 12, 2005)
                South
      Africa
                No.
      2005/0517 (December 28, 2005)New
      Zealand
                No.
      530187 (June 7, 2007)
                South
      Africa
                No.
      2004/3365 (May 31, 2006)New
      Zealand
                No.
      537821 (September 13, 2007)
                South
      Africa
                No.
      2004/3364 (October 25, 2006)Australia
                No.
      2002231095 (November 24, 2005)
                Israel
                No.
      159357 (November 21, 2006)Australia
                No.
      2002352501 (July 5, 2007)Australia
                No.
      2002232464 (February 22, 2007)
 The
Cold-Eeze® products
are marketed by the Company in accordance with the terms of a licensing
agreement (between the Company and the developer).  The contract is
assignable by the Company with the developer’s consent.  In return for
exclusive distribution rights, the Company paid the developer a 3% royalty and a
2% consulting fee based on sales collected, less certain deductions, throughout
the term of this agreement, which expired in 2007.  However, the
Company and the developer are in litigation and as such no potential offset for
these fees from such litigation has been recorded.
 
 During
1997, the Company obtained a trademark for the major components of its lozenge,
ZIGGTM
(denoting zinc gluconate glycine), to set Cold-Eeze® apart from the imitations
then proliferating the marketplace.
   
 10
 Table of Contents
 
 
 An
agreement between the Company and its founders was entered into on June 1,
1995.  The founders, both officers and stockholders of the Company, in
consideration of the acquisition of the Cold-Eeze® cold
therapy product, have received a total commission of five percent (5%), on sales
collected, less certain deductions.  This agreement expired on May 31,
2005.
 
 Product Distribution and
Customers
 
 The
Company has several Broker, Distributor and Representative Agreements, both
nationally and internationally, which provide for commission compensation based
on sales performance.
 
 The Cold-Eeze®products are
distributed through numerous food, chain drug and mass merchandisers throughout
the United States, including: Walgreen Co., Wal-Mart, Ahold, Super Valu, CVS,
RiteAid, Publix, Sam’s Club, Winn-Dixie Stores, Inc., Target, The Kroger
Company, Safeway Inc., Costco Wholesale, Kmart Corporation, and wholesale
distributors including, AmerisourceBergen and Cardinal
Distribution.
 
 The
Company is not dependent on any single customer as the broad range of customers
includes many large wholesalers, mass merchandisers, and multi-outlet pharmacy
chains, five of which account for a significant percentage of sales
volume.  The top five customers of the Company represent 37%, 31%, and
29% of its continuing consolidated gross revenues for the years ended December
31, 2007, 2006 and 2005, respectively.
 
 Darius is
a direct selling organization specializing in proprietary health and wellness
products and the introduction of new products to the marketplace through a
network of independent distributor representatives.  This method of
distribution is in contrast to traditional distribution channels using
independent and chain drug and discount stores as utilized by the Company in the
promotion of the cold-remedy products.  On February 29, 2008, the
Company sold this wholly owned subsidiary, Darius International Inc. (“Darius”)
to InnerLight Holdings, Inc.  (See Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operation” for further
discussion.)
 
 Pharma
currently has no sales since it is undergoing research and development activity
in compliance with regulatory requirements and is at the initial stages of what
may be a lengthy process to develop commercial products.
 
 Research and
Development
 
 The Company’s research and
development costs for the years ended December 31, 2007, 2006 and 2005 were
$6,490,367, $3,820,071 and $3,784,221 respectively.  Future research
and development expenditures are anticipated in order to develop extensions of
the Cold-Eeze®product,
including potential unrelated new products in the consumer health care industry,
that are primarily supported by clinical studies, for efficacious long-term
products that can be coupled with possible line extension derivatives for a
family of products.  Clinical studies and testing are anticipated in
connection with Pharma, such as the formulation of products for diabetic use,
radiation dermatitis, influenza A, arthritis and other
disorders.  Pharma is currently involved in research activity
following patent applications that have been assigned to the
Company.  Research and development costs, relating to potential
products, are expected to increase significantly over time as milestones in the
development and regulatory process may be achieved.
 
 Regulatory
Matters
 
 The business of the
Company is subject to federal and state laws and regulations adopted for the
health and safety of users of the Company’s products.  The Company’s
Cold-Eeze®product is a
homeopathic remedy, which is subject to regulation by various federal, state and
local agencies, including the FDA and the Homeopathic Pharmacopoeia of the
United States.  These regulatory authorities have broad powers, and
the Company is subject to regulatory and legislative changes that can affect the
economics of the industry by requiring changes in operating practices or by
influencing the demand for, and the costs of, providing its
products.  Management believes that the Company is in compliance with
all such laws, regulations and standards currently in effect including the Food,
Drug and Cosmetics Act of 1938 and the Homeopathic Pharmacopoeia Regulatory
Service.  Although it is possible that future results of operations
could be materially affected by the future costs of compliance, management
believes that the future costs will not have a material adverse effect on the
Company’s financial position or competitive position.
 
 The
pre-clinical development, clinical trials, product manufacturing and marketing
of Pharma's
potential new products are subject to federal and state regulation in the United
States and other countries. Obtaining FDA regulatory approval for these
pharmaceutical products can require substantial resources and take several
years.  The length of this process depends on the type, complexity and
novelty of the product and the nature of the disease or other indications to be
treated. If the Company cannot obtain regulatory approval of these new products
in a timely manner or if the patents are not granted
or if the patents are subsequently challenged, these possible events could all
have a material effect on the business and financial condition of the
Company.  The strength of the Company’s patent position may be
important to its long-term success.  There can be no assurance that
these patents and patent applications will effectively protect the Company’s
products from duplication by others.
   11
 Table of Contents
 
 Competition
 
 The
Company competes with other suppliers of cold-remedy and health and wellness
products.  These suppliers range widely in size.  Some of
the Company’s competitors have significantly greater financial, technical or
marketing resources than the Company.  Management believes that its
Cold-Eeze® product, which has been clinically proven in two double-blind studies
to reduce the severity and duration of common cold symptoms, offers a
significant advantage over many of its competitors in the over-the-counter
cold-remedy market.  Management further believes that Darius’ direct
marketing distribution methods offer a significant advantage over many of its
competitors.  The Company believes that its ability to compete depends
on a number of factors, including price, product quality, availability, speed to
market, reliability, credit
terms,  name  recognition,  delivery  time  and  post-sale
service and support.  Effective October 1, 2004,
a  subsidiary  ofthe
Company commenced manufacturing the Cold-Eeze®lozenge
product.  This subsidiary assures future production capabilities of
the lozenge product which constitutes primarily all of the cold remedy
revenue.
 
 Employees
 
 At
December 31, 2007 the Company employed 125 full-time persons, the majority of
which were employed at the Company’s manufacturing facility in a production
function.  The remainder were involved in an executive, marketing or
administrative capacity.  None of the Company’s employees are covered
by a collective bargaining agreement or are members of a union.
 
 Suppliers
 
 Prior to October 1, 2004,
the manufacturing of the lozenge form of Cold-Eeze®
was outsourced, but is now under the control of the Company.  The
other forms of Cold-Eeze®and remaining
products of both the cold remedy and health and wellness segments continue to be
manufactured by contract manufacturers.  Should these third party
relationships terminate or discontinue for any reason, the Company has
formulated a contingency plan necessary in order to prevent such discontinuance
from materially affecting the Company’s operations. Any such termination may,
however, result in a temporary delay in production until the replacement
facility is able to meet the Company’s production
requirements.
 
 Raw
materials used in the production of the cold-remedy products are available from
numerous sources.  Currently, they are being procured from a single
vendor in order to secure purchasing economies and qualitative
security.  In a situation where this one vendor is not able to supply
the ingredients, other sources have been identified.  Any situation
where the vendor is not able to supply the contract manufacturer with
ingredients may result in a temporary delay in production until replacement
supplies are obtained to meet the Company’s production
requirements.
 
 Website
Access
 
 The Company's website address is
www.quigleyco.com. The Company’sfilings with the Securities and Exchange Commission (“SEC”)are available at no cost on its website as soon as practicable after the
filing of such reports with the SEC.
 
 ITEM
1A.                      RISKFACTORS
  On
February 29, 2008, the Company sold Darius to InnerLight Holdings,
Inc.  (See Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” and Note 17 “Subsequent Events” for
additional information.)
  The
Company Has A History of Losses and Limited Working Capital and Expects to
Increase Spending.
 
 The
Company has experienced net losses for four of the past seven fiscal
years.  Although the Company earned net income of approximately
$3,217,000, $453,000 and $675,000, respectively, in the fiscal years ended
December 31, 2005, December 31, 2004 and 2003, it incurred net losses of
$2,458,000, $1,748,000, and $6,454,000,  respectively, in the fiscal
years ended December 31, 2007, December 31, 2006, December 31,
2002.  In the fiscal year ended December 31, 2001, the Company earned
net income of $216,000, but that amount included net settled litigation payments
received of approximately $700,000 related to licensing fees.  As of
December 31, 2007, The Company had working capital of approximately
$18,819,000.  Since the Company continues to increase its spending on
research and development in connection with Pharma’s product development, it is
uncertain whether the Company will generate sufficient revenues to meet expenses
or to operate profitably in the future.
 
  12
 Table of Contents
 
 
 The Company Holds Patents Which It
May Not Be Able to Develop Into Pharmaceutical Medications.
 
 Future
success depends in part on Pharma’s ability to research and develop prescription
medications based on patents, which currently are:
 
 ·
              A
      Patent (No. 6,555,573 B2) entitled “Method and Composition for the Topical
      Treatment of Diabetic Neuropathy.” The patent extends through March 27,
      2021.
 
 ·
              A
      Patent (No. 6,592,896 B2) entitled “Medicinal Composition and Method of
      Using It” (for Treatment of Sialorrhea and other Disorders) for a product
      to relieve sialorrhea (drooling) in patients suffering from Amyotrophic
      Lateral Sclerosis (ALS), otherwise known as Lou Gehrig’s
      Disease.  The patent extends through August 5,
    2021.
 
 ·
              A
      Patent (No. 6,596,313 B2) entitled “Nutritional Supplement and Method of
      Using It” for a product to relieve sialorrhea (drooling) in patients
      suffering from Amyotrophic Lateral Sclerosis (ALS), otherwise known as Lou
      Gehrig’s Disease.  The patent extends through April 14,
      2022.
 
 ·
              A
      Patent (No. 6,753,325 B2) entitled “Composition and Method for Prevention,
      Reduction and Treatment of Radiation Dermatitis,” a composition for
      preventing, reducing or treating radiation dermatitis.  The
      patent extends through November 5,
2021.
 
 ·
              A
      Patent (No. 6,827,945 B2) entitled “Nutritional Supplements and Method of
      Using Same” for a method for treating at least one symptom of
      arthritis.  The patent extends through April 22,
      2023.
 
 ·
              A
      Patent (No. 7,083,813 B2) entitled “Methods for The Treatment of
      Peripheral Neural and Vascular Ailments.”  The patent extends
      through August 4, 2023.
 
 ·
              A
      Patent (No. 7,166,435 B2) entitled “Compositions and Methods for Reducing
      the Tranmissivity of Illnesses.”   This patent will provide
      additional protection to an existing composition patent (number
      6,592,896), which the Company received in July 2003 and will support
      on-going investigations and potential commercialization opportunities. The
      Company will be continuing its studies to test the effects of the
      referenced compound against avian flu and human influenza. The patent
      extends through November 5, 2021.
 
 ·
              A
      Patent (No. 7,175,987 B2) entitled “Compositions and Methods for The
      Treatment of Herpes.”  The patent extends through November 5,
      2021.
 
 ·
              A
      Mexican Patent (No. 236311) entitled “Method and Composition for the
      Treatment of Diabetic Neuropathy.”  The patent extends through
      December 18, 2020.
 
 ·
              A
      New Zealand Patent (No. 533439) entitled “Methods for The Treatment of
      Peripheral Neural and Vascular Ailments.”  The patent extends
      through November 6, 2022.
 
 ·
              A
      New Zealand Patent (No. 526041) entitled “Method and Composition for the
      Treatment of Diabetic Neuropathy.” The patent extends through December 18,
      2021.
 
 ·
              A
      New Zealand Patent (No. 530187) entitled “Nutritional Supplements and
      Methods of Using Same.” The patent extends through August 6,
      2022.
 
 ·
              A
      New Zealand Patent (No. 537821) entitled “Anti-Microbial Compositions and
      Methods of Using Same.” The patent extends through July 23,
      2023.
 
 ·
              An
      Australian Patent (No. 2002231095) entitled “Method and Composition for
      the Treatment of Diabetic Neuropathy.”    The patent
      extends through December 18, 2021.
 
 ·
              An
      Australian Patent (No. 2002352501) entitled “Method for The Treatment of
      Peripheral Neural and Vascular Ailments.”    The
      patent extends through November 5,
2022.
 
 ·
              An
      Australian Patent (No. 2002232464) entitled “Nutritional Supplements and
      Methods of Using Same.”    The patent extends through
      August 5, 2022.
 
 
 13
 Table of Contents
 
 
 ·
              A
      South African Patent (No. 2003/4247) entitled “Methods and Composition for
      the Treatment of Diabetic Neuropathy.”    The patent
      extends through December 18, 2021.
 
 ·
              A
      South African Patent (No. 2003/9802) entitled “Nutritional Supplements and
      Methods of Using Same” for a method for treating at least one symptom of
      arthritis.  The patent extends through August 5,
      2022.
 
 ·
              A
      South African Patent (No. 2004/4614) entitled “Methods for The Treatment
      of Peripheral Neural and Vascular Ailments.”  The patent extends
      through November 5, 2022.
 
 ·
              A
      South African Patent (No. 2005/0517) entitled “Anti-Microbial Compositions
      & Methods for Using Same,” the patent extends through July 23,
      2023.
 
 ·
              A
      South African Patent (No. 2004/3365) “Topical Compositions and Methods for
      Treatment of Adverse Effects of Ionizing Radiation,” the patent extends
      through November 5, 2022.
 
 ·
              A
      South African Patent (No. 2004/3364) “Nutritional Supplements and Methods
      for Prevention, Reduction and Treatment of Radiation Injury” the patent
      extends through May 1, 2022.
 
 ·
              An
      Israeli Patent (No. 159357) entitled “Nutritional Supplements and Methods
      of Using Same,” the patent extends through August 6,
  2022.
 
 These
potential new products are in the development stage and no assurances can be
given that commercially viable products will be developed from these patent
applications.  Prior to any new product being ready for sale,
substantial resources will have to be committed for research, development,
preclinical testing, clinical trials, manufacturing scale-up and regulatory
approval.  The Company faces significant technological risks inherent
in developing these products.  The Company may abandon some or all of
the proposed new products before they become commercially
viable.  Even if the Company develops and obtains approval of a new
product, if the Company cannot successfully commercialize it in a timely manner,
its business and financial condition may be materially adversely
affected.
 
 The
Company Will Need To Obtain Additional Capital To Support Long-Term Product
Development And Commercialization Programs.
 
 The
Company’s ability to achieve and sustain operating profitability depends in
large part on the ability to commence, execute and complete clinical programs
for, and obtain additional regulatory approvals for, prescription medications
developed by Pharma, particularly in the U.S. and Europe.  There is no
assurance that the Company will ever obtain such approvals or achieve
significant levels of sales.  The current sales levels of Cold-Eeze®
products and health and wellness products may not generate all the funds the
Company anticipates will be needed to support current plans for product
development.  The Company may need to obtain additional financing to
support its long-term product development and commercialization
programs.  Additional funds may be sought through public and private
stock offerings, arrangements with corporate partners, borrowings under lines of
credit or other sources.
 
 The
amount of capital that may be needed to complete product development of Pharma’s
products will depend on many factors, including;
  ●
                the
      cost involved in applying for and obtaining FDA and international
      regulatory approvals;
 ●
              whether
      the Company elects to establish partnering arrangements for development,
      sales, manufacturing and marketing of such
  products;
 
 ●
              the
      level of future sales of Cold-Eeze® and health and wellness products, and
      expense levels for international sales and marketing
    efforts;
 
 ●
              whether
      the Company can establish and maintain strategic arrangements for
      development, sales, manufacturing and marketing of its products;
      and
 
 ●
              whether
      any or all of the outstanding options and warrants are exercised and the
      timing and amount of these
exercises.
    14
 Table of Contents
 
 Many of
the foregoing factors are not within the Company’s control.  If
additional funds are required and such funds are not available on reasonable
terms, the Company may have to reduce its capital expenditures, scale back its
development of new
products, reduce its workforce and out-license to others products or
technologies that the Company otherwise would seek to commercialize
itself.  Any additional equity financing will be dilutive to
stockholders, and any debt financing, if available, may include restrictive
covenants.
 
 The Company’s Products and Potential
New Products Are Subject to Extensive Governmental Regulation.
 
 The
Company’s business is regulated by various agencies of the states and localities
where its products are sold.  Governmental regulations in foreign
countries where the Company plans to commence or expand sales may prevent or
delay entry into a market or prevent or delay the introduction, or require the
reformulation, of certain of its products.  In addition, no prediction
can be made as to whether new domestic or foreign legislation regulating our
activities will be enacted.  Any new legislation could have a material
adverse effect on its business, financial condition and
operations.  Non-compliance with any applicable requirements may
subject the Company or the manufacturers of its products to sanctions, including
warning letters, fines, product recalls and seizures.
 
 Cold Remedy and Health and
Wellness Products.  The manufacturing, processing, formulation,
packaging, labeling and advertising of the cold remedy and health and wellness
products are subject to regulation by several federal agencies,
including:
 
 ●           the
FDA;
 
 ●           the
Federal Trade Commission (“FTC”);
 
 ●           the
Consumer Product Safety Commission;
 
 ●           the
United States Department of Agriculture;
 
 ●           the
United States Postal Service;
 
 ●           the
United States Environmental Protection Agency; and
 
 ●           the
Occupational Safety and Health Administration.
 
 In
particular, the FDA regulates the safety, labeling and distribution of dietary
supplements, including vitamins, minerals and herbs, food additives, food
supplements, over-the-counter and prescription drugs and
cosmetics.  The FTC also has overlapping jurisdiction with the FDA to
regulate the promotion and advertising of vitamins, over-the-counter drugs,
cosmetics and foods.  In addition, the cold remedy products are
homeopathic remedies which are regulated by the Homeopathic Pharmacopoeia of the
United States (“HPUS”).  HPUS sets the standards for source,
composition and preparation of homeopathic remedies which are officially
recognized in the Federal Food, Drug and Cosmetics Act of 1938.
 
 Pharma.  The
preclinical development, clinical trials, product manufacturing and marketing of
Pharma’s potential new products are subject to federal and state regulation in
the United States and other countries.  Clinical trials and product
marketing and manufacturing are subject to the rigorous review and approval
processes of the FDA and foreign regulatory authorities.  Obtaining
FDA and other required regulatory approvals is lengthy and
expensive.  Typically, obtaining regulatory approval for
pharmaceutical products requires substantial resources and takes several
years.  The length of this process depends on the type, complexity and
novelty of the product and the nature of the disease or other indication to be
treated.  Preclinical studies must comply with FDA
regulations.  Clinical trials must also comply with FDA regulations
and may require large numbers of test subjects, complex protocols and possibly
lengthy follow-up periods.  Consequently, satisfaction of government
regulations may take several years, may cause delays in introducing potential
new products for considerable periods of time and may require imposing costly
procedures upon the Company’s activities.  If regulatory approval of
new products is not obtained in a timely manner or not at all the Company could
be materially adversely affected.  Even if regulatory approval of new
products is obtained, such approval may impose limitations on the indicated uses
for which the products may be marketed which could also materially adversely
affect the business, financial condition and future operations of the
Company.
 
 The Company’s Business is Very
Competitive and Increased Competition Could Have a Significant Impact on
Earnings.
 
 Both the
non-prescription healthcare product and pharmaceutical industries are highly
competitive.  Many of the Company’s competitors have substantially
greater capital resources, research and development staffs, facilities and
experience than it does.  These and other entities may have or may
develop new technologies.  These technologies may be used to develop
products that compete with the Company.
  
 15
 Table of Contents
 
 
 The
Company believes that the primary cold remedy product, Cold-Eeze®, has a
competitive advantage over other cold remedy products because it has been
clinically proven to reduce the severity and duration of common cold
symptoms.  The Company believes that Darius had an advantage over its
competitors because it directly sells its proprietary health and wellness
products through its extensive network of independent
distributors.  Competition in Pharma’s expected product areas would
most likely come from large pharmaceutical companies as well as other companies,
universities and research institutions, many of which have resources far in
excess of the Company’s resources.
 
 The
Company believes that its ability to compete depends on a number of factors,
including price, product quality, availability, reliability and name recognition
of its cold remedy, health and wellness products and Pharma’s ability to
successfully develop and market prescription medications.  There can
be no assurance that the Company will be able to compete successfully in the
future.  If the Company is unable to compete, its earnings may be
significantly impacted.
 
 The Company’s Future Success is
Dependent on the Continued Services of Key Personnel Including The Chairman of
the Board of Directors, President and Chief Executive
Officer.
 
 The
Company’s future success depends in large part on the continued service of key
personnel.  In particular, the loss of the services of Guy J. Quigley,
Chairman of the Board, President and Chief Executive Officer could have a
material adverse effect on operations.  The Company had an employment
agreement with Mr. Quigley which expired on December 31, 2005.  Future
success and growth also depends on the Company’s ability to continue to attract,
motivate and retain highly qualified employees.  If the Company is
unable to attract, motivate and retain qualified employees, our business and
operations could be materially adversely affected.
 
 The Company’s Future Success Depends
on the Continued Employment of Richard A. Rosenbloom, M.D., Ph.D., with
Pharma.
 
 Pharma’s
potential new products are being developed through the efforts of Dr.
Rosenbloom.  The loss of his services could have a material adverse
effect on the Company’s product development and future operations.
 
 The
Company’s Future Success was Dependent on the Continued Acceptance of the Direct
Selling Philosophy, the Maintenance of the Network of Existing Independent
Distributor Representatives and the Recruitment of Additional Successful
Independent Distributor Representatives.
 
 Darius
markets and sells herbal vitamins and dietary supplements for the human
condition through its network of independent distributor
representatives.  Its products are sold to independent distributor
representatives who either use the products for their own personal consumption
or resell them to consumers.  The independent distributor
representatives receive compensation for sales achieved by means of a commission
structure or compensation plan on certain product sales of certain personnel
within their downstream independent distributor representative
network.  Since the independent distributor representatives are not
employees of Darius, they are under no obligation to continue buying and selling
Darius’ products and the loss of key high-level distributors could negatively
impact the Company’s future growth and profitability.
 
 The
Company’s Future Success Depends on the Continued Sales of its Principal
Product.
 
 For the
fiscal year ended December 31, 2007, the Cold-Eeze® products represented
approximately 65% of the Company’s total sales.  While the Company has
diversified into health and wellness products, the line of Cold-Eeze® products
continues to be a major part of its business.  Accordingly, the
Company has to depend on the continued acceptance of Cold-Eeze® products by its
customers.  However, there can be no assurance that the Cold-Eeze®
products will continue to receive market acceptance.  The inability to
successfully commercialize Cold-Eeze® in the future, for any reason, would have
a material adverse effect on the financial condition, prospects and ability to
continue operations of the Company.
 
 The
Company Has a Concentration of Sales to and Accounts Receivable from Several
Large Customers.
 
 Although
the Company has a broad range of customers that includes many large wholesalers,
mass merchandisers and multiple outlet pharmacy chains, the five largest
customers account for a significant percentage of sales.  These five
customers accounted for 37% of total sales for the fiscal year ended December
31, 2007 and 31% of total sales for the fiscal year ended December 31,
2006.  In addition, customers comprising the five largest accounts
receivable balances represented 58% and 56% of total accounts receivable
balances at December 31, 2007 and 2006, respectively.  Credit is
extended to customers based upon an evaluation of their financial condition and
credit history, and collateral is not generally required.  If one or
more of these large customers cannot pay, the write-off of their accounts
receivable would have a
material adverse effect on the Company’s  operations and financial
condition.  The loss of sales to any one or more of these large
customers would also have a material adverse effect on the operations and
financial condition of the Company.
 
 
 16
 Table of Contents
 
  The
Company is Dependent on Third-Party Manufacturers and Suppliers for the Health
and Wellness Products and Third-Party Suppliers for Certain of the Cold Remedy
Products.
 
 The
Company does not manufacture any of the Health and Wellness products, nor
manufacture any of the ingredients in these products.  In addition,
all active ingredients that are raw materials used in connection with the
Cold-Eeze® product are purchased from a single unaffiliated
supplier.  Should any of these relationships terminate, the Company
believes that the contingency plans which have been formulated would prevent a
termination from materially affecting its operations.  However, if any
of these relationships are terminated, there may be delays in production of the
Company’s products until an acceptable replacement facility is
located.  The Company continues to look for safe and reliable
multiple-location sources for products and raw materials so that it can continue
to obtain products and raw materials in the event of a disruption in its
business relationship with any single manufacturer or supplier.  While
secondary sources have been identified for some of the Company’s products and
raw materials, its inability to find other sources for some of its other
products and raw materials may have a material adverse effect on its
operations.  In addition, the terms on which manufacturers and
suppliers will make products and raw materials available to us could have a
material effect on the Company’s success.
 
 The Company is Uncertain as to
Whether It Can Protect Its Proprietary Rights.
 
 The
strength of the Company’s patent position may be important to its long-term
success.  The Company currently owns eight U.S. and ten foreign
patents in connection with products that are being developed by
Pharma.  In addition, the Company has been granted an exclusive
agreement for worldwide representation, manufacturing, marketing and
distribution rights to a zinc/gluconate/glycine lozenge
formulation.  That formulation has been patented in the United States,
Germany, France, Italy, Sweden, Canada and Great Britain and a patent is pending
in Japan.  However, this patent in the United States expired in August
2004 and expired in June 2005 in all countries except Japan.
 
 There can
be no assurance that these patents and the Company’s exclusive license will
effectively protect its products from duplication by others.  In
addition, the Company may not be able to afford the expense of any litigation
which may be necessary to enforce its rights under any of the
patents.  Although the Company believes that current and future
products do not and will not infringe upon the patents or violate the
proprietary rights of others, if any of the current or future products do
infringe upon the patents or proprietary rights of others, the Company may have
to modify the products or obtain an additional license for the manufacture
and/or sale of such products.  The Company could also be prohibited
from selling the infringing products.  If the Company is found to
infringe on the proprietary rights of others, it is uncertain whether the
Company will be able to take corrective actions in a timely manner, upon
acceptable terms and conditions, or at all, and the failure to do so could have
a material adverse effect upon its business, financial condition and
operations.
 
 The
Company also use non-disclosure agreements with its employees, suppliers,
consultants and customers to establish and protect the ideas, concepts and
documentation of its confidential non-patented and non-copyright protected
proprietary technology and know-how.  However, these methods may not
afford complete protection.  There can be no assurance that third
parties will not obtain access to or independently develop the Company’s
technologies, know-how, ideas, concepts and documentation, which could have a
material adverse effect on the Company’s financial condition.
 
 The Sales of the Company’s Primary
Product Fluctuates by Season.
 
 A
significant portion of the Company’s business is highly seasonal, which causes
major variations in operating results from quarter to quarter.  The
third and fourth quarters generally represent the largest sales volume for the
cold remedy products.  There can be no assurance that the Company will
be able to manage its working capital needs and its inventory to meet the
fluctuating demand for these products.  Failure to accurately predict
and respond to consumer demand may result in the production of excess
inventory.  Conversely, if products achieve greater success than
anticipated for any given quarter, this may result in insufficient inventory to
meet customer demand.
 
 The Company’s Existing Products and
New Products Under Development Expose the Company to Potential Product Liability
Claims.
 
 The
Company’s business results in exposure to an inherent risk of potential product
liability claims, including claims for serious bodily injury or death caused by
the sales of the Company’s existing products and the clinical trials of products
which are being developed.  These claims could lead to substantial
damage awards.  The Company currently maintains product
liability insurance in the amount of, and with a maximum payout of $25
million.  A successful claim brought against us in excess of, or
outside of, existing insurance coverage could have a material adverse effect on
the Company’s results of operations and financial condition.  Claims
against the Company, regardless of their merit or eventual outcome, may also
have a material adverse effect on the consumer demand for its
products.
   17
 Table of Contents
  The Company is Involved in Lawsuits
Regarding Claims Relating to Certain of the Cold-Eeze® Products and other
Business Matters.
 
 The
Company is, from time to time, subject to various legal proceedings and claims,
either asserted or unasserted.  Any such claims, including those
contained in Item 3 of this report, whether with or without merit, could be
time-consuming and expensive to defend and could divert management's attention
and resources.  While management believes that the Company has
adequate insurance coverage and, if applicable, accrued loss contingencies for
all known matters, there is no assurance that the outcome of all current or
future litigation will not have a material adverse effect on the
Company.
 
 A Substantial Amount of the Company’s
Outstanding Common Stock is Owned by the Chairman of the Board and President and
Executive Officers and Directors, as a Group Can Significantly Influence All
Matters Voted on by Stockholders.
 
 Guy J.
Quigley, Chairman of the Board, President and Chief Executive Officer, through
his beneficial ownership, has the power to vote approximately 25.5%of The Company’s common
stock.  Mr. Quigley and the other executive officers and directors
collectively beneficially own approximately 38.4% of the common
stock.  These individuals have significant influence over the outcome
of all matters submitted to stockholders for approval, including election of
directors.  Consequently, they exercise substantial control over all
major decisions which could prevent a change of control of the
Company.
 
 The Company’s Stock Price is
Volatile.
 
 The
market price of the Company’s common stock has experienced significant
volatility.  From January 1, 2004 to January 31, 2008, the per share
bid price has ranged from a low of approximately $2.92 to a high of
approximately $16.94.  There are several factors which could affect
the price of the common stock, some of which are announcements of technological
innovations for new commercial products by us or competitors, developments
concerning propriety rights, new or revised governmental regulation or general
conditions in the market for the Company’s products.  Sales of a
substantial number of shares by existing stockholders could also have an adverse
effect on the market price of the common stock.
 
 Future
Sales of Shares of the Company’s Common Stock in the Public Market Could
Adversely Affect the Trading Price of Shares of the Common Stock and the
Company’s Ability to Raise Funds in New Stock Offerings.
 
 Future
sales of substantial amounts of shares of the Company’s common stock in the
public market, or the perception that such sales are likely to occur, could
affect prevailing trading prices of the common stock and, as a result, the value
of the notes.  As of December 31, 2007, the Company had 12,853,133
shares of common stock outstanding.
 
 The
Company also has outstanding options to purchase an aggregate of 2,482,000
shares of common stock at an average exercise price of $7.70 per
share.  If the holders of these options were to attempt to sell a
substantial amount of their holdings at once, the market price of the common
stock would likely decline.  Moreover, the perceived risk of this
potential dilution could cause stockholders to attempt to sell their shares and
investors to “short” the stock, a practice in which an investor sells shares
that he or she does not own at prevailing market prices, hoping to purchase
shares later at a lower price to cover the sale.  As each of these
events would cause the number of shares of common stock being offered for sale
to increase, the common stock’s market price would likely further
decline.  All of these events could combine to make it very difficult
for the Company to sell equity or equity-related securities in the future at a
time and price that it deems appropriate.
 
 The Company Does Not Intend to Pay
Cash Dividends in the Foreseeable Future.
 
 The
Company has not paid cash dividends on its common stock since
inception.  The intention of the Company is to retain earnings, if
any, for use in the business and does not anticipate paying any cash dividends
to stockholders in the foreseeable future.
 
 
 18
 Table of Contents
  The
Company’s Articles of Incorporation and By-laws Contain Certain Provisions that
May Be Barriers to a Takeover.
 
 The
Company’s Articles of Incorporation and By-laws contain certain provisions which
may deter, discourage, or make it difficult to assume control of the Company by
another corporation or person through a tender offer, merger, proxy contest or
similar transaction or series of transactions.  These provisions may
deter a future tender offer or other takeover attempt.  Some
stockholders may believe such an offer to be in their best interest because it
may include a premium over the market price of the common stock at the
time.  In addition, these provisions may assist current management in
retaining its position and place it in a better position to resist changes which
some stockholders may want to make if dissatisfied with the conduct of the
Company’s business.
 
 The Company Has Agreed to Indemnify
Its Officers and Directors From Liability.
 
 Sections
78.7502 and 78.751 of the Nevada General Corporation Law allow the Company to
indemnify any person who is or was made a party to, or is or was threatened to
be made a party to, any pending, completed, or threatened action, suit or
proceeding because he or she is or was a director, officer, employee or agent of
the Company or is or was serving at the Company’s request as a director,
officer, employee or agent of any corporation, partnership, joint venture, trust
or other enterprise.  These provisions permit the Company to advance
expenses to an indemnified party in connection with defending any such
proceeding, upon receipt of an undertaking by the indemnified party to repay
those amounts if it is later determined that the party is not entitled to
indemnification.  These provisions may also reduce the likelihood of
derivative litigation against directors and officers and discourage or deter
stockholders from suing directors or officers for breaches of their duties to
the Company, even though such an action, if successful, might otherwise benefit
the Company or its stockholders.  In addition, to the extent that the
Company expends funds to indemnify directors and officers, funds will be
unavailable for operational purposes.
  ITEM
1B.                      UNRESOLVED STAFFCOMMENTS
 
 Not
Applicable
 
 ITEM
2.                      PROPERTIES
 
 The
corporate office of The Quigley Corporation is located at 621 Shady Retreat
Road, Doylestown, Pennsylvania.  This property, with an area of
approximately 13,000 square feet, was purchased in November 1998 and refurbished
during 1999.  The Company occupies warehouse space in Las Vegas,
Nevada at a current monthly cost of $2,691.  This Nevada location has
a three-year lease that expires in July 2009.  In addition to storage
facilities at the manufacturing subsidiary’s locations, the Company also stores
product in a number of additional warehouses in Pennsylvania with storage
charges based upon the quantities of product being stored.
 
 The
manufacturing facilities of the Company are located in each of Elizabethtown and
Lebanon, Pennsylvania.  The facilities were purchased effective
October 1, 2004.  In total, the facilities have a total area of
approximately 73,000 square feet, combining both manufacturing and office
space.
 
 The
Darius business in Utah is located at 867 East 2260 South, Provo, Utah, with an
area of approximately 24,750 square feet.  The current monthly lease
cost of these offices and warehouse space is $14,789 with current leases set to
expire no later than July 2009.  The Company expects that these leases
will be renewed or that alternative spaces will be obtained.  On
February 29, 2008, the Company sold Darius to InnerLight Holdings,
Inc.
 
 The
Company believes that its existing facilities are adequate at this
time.
 
 ITEM
3.                      LEGALPROCEEDINGS
 
 TESAURO
AND ELEY, ET AL. VS. THE QUIGLEY CORPORATION
 (CCP
of Phila., August Term 2000, No. 001011)
 In
September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), allegedly on behalf of a "nationwide
class" of "similarly situated individuals," in the Court of Common Pleas of
Philadelphia County, Pennsylvania.  The Complaint further alleges that
the plaintiffs purchased certain Cold-Eeze products between August, 1996, and
November, 1999, based upon cable television, radio and internet advertisements,
which allegedly misrepresented the qualities and benefits of the Company's
products.  The Complaint, as pleaded originally,
requested an unspecified amount of damages for violations of Pennsylvania's
consumer protection law, breach of implied warranty of merchantability and
unjust enrichment, as well as a judicial determination that the action be
maintained as a class action.  In October, 2000, the Company filed
Preliminary Objections to the Complaint seeking dismissal of the
action.  The court sustained certain objections, thereby narrowing
plaintiffs' claims.
  
 19
 Table of Contents
   In May
2001, plaintiffs filed a motion to certify the putative class.  The
Company opposed the motion.  In November, 2001, the court held a
hearing on plaintiffs' motion for class certification.  In January,
2002, the court denied in part and granted in part plaintiffs'
motion.  The court denied plaintiffs' motion to certify a class based
on plaintiffs' claims under Pennsylvania's consumer protection law, under which
plaintiffs sought treble damages, effectively dismissing this cause of action;
however, the court certified a class based on plaintiffs' secondary breach of
implied warranty and unjust enrichment claims.  In August, 2002, the
court issued an order adopting a form of Notice of Class Action to be published
nationally.  Significantly, the form of Notice approved by the court
included a provision which limits the potential class members who may
potentially recover damages in this action to those persons who present a proof
of purchase of Cold-Eeze during the period August 1996 and November
1999.
 
 Afterward,
a series of pre-trial motions were filed raising issues concerning trial
evidence and the court's jurisdiction over the subject matter of the
action.  In March, 2005, the court held oral argument on these
motions.
 
 Significantly,
on November 8, 2006, the Court entered an Order dismissing the case in its
entirety on the basis that the action was preempted by federal
law.  The plaintiffs appealed the Court's decision in December, 2006
to the Superior Court of the Commonwealth of Pennsylvania.  On
February 19, 2008, the Superior Court upheld defendant's appeal and remanded the
case to the Philadelphia County Court of Common Pleas for trial.  The
Company has decided not to appeal to the Supreme Court of Pennsylvania and the
case is being prepared for trial.
 
 For the
reasons stated by the Court in dismissing the case, as well as for other
reasons, the Company believes that plaintiffs' case on appeal lacks merit;
however, no prediction as to the outcome of the appeal can be made.
 
 THE
QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL.
 (Bucks
Co. CCP, No. 04-07776)
 
 In this
action, which was commenced in November 2004, the Company is seeking declaratory
and injunctive relief against John C. Godfrey, Nancy Jane Godfrey, and Godfrey
Science and Design, Inc. requesting injunctive relief regarding the Cold-Eeze
trade name and trademark; injunctive relief relating to the Cold-Eeze
formulations and manufacturing methods; injunctive relief for breach of the duty
of loyalty, and declaratory judgment pending the Company's payment of
commissions to defendants.  The Company's Complaint is based in part
upon the Exclusive Representation and Distribution Agreement and the Consulting
Agreement (together the "Agreements") entered into between the defendants and
the Company.  The Company terminated the Agreements for the
defendants' alleged material breaches of the Agreements.  Defendants
have answered the complaint and asserted counterclaims against the Company
seeking remedies relative to the Agreements.  The Company believes
that the defendants' counterclaims are without merit and is vigorously defending
those counterclaims and is prosecuting its action on its
complaint.  Discovery and depositions have been partially completed
and the case is scheduled to be put on the Trial List on or before June 1,
2008.
 
 At this time no prediction as to the
outcome of this action can be made.
  DARIUS
INTERNATIONAL INC., ET AL. VS. ROBERT O. YOUNG ET AL.
 (FEDERAL DISTRICT COURT –
EASTERN DISTRICT, PA)
  In this
action, the Company seeks injunctive relief and monetary damages against two
individuals for violation of a non-competition agreement between a wholly owned
subsidiary of the Company, Innerlight Inc., and the defendants, each of whom are
also under agreement to serve as consulting to the Company.
 
 In late
November, 2005, the Company learned that the defendants had launched a line of
nutritional supplement products that competed with Innerlight
products.  Defendants promoted their line of products by a website,
among other means.  The Company moved for a temporary restraining
order against the defendants, which the court denied; however, the court ordered
expedited discovery and scheduled a preliminary injunction
hearing.  Before the hearing, the Company amended its complaint to add
counts against defendants for unfair competition, trademark infringement and
other causes, which the court allowed.  In response, defendants
initially moved to dismiss the case.  The court denied the
motion.  Defendants answered the complaint and asserted nine
counterclaims, including: breach of contract; breach of covenant of good faith
and fair dealing; unjust enrichment, conversion; common law trademark
infringement; common law violation of the right to publicity; violation of abuse
of personal identity act; injunctive relief; and declaratory
relief.
 
  20
 Table of Contents
 
 After the
preliminary injunction hearing, held in January, 2006, the parties briefed the
court on the significance of the hearing evidence in relation to the parties'
respective claims.  On February 17, 2006, the court held oral argument
on the motion for preliminary injunction.
 
 On April
20, 2006, the Court entered an Order enjoining defendants from competing against
the Company.  Thereafter, the parties engaged in pre-trial
discovery.
 
 A trial
on the merits of the case was held before the Court, without a jury, during
November 2006.  Following the presentation of evidence, the Company
renewed its claim for a permanent injunction and monetary damages against the
defendants.  Based upon the evidence presented at trial, the Company
believes the counterclaim actions are without merit.
 
 The Court has not entered its ruling at
this point, and at this time no prediction as to the outcome can be
made.
 
 NICODROPS,
INC. VS. QUIGLEY MANUFACTURING, INC.
 
 On
January 30, 2006, Quigley Manufacturing, Inc., a wholly-owned subsidiary of The
Quigley Corporation, was put on notice of a claim by Nicodrops,
Inc.  Nicodrops, Inc. has claimed that the packaging contained
incorrect expiration dates and caused it to lose sales through two (2)
retailers.  The total alleged sales of Nicodrops was approximately
$250,000 and Nicodrops is claiming unspecified damages exceeding
$2,000,000.
 
 No suit
has been filed.  The Company is investigating this
claim.  Based on its investigation to date, the Company believes the
claim is without merit.  However, at this time no prediction can be
made as to the outcome of this case.
 
 THE
QUIGLEY CORPORATION VS. WACHOVIA INSURANCE SERVICES, INC. AND FIRST UNION
INSURANCE SERVICES AGENCY, INC.
 
 The
Quigley Corporation instituted a Writ of Summons against Wachovia Insurance
Services, Inc. and First Union Insurance Services Agency, Inc. on December 8,
2005.  The purpose of this suit was to maintain an action and toll the
statute of limitation against The Quigley Corporation's insurance broker who
failed to place excess limits coverage for the Company for the period from
November 29, 2003 until April 6, 2004.  As a result of the defendant's
failure to place insurance and to notify Quigley of its actions, certain pending
actions covered by Quigley's underlying insurance at the present time many
result in certain cases presently being defended by insurance counsel and the
underlying insurance carrier to cause an exhaustion of the underlying insurance
for the policy periods ending November 29, 2004 and November 29,
2005.  Any case in which an alleged action arose by the use of
COLD-EEZE Nasal Spray from November 29, 2003 to April 6, 2004 is not covered by
excess insurance.
 
 The
Company's claim against Wachovia Insurance Services, Inc. and First Union
Insurance Services Agency, Inc. is for negligence and for equitable insurance
for these claims in the event that Quigley's underlying policy limits are
exhausted.  Underlying coverage on certain actions has been exhausted
but there can be no determination as to the damage claim until the Polski case
appealed to the Eighth United States Circuit Court of Appeals has been
decided.
 
 At this
time no prediction can be made as to the outcome of any action against Wachovia
Insurance Services, Inc. and First Union Insurance Services Agency,
Inc.
  MONIQUE
FONTENOT DOYLE VS. THE QUIGLEY CORPORATION
 (U.S.D.C.,
W.D. La. Docket No.: 6:06CV1497)
  On August
31, 2006, the plaintiff filed an action against the Company in the United States
District Court for the Western District of Louisiana (Lafayette-Opelousas
Division).  The action alleges the plaintiff suffered certain losses
and injuries as a result of the Company’s nasal spray product.  Among
the allegations of plaintiff are breach of express warranties and damages
pursuant to the Louisiana Products Liability Act.
 
 A trial
date has been set for August 4, 2008.  Discovery is not yet
complete.  The Company believes the plaintiff’s claims are without
merit and is vigorously defending this lawsuit.
 
  21
 Table of Contents
 HOWARD
POLSKI AND SHERYL POLSKI
VS. THE QUIGLEY CORPORATION, ET AL.
 (U.S.D.C.,
D. Minn. Docket No.: 04-4199 PJS/JJG)
 On August
12, 2004, plaintiffs filed an action against the Company in the District Court
for Hennepin County, Minnesota, which was not served until September 2, 2004. On
September 17, 2004, the Company removed the case to the United States District
Court for the District of Minnesota. The action alleges that plaintiffs suffered
certain losses and injuries as a result of the Company's nasal
spray product. Among the allegations of plaintiffs are negligence, products
liability, breach of express and implied warranties, and breach of the Minnesota
Consumer Fraud Statute.
 
 The
Company believes the plaintiffs' claims are without merit and vigorously
defended this lawsuit. On September 5, 2007, the Company obtained a judgment in
its favor, as a matter of law, and that decision is currently on appeal; the
Company believes the appeal lacks merit, and that the judgment of the trial
court will be affirmed.
 
 At the
present time this matter is being defended by the Company's liability insurance
carrier.  Based upon the information the Company has at this time, it
believes the action will not have a material impact to the
Company.  However, at this time no prediction as to the outcome can be
made.
  CAROLYN
SUNDERMEIER VS. THE QUIGLEY CORPORATION
 (Pa. C.C.P., Bucks County,
Docket No.: 07-01324-26-2)
  On
February 16, 2007, plaintiff filed an action in the Court of Common Pleas of
Bucks County, Pennsylvania.  The complaint was served on the Company
on February 20, 2007.  The action alleges the plaintiff suffered
certain losses and injuries as a result of using the Company’s nasal spray
product.  Plaintiff’s complaint consists of counts for negligence,
strict products liability (failure to warn), strict products liability
(defective design), breach of express and implied warranties, and violations
under the Pennsylvania Unfair Trade Practices and Consumer Protection Law and
other consumer protection statutes.
 
 Discovery
is not yet complete.  The Company believes the plaintiff's claims are
without merit and is vigorously defending this lawsuit.
 
 At the
present time this matter is being defended by the Company's liability insurance
carrier.  Based upon the information the Company has at this time, it
believes the action will not have a material impact to the
Company.  However, at this time no prediction as to the outcome can be
made.
 
 ROBERT
O. AND SHELLEY YOUNG VS. DARIUS INTERNATIONAL INC.
 AND
INNERLIGHT INC.,
 (UTAH
THIRD PARTY COMPLAINTS)
 On September 14, 2005, a
third-party complaint was filed by Shelley R. Young in Fourth District Court in
Provo, Utah against Innerlight Inc. and its parent company, Darius.  Robert
O. Young has filed a motion to intervene to join as a third-party plaintiff with
Shelley R. Young.  On November 3, 2005, Shelley and Robert Young filed a
parallel suit also in Fourth District Court in Provo, Utah.  The
allegations in both complaints include, but are not limited to, an alleged
breach of contract by Innerlight Inc. for alleged failures to make certain
payments under an asset purchase agreement entered into by all parties. 
Additional allegations stem from this alleged breach of contract including
unjust enrichment, trademark infringement and alleged violation of rights of
publicity. The plaintiffs are seeking both monetary and injunctive relief. 
Innerlight Inc. has objected to the complaint in the third-party action based on
procedural deficiencies and other grounds.
  The
Fourth District Court of Utah has stayed both the September 14, 2005 and
November 3, 2005 actions pending the adjudication of the Federal District Court
action referenced above and has ordered that all disputes be determined in the
Federal District Court action in the Eastern District of
Pennsylvania.
  In
connection with the Utah actions the Company has sued the Youngs in United
States District Court for the Eastern District of Pennsylvania.  The
Company has alleged breach of contract, including but not limited to breach of
non-competition provisions in a consulting agreement between the parties and is
seeking unspecified damages and injunctive relief.
   22
 Table of Contents
  INNERLIGHT
INC. VS. THE MATRIX GROUP, LLC
 (FOURTH
JUDICIAL DISTRICT COURT, UTHA COUNTY, STATE OF UTAH)
 On March
13, 2006, Innerlight Inc. filed a declaratory judgment action in the Fourth
Judicial District, Utah County, State of Utah, requesting a declaration that
there is no valid contract between the parties. The Matrix Group, LLC has
alleged there is a contract between the parties obligating Innerlight Inc. to
purchase $750,000 of products for the 12-month period commencing October 18,
2004 and ending October 17, 2005, $1,500,000 for the period commencing October
18, 2005 and ending October 17, 2006, and for each 12-month period thereafter,
through and including October 17, 2013, at least $4,000,000 of products from The
Matrix Group, LLC. The document on which Matrix relies was drafted by Matrix and
states that the acceptance of the appointment by distributor (Innerlight Inc.)
is conditioned upon distributor's written acceptance of the Company's product
price list.  No written acceptance of the product price list was ever
made by Innerlight Inc.
 The
Matrix Group, LLC filed a Utah Rule of Civil Procedure 12(b)(3) motion asking
that the complaint be dismissed. On July 13, 2006 the Court for the Fourth
Judicial District, Utah County, State of Utah, entered an order denying
defendant's motion to dismiss under Rule 12(b)(3) based on Innerlight's
assertion that a material condition precedent remains to be satisfied to
establish an enforceable agreement between the parties. The Utah County Court
has maintained jurisdiction of this action to make a final determination on the
merits of Innerlight's claim.
 Thereafter,
Matrix filed a counterclaim alleging that a contract did exist and that
Innerlight had breached this contract.  Both parties then agreed to
stay discovery, pending resolution of crossover motions for summary
judgment.
 On
January 17, 2007, arguments were presented to the Court on the parties' cross
motions for summary judgment and the Court ruled in Innerlight's favor, finding
that no contract existed between the parties and that Innerlight was entitled to
return over $150,000 in product to Matrix for reimbursement. The final Order
granting Innerlight's motion and rejecting Matrix's was entered by the Court on
April 10, 2007.
 Matrix
appealed the Court's Order granting summary judgment on May 8, 2007. Matrix
requested a stay of the judgment in favor of Innerlight claiming that
Innerlight's possession of the surplus Sassoon products was sufficient security.
Innerlight opposed Matrix's request to proceed without a bond and the Court
denied Matrix's request.  The Court entered a Judgment for Innerlight
against Matrix on June 25, 2007, in the amount of $202,292.72. Innerlight
attempted to return the surplus Sassoon products to Matrix pursuant to the
Court's order, but when Matrix refused receipt the Court authorized Innerlight
to dispose of the Sassoon products.
 Innerlight
filed a writ of execution on July 26, 2007, to foreclose on its Judgment against
Matrix. Matrix requested a hearing wherein it argued for a stay of execution on
the basis that collecting against Matrix was unconstitutional. On September 19,
2007, the Court denied Matrix's motion to stay. Matrix appealed this Order on
September 25, 2007, and requested a stay of execution from the Utah Court of
Appeals. The Utah Court of Appeals granted Matrix's motion to stay execution.
The parties are currently briefing the appeal before the Utah Court of Appeals.
Innerlight will continue to vigorously defend Matrix's
appeal.
 For the
reasons stated by the Court in the case, as well as for other reasons, the
Company believes that Matrix's case on appeal lacks merit; however, no
prediction as to the outcome of the appeal can be made.
  INNERLIGHT
INC. VS. READYCASH HOLDINGS, LLC. AND
 GLOBAL
TRADE SOLUTIONS, INC. DBA READYCASH
 (FOURTH
JUDICIAL DISTRICT COURT, UTAH COUNTY, STATE OF UTAH)
  On April 20, 2007
Innerlight Inc. filed a complaint against ReadyCash, alleging claims for breach
of contract, unjust enrichment and conversion and for a constructive trust and
accounting over Innerlight Inc.'s funds. On June 8, 2007, ReadyCash filed its
answer denying liability and counterclaimed with claims of breach of contract
and unjust enrichment. On June 28, 2007, Innerlight Inc. answered the
counterclaims by denying liability. Discovery has commenced between the parties.
No opinion can be expressed at this time regarding the outcome of this
matter.
      23
 Table of Contents
 
  TERMINATED
LEGAL PROCEEDINGS
  BRIGITTE
YVON KLAUS YVON VS. THE QUIGLEY CORPORATION, ET AL.
  On October 12, 2005, the
Plaintiffs instituted an action against Caribbean Pacific Natural Products, Inc.
and other defendants for personal injuries as a result of being hit by a chair
on the pool deck of Waikoloa Beach Marriott Hotel d/b/a Outrigger Enterprises,
Inc. in Honolulu, Hawaii.  On December 9, 2005, The Quigley Corporation was
added as an additional defendant without notice to this case.  The main
defendant in the case is Caribbean Pacific Natural Products, Inc. in which The
Quigley Corporation formerly held stock.  On January 22, 2003, all shares
of The Quigley Corporation stock were sold to Suncoast Naturals, Inc. in return
for stock of Suncoast Naturals, Inc.  At the time of the accident, The
Quigley Corporation had no ownership interest in Caribbean Pacific Natural
Products, Inc.  On April 26, 2007, counsel for all parties entered into a
stipulation for partial dismissal without prejudice against The Quigley
Corporation.
  ZANG
ANGELFIRE, TRACEY ARVIN, SHANE HOHNSTEIN, TAMMY
 LAURENT,
BARBARA SEOANE, DONNA SMALLEY, AND JOHN WILLIAMS
 VS.
THE QUIGLEY CORPORATION
 (Pa.
C.C.P., Bucks County, Docket No.: 2004-07364-27-2)
  On November 4, 2004, the
above plaintiffs filed an action in the Court of Common Pleas of Bucks County
against the Company.  The complaint was amended on March 11, 2005. 
The action alleged that the plaintiffs suffered certain losses and injuries as a
result of using the Company's nasal spray product.  The plaintiffs claimed
the Company was liable to them based on the following allegations: 
negligence, strict products liability (failure to warn and defective design),
breach of express warranty, breach of implied warranty, and a violation of the
Pennsylvania Unfair Trade Practices and Consumer Protection Law and other
consumer protection statutes.
  These actions were
recently settled at the direction of the insurance carrier out of insurance
proceeds.
  DOMINIC
DOMINIJANNI, SONJA FORSBERG-WILLIAMS, VINT PAYNE,
 MURRAY
LOU ROGERS, AND RANDY STOVER VS.
 THE
QUIGLEY CORPORATION
 (Pa. C.C.P., Bucks County,
Docket No.: 060013427-1; Consolidated Under Docket No.:
2004-07364-27-2)
  On January 6, 2006, five
(5) plaintiffs filed an action in the Court of Common Pleas of Bucks County,
Pennsylvania, against the Company.  The action alleges the plaintiffs
suffered certain losses and injuries as a result of using the Company's nasal
spray product.  The complaint was served on the Company on January 31,
2006.  Plaintiffs' complaint consists of counts for negligence, strict
products liability (failure to warn), strict products liability (defective
design), breach of express and implied warranties, and violations under the
Pennsylvania Unfair Trade Practices and Consumer Protection Law and other
consumer protection statutes.  The Dominic Dominijanni and Murray Lou
Rogers claims were settled at the direction of the carrier with both insurance
proceeds and company proceeds.  The settlement contribution by the Company
is a portion of the Company's claim against Wachovia Insurance Services, Inc.
and First Union Insurance Services Agency, Inc.
  The Vint Payne, Sonja
Forsberg-Williams and Randy Stover claims were settled at the direction of the
carrier out of the insurance proceeds.
  GREG
SCRAGG VS. THE QUIGLEY CORPORATION, ET AL.
 (U.S.D.C., D. Colo. Docket
No.: 06-00061 LTB-CBS)
  On November 30, 2005, an
action was brought in the District Court of Denver, Colorado.  The
complaint was served on the Company soon thereafter.  The action alleges
the plaintiff suffered certain losses and injuries as a result of using the
Company's nasal spray product.  The complaint consists of counts for fraud
and deceit (fraudulent concealment), negligent misrepresentation, strict
liability (failure to warn), and strict product liability (design
defect).
  This case was turned over
to The Quigley Corporation for defense and settlement and was settled for less
than the cost of defense after discovery was completed.  The cost of
defense and the settlement remain claims against Wachovia Insurance Services,
Inc. and First Union Insurance Services Agency, Inc.  The Company's claim
against Wachovia Insurance Services, Inc. and First Union Insurance Services
Agency, Inc. is for negligence and for equitable insurance for this
claim because of the exhaustion of the underlying limits pertaining to it. At
this time no prediction as to the outcome of the action against Wachovia
Insurance Services, Inc. and First Union Insurance Services Agency, Inc. can be
made.
   24
 Table of Contents
  BONNIE
L. HURD. VS. THE QUIGLEY CORPORATION(Pa. C.C.P., Bucks County, Docket No.:
06-10055-13-2)
  On October 31, 2006,
plaintiff filed an action in the Court of Common Pleas of Bucks County,
Pennsylvania.  The complaint was served on the Company soon
thereafter.  The action alleges the plaintiff suffered certain losses and
injuries as a result of using the Company's nasal spray product. 
Plaintiff's complaint consists of counts for negligence, strict products
liability (failure to warn), strict products liability (defective design),
breach of express and implied warranties, and violations under the Pennsylvania
Unfair Trade Practices and Consumer Protection Law and other consumer protection
statutes.
  This action was recently settled at the direction of the insurance carrier out
of insurance proceeds.
  CAROLYN
HENRY BAYNHAM VS. THE QUIGLEY CORPORATION, ET AL.
 (U.S.D.C,
E.D. Tex. Docket No.: 1:07CV0010)
  On January 8, 2007,
plaintiff filed an action in the United States District Court for the Eastern
District of Texas-Beaumont Division.  The complaint was served on the
Company on January 15, 2007.  The action alleges the plaintiff suffered
certain losses and injuries as a result of using the Company's nasal spray
product.  Plaintiff's complaint consists of counts for negligence, strict
products liability (failure to warn), strict products liability (defective
design), and breach of express and implied warranties.
  This action was recently settled at the direction of the insurance carrier out
of insurance proceeds.
  THE
MATRIX GROUP, LLC VS. INNERLIGHT INC.
 (U.S.
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA)
  On July 6, 2006, The
Matrix Group, LLC commenced an action against Innerlight Inc. in the United
States District Court for the Southern District of Florida.  The action
brought by The Matrix Group, LLC relates to the same facts and circumstances as
the action commenced in March of 2006 by Innerlight Inc. against The Matrix
Group, LLC in Utah County, Utah.  The Matrix Group, LLC is claiming that
according to the terms of the alleged contract, Innerlight has the obligation to
purchase $28,750,000 additional product from April 6, 2006 through October 17,
2013 and that The Matrix Group, LLC is entitled to a judgment against Innerlight
Inc. for alleged obligations to purchase product in the amount of $744,050 from
the period of October 18, 2005 through April 17, 2006.  The United States
District Court for the Southern District of Florida has dismissed without
prejudice this action.
  On February 29, 2008, the
Company sold Darius to InnerLight Holdings, Inc.  (See Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operation” and Note 17 “Subsequent Events” for additional
information.)
  25
 Table of Contents
  ITEM
4.                      SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 None
   PART II
  ITEM
5.                      MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER
 MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 
 PERFORMANCE CHART
 
 The
following graph reflects a five-year comparison, calculated on a dividend
reinvested basis, of the cumulative total stockholder return on the Common Stock
of the Company, a “peer group” index classified as drug related products by
Hemscott Group Ltd., (“Hemscott Group Index”) and the NASDAQ Market Index. The
comparisons utilize an investment of $100 on December 31, 2002 for the Company
and the comparative indices, which then measure the values for each group at
December 31 of each year presented. There can be no assurance that the Company’s
stock performance will continue with the same or similar trends depicted in the
following performance graph.
  
   26
 Table of Contents
 
 Market
Information
 
 The
Company’s Common Stock, $.0005 par value, is currently traded on The NASDAQ
Global Market under the trading symbol “QGLY.”  The price set forth in
the following table represents the high and low bid prices for the Company’s
Common Stock.
 
 
 Common
      Stock2007
              
              
              2006Quarter
      Ended
              
              High
              
              
              Low
              
              
              High
              
              
              LowMarch
      31
              
              $
              7.99
              
              
              $
              5.09
              
              
              $
              15.95
              
              
              $
              8.02June
      30
              
              $
              7.49
              
              
              $
              4.55
              
              
              $
              12.35
              
              
              $
              8.19September
      30
              
              $
              5.24
              
              
              $
              2.92
              
              
              $
              9.50
              
              
              $
              7.00December
      31
              
              $
              6.13
              
              
              $
              3.75
              
              
              $
              7.99
              
              
              $
              5.31
   27
 Table of Contents
  Such
quotations reflect inter-dealer prices, without mark-up, mark-down or commission
and may not represent actual transactions.
  The
Company’s securities are traded on The NASDAQ Global Market and consequently
stock prices are available daily as generated by The NASDAQ Global Market
established quotation system.
 
 Holders
 
 As of
December 31, 2007, there were approximately 300 holders of record of the
Company’s Common Stock,  including brokerage firms, clearing houses,
and/or depository firms holding the Company’s securities for their respective
clients.  The exact number of beneficial owners of the Company’s
securities is not known but exceeds 400.
  Dividends
 The
Company has not declared, nor paid, any cash dividends on its Common
Stock.  At this time the Company intends to retain its earnings to
finance future growth and maintain liquidity.
 
 Warrants and
Options
 
 In
addition to the Company’s outstanding Common Stock, there are, as of December
31, 2007, issued and outstanding Common Stock Purchase Warrants and Options that
are exercisable at the price-per-share stated and expire on the date indicated,
as follows:
 
 Description
              Number
              Exercise
      Price
              Expiration
      DateOption
      Plan
              331,000
              $5.125
              April
      6, 2009Option
      Plan
              173,250
              $0.8125
              December
      20, 2010Option
      Plan
              196,000
              $1.2600
              December
      10, 2011Option
      Plan
              311,250
              $5.1900
              July
      30, 2012Option
      Plan
              62,500
              $5.4900
              December
      17, 2012Option
      Plan
              404,000
              $8.1100
              October
      29, 2013Option
      Plan
              484,000
              $9.5000
              October
      26, 2014Option
      Plan
              520,000
              $13.8000
              December
      11, 2015
 
 At
December 31, 2007, there were 2,482,000 unexercised and vested options of the
Company’s Common Stock available for exercise.
 
 Securities Authorized Under
Equity Compensation
 
 The
following table sets forth certain information regarding stock option and
warrant grants made to employees, directors and consultants:
  SECURITIES AUTHORIZED FOR ISSUANCE
UNDER EQUITY COMPENSATION PLANS
  Plan
      Category
              
              Number
      of Securities to be Issued Upon Exercise of Outstanding Options &
      Warrants
                (A)
              
              
              Weighted
      Average Exercise Price of Outstanding Options & Warrants
                (B)
              
              
              Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans (Excluding Securities Reflected in Column
      A)
                ( C
      )Equity
      Plans Approved by Security Holders (1)
              
              
              2,482,000
              
              
              $
              7.70
              
              
              
              1,595,250
 
 (1)
              An
      incentive stock option plan was instituted in 1997, (the “1997 Stock
      Option Plan”) and approved by the stockholders in 1998. Options pursuant
      to the 1997 Stock Option Plan have been granted to directors, executive
      officers, and employees.
 
 
 
 28
 Table of Contents
  ITEM
6.          SELECTED FINANCIAL DATA
 
 The
following table sets forth the selected financial data of the Company for and at
the end of the years ended December 31, 2007, 2006, 2005, 2004 and
2003.
 
 The data
presented below should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operation” and the Company’s
financial statements and notes thereto appearing elsewhere herein.
  (Amounts
      in thousands, except
                  per
      share data)
                
                Year Ended
                  December
      31, 2007
                
                
                Year Ended
                  December
      31, 2006
                
                
                Year Ended
                  December
      31, 2005
                
                
                Year Ended
                  December
      31, 2004
                
                
                Year Ended
                  December
      31, 2003Statement
      of Income Data:Net
      sales
                
                $
                39,475
                
                
                $
                42,125
                
                
                $
                53,658
                
                
                $
                43,948
                
                
                $
                41,499Total
      revenue
                
                $
                39,475
                
                
                $
                42,125
                
                
                $
                53,658
                
                
                $
                43,948
                
                
                $
                41,499Gross
      profit
                
                $
                22,648
                
                
                $
                22,878
                
                
                $
                27,834
                
                
                $
                20,375
                
                
                $
                20,011Income
      (loss) - continuing operations
                
                $
                (2,458
                )
                
                $
                (1,748
                )
                
                $
                3,217
                
                
                $
                453
                
                
                $
                729Loss
      - discontinued operations (1)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                $
                (54
                )Net
      income (loss)
                
                $
                (2,458
                )
                
                $
                (1,748
                )
                
                $
                3,217
                
                
                $
                453
                
                
                $
                675Basic
      earnings (loss) per share:
                  Continuing
      operations
                
                $
                (0.19
                )
                
                $
                (0.14
                )
                
                $
                0.28
                
                
                $
                0.04
                
                
                $
                0.06Discontinued
      operations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net income
      (loss)
                
                $
                (0.19
                )
                
                $
                (0.14
                )
                
                $
                0.28
                
                
                $
                0.04
                
                
                $
                0.06Diluted
      earnings (loss) per share:
                  Continuing
      operations
                
                $
                (0.19
                )
                
                $
                (0.14
                )
                
                $
                0.24
                
                
                $
                0.03
                
                
                $
                0.05Discontinued
      operations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net income
      (loss)
                
                $
                (0.19
                )
                
                $
                (0.14
                )
                
                $
                0.24
                
                
                $
                0.03
                
                
                $
                0.05Weighted
      average shares outstanding:Basic
                
                
                12,693
                
                
                
                12,245
                
                
                
                11,661
                
                
                
                11,541
                
                
                
                11,467Diluted
                
                
                12,693
                
                
                
                12,245
                
                
                
                13,299
                
                
                
                14,449
                
                
                
                14,910
 As
      of December 31, 2007
                
                
                As
      of December 31, 2006
                
                
                As
      of December 31, 2005
                
                
                As
      of December 31, 2004
                
                
                As
      of December 31, 2003Balance
      Sheet Data:Working
      capital
                
                $
                18,819
                
                
                $
                20,541
                
                
                $
                20,682
                
                
                $
                17,853
                
                
                $
                18,257Total
      assets
                
                $
                33,314
                
                
                $
                34,845
                
                
                $
                35,976
                
                
                $
                31,530
                
                
                $
                26,270Debt
                
                
                -
                
                
                
                -
                
                
                $
                1,464
                
                
                $
                2,893
                
                
                
                -Stockholders’
      equity
                
                $
                23,244
                
                
                $
                25,529
                
                
                $
                25,320
                
                
                $
                21,902
                
                
                $
                20,787
 (1) In
December 2002, the Board of Directors of the Company approved a plan to sell
Caribbean Pacific Natural Products, Inc. (“CPNP”). On
January  22,  2003,  the  Board
of  Directors of the  Company completed  the sale
of the  Company's  60%
equity  interest  in CPNP to  Suncoast
Naturals,  Inc. The sale of this segment has been treated as
discontinued operations and all periods presented have been
reclassified.
 
 On
February 29, 2008, the Company sold Darius to InnerLight Holdings, Inc. (See
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operation” and Note 17 “Subsequent Events” for additional
information.)
 
 29
 Table of Contents
 
 ITEM
      7.
              MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATION
 
 Overview
 
 The
Company, headquartered in Doylestown, Pennsylvania, is a leading manufacturer,
marketer and distributor of a diversified range of homeopathic and health
products which comprise the Cold Remedy, Health and Wellness and Contract
Manufacturing segments.  The Company is also involved in the research
and development of potential prescription products that comprise the Ethical
Pharmaceutical segment.
 
 The
Company’s business is the manufacture and distribution of cold remedy products
to the consumer through the over-the-counter marketplace together with the sale
of proprietary health and wellness products through its direct selling
subsidiary. One of the Company’s key products in its Cold Remedy segment is
Cold-Eeze, a zinc gluconate glycine product proven in two double-blind clinical
studies to reduce the duration and severity of the common cold symptoms by
nearly half. Cold-Eeze is an established product in the health care and cold
remedy market.   Effective October 1, 2004, the Company acquired
substantially all of the assets of JoEl, Inc., the previous manufacturer of the
Cold-Eeze lozenge product.  This manufacturing entity, now called
Quigley Manufacturing Inc. (“QMI”), a wholly owned subsidiary of the Company,
will continue to produce lozenge product along with performing such operational
tasks as warehousing and shipping the Company’s Cold-Eeze
products.  In addition, QMI, which is an FDA approved facility,
produces a variety of hard and organic candy for sale to third party customers
in addition to performing contract manufacturing activities for non-related
entities.
 
 The Cold
Remedy segment reported a sales increase in 2007 compared to
2006.  This increase was primarily the result of the introduction of
two new products during the course of 2007, Cold-Eeze Immune Support Complex 10
and OrganixTM Organic Cough and Sore Throat Drops.  Additionally, the
Company increased the price of Cold-Eeze to the trade in July 2007, thereby
positively impacting 2007 revenues.  However, these positive events
were mitigated by a significant reduction in the unit consumption of Cold-Eeze
in the year of 2007, particularly in the fourth quarter.  Available
reports indicate that the 2007 cough/cold season had the lowest reported
incidence of the common cold in over eight years, a factor which had
consequences across the cough/cold category.  Revenues of this segment
were also negatively impacted by the reduction in warehouse and retail inventory
levels of several key retail outlets.  New competitor products
continue to enter into the retail arena and vie for visibility in an already
congested category.  Unlike Cold-Eeze, which is clinically proven to
treat the common cold, many of these new products are without any evidence of
clinical effectiveness.
 
 In 2007,
the margin of the Cold Remedy segment was favorably impacted as a result of the
discontinuation in May 2007 of royalty costs associated with the developer of
Cold-Eeze along with the price increase of Cold-Eeze to the trade in July
2007.   These margin gains were somewhat reduced by the execution
of a coupon program in the fourth quarter, which was accounted for as a
reduction in sales, thereby reducing margin.  Additionally, the
margins of the newly introduced products were slightly lower than typical for
this segment.
 
 The Health and Wellness
segment is operated through Darius International Inc. (“Darius”), a wholly owned
subsidiary of the Company which was formed in January 2000 to introduce new
products to the marketplace through a network of independent distributor
representatives.  Darius is a direct selling organization specializing
in proprietary health and wellness products.  The formation of Darius
has provided diversification to the Company in both the method of product
distribution and the broader range of products available to the marketplace,
serving as a balance to the seasonal revenue cycles of the Cold-Eeze®branded
products.  The revenues of this segment are proportionate to the
number of active independent distributors and during the course of 2007 these
distributor numbers declined.  Additionally, 2007 revenues may have
been adversely affected due to continuing litigation between the Company and the
sponsor of the segment’s product line.  Corrective action, which
involved the appointment of a new president of the segment and expanding the
international sector, initiated during 2006 has helped to decrease the rate of
decline in revenues of this segment.
 
 On
February 29, 2008, the Company sold Darius to InnerLight Holdings, Inc., whose
major shareholder is Mr. Kevin P. Brogan, the current president of
Darius.  The terms of the agreement include a cash purchase price of
$1,000,000 by InnerLight Holdings, Inc., for the stock of Darius and its
subsidiaries without guarantees, warranties or
indemnifications.  Darius markets health and wellness products through
its wholly owned subsidiary, Innerlight Inc., which constituted the Health and
Wellness segment of the Company.  Losses from this segment in recent
times have reduced the resources available for the research and development
activities of the Pharma segment.  Additionally, the divestiture of
Darius will provide clarity to the Company’s strategic plan to focus its future
endeavors in a pharmaceutical entity with OTC products and a pipeline of
potential formulations that may lead to prescription products.
 
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 Table of Contents
  In
January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley
Pharma Inc. (“Pharma”), that is under the direction of its Executive Vice
President and Chairman of its Medical Advisory Committee.  Pharma was
formed for the purpose of developing naturally derived prescription
drugs.  Pharma is currently
undergoing  research  and  development  activity  in  compliance  with
regulatory  requirements. The Company is in the initial stages of what
may be a lengthy process to develop these patent applications into commercial
products.  The Company continues to invest significantly with ongoing
research and development activities of this segment.
 
 Future
revenues, costs, margins, and profits will continue to be influenced by the
Company’s ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities and the requirements
associated with the development of Pharma’s potential prescription drugs in
order to continue to compete on a national and international
level.  The business development of Darius is dependent on the Company
retaining existing independent distributor representatives and recruiting
additional active representatives both internationally and within the United
States, continued conformity with government regulations, a reliable information
technology system capable of supporting continued growth and continued reliable
sources for product and materials to satisfy consumer demand.
 
 Effect of
Recent Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”) SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP) and expands
disclosures about fair value measurements.  SFAS 157 is
effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years.  The adoption of this standard has not
had a significant impact on the Company’s consolidated financial position,
results of operations or cash flows.
 
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” - Including an amendment of FASB No.
115 (“SFAS
159”). The Statement permits companies to choose to measure many
financial instruments and certain other items at fair value in order to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for the Company beginning January 1, 2008. The
Company is currently evaluating the impact, if any, of SFAS 159 on its operating
results and financial position.
  
 In
December 2007, the FASB issued Statement of Financial Accounting Standard
No. 160,“Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB
No. 51” (“FAS 160”).  FAS 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
retained interest and gain or loss when a subsidiary is deconsolidated. This
statement is effective for financial statements issued for fiscal years
beginning on or after December 15, 2008 with earlier adoption prohibited.
The Company is currently evaluating the impact, if any, of FAS 160 on its
operating results and financial position.
  In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations,"(“SFAS 141R”) which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree. SFAS 141R also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal years.
The Company is currently evaluating the impact, if any, of SFAS 141R on its
operating results and financial position.
 
 Critical Accounting
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods.  Actual results could differ from those
estimates.
 
 The
Company is organized into four different but related business segments, Cold
Remedy, Health and Wellness, Contract Manufacturing and Ethical Pharmaceutical.
When providing for the appropriate sales returns, allowances, cash discounts and
cooperative incentive promotion costs, each segment applies a uniform and
consistent method for making certain assumptions for estimating these provisions
that are applicable to that specific segment. Traditionally, these provisions
are not material to net income in the Health and Wellness and Contract
Manufacturing segments. The Ethical Pharmaceutical segment does not have any
revenues.
 
 The product in the Cold
Remedy segment, Cold-Eeze®, has been
clinically proven in two double-blind studies to reduce the severity and
duration of common cold symptoms. Accordingly, factors considered in estimating
the appropriate sales returns and allowances for this product include it being:
a unique product with limited competitors; competitively priced; promoted;
unaffected for remaining shelf life as there is no expiration date; monitored
for inventory levels at major customers and third-party consumption data, such
as Information Resources, Inc. (“IRI”).
 
 
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 Table of Contents
  
 At
December 31, 2007 and 2006 the Company included reductions to accounts
receivable for sales returns and allowances of $356,000 and $534,000,
respectively, and cash discounts of $169,000 and $154,000, respectively.
Additionally, current liabilities at December 31, 2007 and 2006 include
$1,137,650 and $861,186, respectively for cooperative incentive promotion
costs.
 
 The
roll-forward of the sales returns and allowance reserve ending at December 31 is
as follows:
 
 Account
      – Sales Returns & Allowances
              
              2007
              
              
              2006Beginning
      balance
              
              $
              534,176
              
              
              $
              634,580Provision
      made for future charges relative to sales for each period
      presented
              
              
              1,168,615
              
              
              
              1,061,640Current provision
      related to discontinuation of Cold-Eeze®nasal
      spray
              
              
              -
              
              
              
              113,067Actual
      returns & allowances recorded in the current period
      presented
              
              
              (1,346,185
              )
              
              
              (1,275,111
              )Ending
      balance
              
              $
              356,606
              
              
              $
              534,176
 
 The
increase in the 2007 provision was principally due to non-routine returns of
obsolete product and product mix realignment by certain of our
customers.  Also, the Company applies specific limits on product
returns from customers, and evaluates return requests from customers relative to
the Cold Remedy segment.
 
 Management
believes there are no material charges to net income in the current period,
related to sales from a prior period.
 
 Revenue
 
 Provisions
to reserves to reduce revenues for cold remedy products that do not have an
expiration date, include the use of estimates, which are applied or matched to
the current sales for the period presented. These estimates are based on
specific customer tracking and an overall historical experience to obtain an
effective applicable rate, which is tested on an annual basis and reviewed
quarterly to ascertain the most applicable effective rate. Additionally, the
monitoring of current occurrences, developments by customer, market conditions
and any other occurrences that could affect the expected provisions relative to
net sales for the period presented are also performed.
 
 A one
percent deviation for these consolidated reserve provisions for the years ended
December 31, 2007, 2006 and 2005 would affect net sales by approximately
$468,000, $483,000 and $599,000, respectively. A one percent deviation for
cooperative incentive promotions reserve provisions for the years ended December
31, 2007, 2006 and 2005 could affect net sales by approximately $323,000,
$298,000 and $352,000, respectively.
 
 The reported results
include a remaining returns provision of approximately zero and $113,000 at
December 31, 2007 and December 31, 2006, respectively in the event of future
product returns following the discontinuation of the Cold-Eeze®Cold Remedy Nasal
Spray product in September 2004.
 
 Income
Taxes
 
 The
Company has recorded a valuation allowance against its net deferred tax
assets.  Management believes that this allowance is required due to
the uncertainty of realizing these tax benefits in the future.  The
uncertainty arises because the Company may incur substantial research and
development costs in its Ethical Pharmaceutical segment.
 
 Results of
Operations
 Year ended December 31, 2007
compared with same period 2006
 
 Net sales
for 2007 were $39,475,381 compared to $42,124,969 for 2006, reflecting a
decrease of 6.3% in 2007.  Revenues, by segment, for 2007 were Cold
Remedy, $25,730,016, Health and Wellness, $11,233,879; and Contract
Manufacturing, $2,511,486, as compared to 2006, when the revenues for each
respective segment were $24,815,850, $15,274,940 and $2,034,179.
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 Table of Contents
 
 The Cold
Remedy segment reported a sales increase in 2007 of $914,166 or 3.7%. This
increase reflects the launch of the OrganixTM and Immune products in the third
quarter 2007, contributing combined net sales of $2,017,316. Additionally, the
Cold-Eeze price increase to the trade on July 1, 2007 contributed additional net
sales amount of approximately $2,250,000. The 2007 sales activity indicates
reduced unit sales of Cold-Eeze to retail which is reflective of Information Resources
Inc. (“IRI”) reports indicating a substantial decrease in unit consumption of
Cold-Eeze in 2007, both in the fourth quarter and over the twelve month
period.  Available IRI reports indicate that the 2007 cough/cold
season had the lowest reported incidence of the common cold in over eight years,
a factor which had consequences across the cough/cold
category.  Revenues of this segment were also negatively impacted by
the reduction in warehouse and retail inventory levels of several key retail
outlets.  New competitor products continue to enter into the retail
arena and vie for visibility in an already congested category.  Unlike
Cold-Eeze, which is clinically proven to treat the common cold, many of these
new products are without any evidence of clinical effectiveness.  The
Company is continuing to strongly support Cold-Eeze as a clinically proven cold
remedy product through in-store promotion, media advertising and the
introduction of new flavors.
 
 The
Health and Wellness segment’s net sales decreased in 2007 by $4,041,061 or
26.5%.   The revenues of this segment are proportionate to the
number of active independent distributors and during the course of 2007 these
distributor numbers declined.  Additionally, 2007 revenues may have
been adversely affected due to continuing litigation between the Company and the
sponsor of the segment’s product line.  Corrective action, which
involved the appointment of a new president of the segment and expanding the
international sector, initiated during 2006 has helped to decrease the rate of
decline in revenues of this segment.  On February 29, 2008, the
Company sold this wholly owned subsidiary, Darius International Inc. (“Darius”)
to InnerLight Holdings, Inc., as discussed earlier.
 
 The Contract Manufacturing
segment refers to the third party sales generated by QMI.  In addition
to the manufacture of the Cold-Eeze®product, QMI also
manufactures a variety of hard and organic candies under its own brand names
along with other products on a contract manufacturing basis for other
customers.  Sales for this segment in 2007 increased by $477,307 or
23.5%.
 
 Cost of
sales from continuing operations for 2007 as a percentage of net sales was
42.6%, compared to 45.7% for 2006.  The cost of sales percentage for
the Cold Remedy segment decreased in 2007 by 1.6% primarily due to the impact of
the discontinuation of the Company’s royalty obligations to the developers in
May 2007, a favorable effect of 3.4% in 2007, the launch of the two new products
and the impact of the Cold-Eeze price increase resulted in a combined increase
in cost of 0.7% and the adverse impact of the coupon programs on cost of goods
was 1.4%.  The cost of sales percentage for the Health and Wellness
segment decreased in 2007 by 1.5% due to reduced independent distributor
representatives commission costs of 3.9% with some offset due to increased
product and inventory obsolescence costs.
 
 The 2007 and 2006
consolidated cost of sales were both favorably impacted as a result of the
consolidation effects of the manufacturing facility as it relates to
Cold-Eeze®.  These
gross profit gains of the Cold Remedy segment were mitigated by substantially
lower gross profit margins for the Contract Manufacturing segment, which is
significantly lower than the other operating
segments.
 
 Selling,
marketing and administrative expenses for 2007 were $19,394,020 compared to
$21,449,934 in 2006.  The
decrease  in  2007  was  primarily  due  to  decreased
outside advertising, marketing and promotional costs of $2,117,000, primarily
due to a reduction in media advertising with a change to various coupon programs
the costs of which are accounted for as a reduction from sales.  Sales
brokerage  commission costs increased by $275,000 due to increased
2007 cold remedy sales;  payroll costs increased by $897,000, mainly
due to increased 2007 bonuses; legal costs decreased by $194,000, insurance
costs decreased by $461,000, stock promotion increased by
$184,000.  Selling, marketing and administrative expenses, by segment,
in 2007 were Cold Remedy $12,695,795, Health and Wellness $4,464,371, Pharma
$602,409 and Contract Manufacturing $1,631,445, as compared to 2006 of
$13,180,620, $5,953,277, $743,465 and $1,572,572, respectively.
 
 Research
and development costs for 2007 and 2006 were $6,490,367 and $3,820,071,
respectively.  Principally, the increase in research and development
expenditure was the result of increased Pharma study costs of approximately
$2,772,000 in 2007.
 
 During
2007, the Company’s major operating expenses of salaries, brokerage commissions,
promotion, advertising, and legal costs accounted for approximately $15,179,152
(58.6%) of the total operating expenses of $25,884,387, a decrease of 5.6% over
the 2006 amount of $16,086,896 (63.7%) of total operating expenses of
$25,270,005, largely the result of decreased advertising, increased brokers
commission and increased payroll costs in 2007.
 
 Total
assets of the Company at December 31, 2007 and 2006 were $33,313,718 and
$34,845,034, respectively.  Working capital decreased by $1,722,354 to
$18,818,919 at December 31, 2007.  The primary influences on working
capital during 2007 were: the decrease in cash balances, increased inventory on
hand; increased accrued royalties and sales commissions as a result
of  litigation between the Company and the developer of Cold-Eeze,
increased other liabilities and
decreased advertising payable balances due to variations in advertising
scheduling and strategies between years and related seasonal
factors.
   33
 Table of Contents
 
 Year ended December 31, 2006
compared with same period 2005
 
 Net sales
for 2006 were $42,124,969 compared to $53,658,043 for 2005, reflecting a
decrease of 21.5% in 2006.  Revenues, by segment, for 2006 were Cold
Remedy, $24,815,850, Health and Wellness, $15,274,940; and Contract
Manufacturing, $2,034,179, as compared to 2005 when the revenues for each
respective segment were $29,284,651, $20,473,050 and $3,900,342.
 
 The Cold
Remedy segment reported a sales decrease in 2006 of $4,468,801 or
15.3%.  Sales in 2006 were negatively impacted by higher than expected
inventory levels being carried by our customers resulting in a shift in their
buying patterns; lower than expected incidences of colds and upper respiratory
ailments which was reflected in reduced unit consumption of the product as
measured by Information Resources Incorporated (IRI) of 8.5% for the year to
December 2006. The sales performance of Cold-Eeze in 2006 may also have been
influenced by the introduction of six nationally branded Immune Booster products
by competitors possibly causing temporary migration to these brands in search of
a product to help them avoid catching a cold as against treating a
cold.  The Company is continuing to strongly support Cold-Eeze as a
clinically proven cold remedy through in-store promotion, media advertising and
the introduction of new flavors.
 
 The
Health and Wellness segment’s net sales decreased in 2006 by $5,198,110 or
25.4%.   This decrease reflects a reduction in the number of
active independent distributor representatives and litigation with the sponsor
of the Company’s product line in this segment, which directly affects the
segment’s net sales.  Corrective action to remediate this segment was
implemented in 2006 with the appointment of a new president for this segment
knowledgeable in the network marketing business along with the Company investing
in and expanding its Singapore and Taiwan markets.
 
 The Contract Manufacturing
segment refers to the third party sales generated by QMI.  In addition
to the manufacture of the Cold-Eeze®product, QMI also
manufactures a variety of hard and organic candies under its own brand names
along with other products on a contract manufacturing basis for other
customers.  Sales for this segment in 2006 decreased by $1,866,163 or
47.8%, largely attributable to a customer’s discontinuation of a significant
product during 2006 which was manufactured by QMI.
 
 Cost of sales from
continuing operations for 2006 as a percentage of net sales was 45.7%, compared
to 48.1% for 2005.  The cost of sales percentage for the Cold Remedy
segment decreased in 2006 by 0.6% primarily due to the impact of the
discontinuation of the Company’s royalty obligations to the founders in May 2005
and variations in product sales mix.   The cost of sales
percentage for the Health and Wellness segment decreased in 2006 by 3.0% due to
reduced independent distributor representatives commission costs, reduced
product cost with some offset due to increased costs associated with
international sales activity.  The 2006 and 2005 consolidated cost of
sales were both favorably impacted as a result of the consolidation effects of
the manufacturing facility as it relates to Cold-Eeze®.  These
gross profit gains of the Cold Remedy segment were mitigated by substantially
lower gross profit margins for the Contract Manufacturing segment, which is
significantly lower than the other operating
segments.
  Selling, marketing and
administrative expenses for 2007 were $19,394,020 compared to $21,449,934 in
2006. The decrease in 2007 was primarily due to decreased outside advertising,
marketing and promotional costs of $2,117,000, primarily due to a reduction in
media advertising with a change to various coupon programs the costs of which
are accounted for as a reduction from sales.  Sales brokerage 
commission costs increased by $275,000 due to increased 2007 sales; 
payroll costs increased by $897,000, mainly due to increased 2007 bonuses; legal
costs decreased by $194,000, insurance costs decreased by $461,000, stock
promotion increased by $184,000.  Selling, marketing and administrative
expenses, by segment, in 2007 were Cold Remedy $12,695,795, Health and Wellness
$4,464,371, Pharma $602,409 and Contract Manufacturing $1,631,445, as compared
to 2006 of $13,180,620, $5,953,277, $743,465 and $1,572,572, respectively.
  Research
and development costs for 2006 and 2005 were $3,820,071 and $3,784,221,
respectively.  Principally, the increase in research and development
expenditure was the result of increased Pharma study costs of approximately
$246,000 in 2006 with offset due to decreased cold-remedy related product
testing costs in 2006 compared to the prior year.
 
 During
2006, the Company’s major operating expenses of salaries, brokerage commissions,
promotion, advertising, and legal costs accounted for approximately $16,086,896
(63.7%) of the total operating expenses of $25,270,005, a decrease of 4.9% over
the 2005 amount of $16,922,587 (68.1%) of total operating expenses of
$24,854,528, largely the result of decreased sales brokerage commission costs,
increased legal costs and decreased payroll costs in 2006.
 
 
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 Table of Contents
  Total assets of the
Company at December 31, 2006 and 2005 were $34,845,034 and $35,975,639,
respectively.  Working capital decreased by $140,989 to $20,541,273 at
December 31, 2006.  The primary influences on working capital during
2006 were: the increase in cash balances, decreased account receivable balances
due to reduced sales, increased inventory on hand as a result of sales
shortfall; increased accrued royalties and sales commissions as a result
of  litigation between the Company and the developer of Cold-Eeze®, the total
repayment of the debt balance, and decreased advertising payable balances due to
variations in advertising scheduling between years and related seasonal
factors.
  Material Commitments and
Significant Agreements
 
 Effective October 1, 2004,
the Company acquired certain assets and assumed certain liabilities of JoEl,
Inc., the sole manufacturer of the Cold-Eeze®lozenge
product.  As part of the acquisition, the Company entered into a loan
obligation in the amount of $3.0 million payable to PNC Bank,  N.A.
The loan was collateralized by mortgages on real property located in each of
Lebanon, Pennsylvania and Elizabethtown, Pennsylvania and was used to finance
the majority of the cash portion of the purchase price.  The Company
could elect  interest  rate  options  of
either the Prime Rate or LIBOR plus 200 basis points.  The loan was
payable in eighty-four equal monthly principal payments of $35,714 commencing
November 1, 2004, and such amounts payable were reflected in the consolidated
balance sheet as current portion of long-term debt amounting to $428,571 and
long term debt amounting to $1,035,715 at December 31, 2005.  The loan
was completely repaid in 2006.  During the duration of the loan, The
Company was in compliance with all related loan
covenants.
  With the exception of the
Company’s Cold-Eeze®brand lozenge
products and QMI's sales to third party customers, the Company’s products are
manufactured by outside sources.  The Company has agreements in place
with these manufacturers, which ensure a reliable source of product for the
future.
  The Company has agreements
in place with independent brokers whose function is to represent the Company’s
Cold-Eeze®products, in a
product sales and promotion capacity, throughout the United States and
internationally.  The brokers are remunerated through a commission
structure, based on a percentage of sales collected, less certain
deductions.
 
 The
Company has maintained a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product
formulation.  In return for exclusive distribution rights, the Company
must pay the developer a 3% royalty and a 2% consulting fee based on sales
collected, less certain deductions, throughout the term of this agreement, which
expired May 2007.  However, the Company and the developer are in
litigation and as such, no potential offset for these fees from such litigation
has been recorded.  A founder’s commission totaling 5%, on sales
collected, less certain deductions, has been paid to two of the officers of the
Company, who are also directors and stockholders of the Company, and whose
agreements expired in May 2005.  The expenses for the respective
periods relating to such agreements amounted to $293,266, $1,153,354 and
$1,745,748 for the year ended December 31, 2007, 2006 and 2005,
respectively.   Amounts accrued for these expenses at December
31, 2007 and 2006 were $3,524,031 and $3,230,765, respectively.
 
 On
February 29, 2008, the Company sold Darius to InnerLight Holdings, Inc., whose
major shareholder is Mr. Kevin P. Brogan, the current president of
Darius.  The terms of the agreement include a cash purchase price of
$1,000,000 by InnerLight Holdings, Inc. for the stock of Darius and its
subsidiaries without guarantees, warranties or
indemnifications.  Darius markets health and wellness products through
its wholly owned subsidiary, Innerlight Inc., which constituted the Health and
Wellness segment of the Company.  Losses from this segment in recent
times have reduced the resources available for the research and development
activities of the Pharma segment.  Additionally, the divestiture of
Darius will provide clarity to the Company’s strategic plan to focus its future
endeavors in a pharmaceutical entity with OTC products and a pipeline of
potential formulations that may lead to prescription products.
 
 The
Company has an agreement with the former owners of the Utah-based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for exclusivity, consulting, marketing presentations,
confidentiality and non-compete arrangements.   Amounts expensed
under such agreement during 2007, 2006 and 2005 were $408,343, $630,723, and
$838,607, respectively.  Amounts payable under such agreement at
December 31, 2007 and 2006 were $935,906 and $528,990,
respectively.
 
 Certain
operating leases for office and warehouse space maintained by the Company
resulted in rent expense for the years ended December 31, 2007, 2006 and 2005,
of $310,957, $336,914, and $227,701, respectively. The future minimum lease
obligations under these operating leases are approximately
$305,333.
 
 
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 Table of Contents
  Liquidity and Capital
Resources
 
 The
Company had working capital of $18,818,919 and $20,541,273 at December 31, 2007
and 2006, respectively. Changes in working capital overall have been primarily
due to the following items:  cash balances decreased by $1,671,477;
account receivable balances, net, increased by $115,516 due to increased cold
remedy sales and effective collection practices; inventory increased by $549,523
primarily the result of finished goods and related raw materials related to the
addition of the two new cold remedy product and seasonal factors, accrued
advertising decreased by $770,498 due to variations in media advertising
scheduling and strategies between years and seasonal factors; accrued royalties
and sales commissions increased by $328,439 largely due to the effects of
certain litigation in progress. Total cash balances at December 31, 2007 were
$16,085,282 compared to $17,756,759 at December 31, 2006.
 Management believes that
its strategy to establish Cold-Eeze®as a recognized
brand name, its broader range of products, adequate manufacturing capacity, and
growth in international sales, together with its current working capital, should
provide an internal source of capital to fund the Company’s normal business
operations.  The operations of the Company contribute to the current
research and development expenditures of the Ethical Pharmaceutical
segment.   In addition to the funding from operations, the
Company may in the short and long term raise capital through the issuance of
equity securities or secure other financing resources to support such
research.  As research progresses on certain formulations,
expenditures of the Pharma segment will require substantial financial support
and would necessitate the consideration of other approaches such as licensing or
partnership arrangements that meet the Company’s long term goals and
objectives.  Ultimately, should internal working capital or internal
funding be insufficient, there is no guarantee that other financing resources
will become available, thereby deferring future growth and development of
certain formulations.
 
 Management
is not aware of any trends, events or uncertainties that have or are reasonably
likely to have a material negative impact upon the Company’s (a) short-term or
long-term liquidity, or (b) net sales or income from continuing
operations.  Any challenge to the Company’s patent rights could have a
material adverse effect on future liquidity of the Company; however, the Company
is not aware of any condition that would make such an event
probable.
 
 Management
believes that cash generated from operations, along with its current cash
balances, will be sufficient to finance working capital and capital expenditure
requirements for at least the next year.
 
 Contractual
Obligations
 
 The
Company’s future contractual obligations and commitments at December 31, 2007
consist of the following:
 
 Payment
Due by Period
 Contractual
      Obligations
              
              Total
              
              
              Less
      than
                1
      year
              
              
              1-3
                years
              
              
              4-5
                years
              
              
              More
      than
                5
      yearsOperating
      Lease Obligations
              
              $
              316,002
              
              
              $
              198,825
              
              
              $
              117,177
              
              
              
              -
              
              
              
              -Purchase
      Obligations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Research
      and Development
              
              
              3,930,412
              
              
              
              3,930,412
              
              
              
              -
              
              
              
              -
              
              
              
              -Advertising
              
              
              1,915,643
              
              
              
              1,915,643
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      Contractual Obligations
              
              $
              6,162,057
              
              
              $
              6,044,880
              
              
              $
              117,177
              
              
              
              -
              
              
              
              -
  Off-Balance
Sheet Arrangements
 
 It is not
the Company's usual business practice to enter into off-balance sheet
arrangements such as guarantees on loans and financial commitments and retained
interests in assets transferred to an unconsolidated entity for securitization
purposes.  Consequently, the Company has no off-balance sheet
arrangements that have, or are reasonably likely to have, a material current or
future effect on its financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.
 
 Impact of
Inflation
 
 The
Company is subject to normal inflationary trends and anticipates that any
increased costs would be passed on to its customers.
 
 
 36
 Table of Contents
 
 ITEM
7A.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
 
 The
Company's operations are not subject to risks of material foreign currency
fluctuations, nor does it use derivative financial instruments in its investment
practices. The Company places its marketable investments in instruments that
meet high credit quality standards. The Company does not expect material losses
with respect to its investment portfolio or exposure to market risks associated
with interest rates. The impact on the Company's results of one percentage point
change in short-term interest rates would not have a material impact on the
Company’s future earnings, fair value, or cash flows related to investments in
cash equivalents or interest-earning marketable securities.
 
 
 37
 Table of Contents
  
 ITEM
8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
 
 INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS
                PageBalance Sheets as of December 31, 2007 and
      2006
                F-1Statements of Operations for the years
      ended December 31, 2007, 2006, and 2005
                F-2Statements of Stockholders’ Equity for the
      years ended December 31, 2007, 2006,
                F-3Statements of Cash Flows for the years ended December
      31, 2007, 2006, and 2005
                F-4Notes to Financial Statements
                F-5
      to F-24Responsibility for Financial
      Statements
                F-25Report of Independent Registered Public Accounting Firm
      Amper, Politziner & Mattia, P.C.
                F-26
 
 
 38
 Table of Contents
  THE
QUIGLEY CORPORATION
 CONSOLIDATED
BALANCE SHEETS
 
 ASSETSDecember
      31, 2007
                  
                  
                  December
      31, 2006CURRENT
      ASSETS:Cash
      and cash equivalents
                  
                  $
                  16,085,282
                  
                  
                  $
                  17,756,759Accounts
      receivable (net of doubtful accounts of $178,144 and
    $275,636)
                  
                  
                  6,672,863
                  
                  
                  
                  6,557,347Inventory
                  
                  
                  4,811,627
                  
                  
                  
                  4,262,104Prepaid
      expenses and other current assets
                  
                  
                  1,265,518
                  
                  
                  
                  1,217,097TOTAL
      CURRENT ASSETS
                  
                  
                  28,835,290
                  
                  
                  
                  29,793,307PROPERTY,
      PLANT AND EQUIPMENT – net
                  
                  
                  4,355,213
                  
                  
                  
                  4,838,076OTHER
      ASSETS
                  
                  
                  123,215
                  
                  
                  
                  213,651TOTAL
      ASSETS
                  
                  $
                  33,313,718
                  
                  
                  $
                  34,845,034LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                  
                  $
                  537,863
                  
                  
                  $
                  885,648Accrued
      royalties and sales commissions
                  
                  
                  4,081,085
                  
                  
                  
                  3,752,646Accrued
      advertising
                  
                  
                  1,379,761
                  
                  
                  
                  2,150,259Other
      current liabilities
                  
                  
                  4,017,662
                  
                  
                  
                  2,463,481TOTAL
      CURRENT LIABILITIES
                  
                  
                  10,016,371
                  
                  
                  
                  9,252,034MINORITY
      INTEREST
                  
                  
                  53,092
                  
                  
                  
                  63,563STOCKHOLDERS’
      EQUITY:Common
      stock, $.0005 par value; authorized 50,000,000; Issued: 17,499,186 and
      17,330,686 shares
                  
                  
                  8,750
                  
                  
                  
                  8,665Additional
      paid-in-capital
                  
                  
                  37,535,523
                  
                  
                  
                  37,362,453Retained
      earnings
                  
                  
                  10,888,141
                  
                  
                  
                  13,346,478Less:
      Treasury stock, 4,646,053 and 4,646,053 shares, at cost
                  
                  
                  (25,188,159
                  )
                  
                  
                  (25,188,159
                  )TOTAL
      STOCKHOLDERS’ EQUITY
                  
                  
                  23,244,255
                  
                  
                  
                  25,529,437TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  33,313,718
                  
                  
                  $
                  34,845,034
  See
accompanying notes to consolidated financial statements
   F-1
 Table of Contents
  THE
QUIGLEY CORPORATION
 CONSOLIDATED
STATEMENTS OF OPERATIONS
  Year
      Ended
                  December
      31, 2007
                
                
                Year
      Ended
                  December
      31, 2006
                
                
                Year
      Ended
                  December
      31, 2005NET
      SALES
                
                $
                39,475,381
                
                
                $
                42,124,969
                
                
                $
                53,658,043COST
      OF SALES
                
                
                16,827,062
                
                
                
                19,246,604
                
                
                
                25,824,085GROSS
      PROFIT
                
                
                22,648,319
                
                
                
                22,878,365
                
                
                
                27,833,958OPERATING
      EXPENSES:Sales and
      marketing
                
                
                5,977,358
                
                
                
                8,326,197
                
                
                
                8,414,065Administration
                
                
                13,416,662
                
                
                
                13,123,737
                
                
                
                12,656,242Research and
      development
                
                
                6,490,367
                
                
                
                3,820,071
                
                
                
                3,784,221TOTAL
      OPERATING EXPENSES
                
                
                25,884,387
                
                
                
                25,270,005
                
                
                
                24,854,528(LOSS)
      INCOME  FROM OPERATIONS
                
                
                (3,236,068
                )
                
                
                (2,391,640
                )
                
                
                2,979,430OTHER
      INCOME  (EXPENSE)Interest
      income
                
                
                777,731
                
                
                
                753,538
                
                
                
                402,580Interest
      expense
                
                
                -
                
                
                
                (21,644
                )
                
                
                (100,326
                )TOTAL
      OTHER INCOME, NET
                
                
                777,731
                
                
                
                731,894
                
                
                
                302,254(LOSS)
      INCOME  BEFORE TAXES
                
                
                (2,458,337
                )
                
                
                (1,659,746
                )
                
                
                3,281,684INCOME
      TAXES
                
                
                -
                
                
                
                88,599
                
                
                
                65,000NET
      (LOSS) INCOME
                
                $
                (2,458,337
                )
                
                $
                (1,748,345
                )
                
                $
                3,216,684(Loss)
      Earnings  per common share:Basic
                
                $
                (0.19
                )
                
                $
                (0.14
                )
                
                $
                0.28Diluted
                
                $
                (0.19
                )
                
                $
                (0.14
                )
                
                $
                0.24Weighted
      average common shares outstanding:Basic
                
                
                12,728,706
                
                
                
                12,245,073
                
                
                
                11,660,561Diluted
                
                
                12,728,706
                
                
                
                12,245,073
                
                
                
                13,299,162
   See
accompanying notes to consolidated financial statements
   F-2
 Table of Contents
  THE
QUIGLEY CORPORATION
 CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’
EQUITY
  Common
                  Stock
                  Shares
                
                
                Issued
                  Amount
                
                
                Additional
                  Paid-in-
                  Capital
                
                
                Treasury
                  Stock
                
                
                Retained
                  Earnings
                
                
                TotalBalance
      December 31, 2004
                
                
                11,639,743
                
                
                $
                8,143
                
                
                $
                35,203,816
                
                
                $
                (25,188,159
                )
                
                $
                11,878,139
                
                
                $
                21,901,939Tax
      benefits from options,
                  warrants
      & common stock
                
                
                
                
                
                
                
                
                
                
                249,453
                
                
                
                
                
                
                
                
                
                
                
                249,453Tax
      benefit allowance
                
                
                
                
                
                
                
                
                
                
                (249,453
                )
                
                
                
                
                
                
                
                
                
                
                (249,453
                )Proceeds
      from options and
                  warrants
      exercised
                
                
                74,728
                
                
                
                37
                
                
                
                200,987
                
                
                
                
                
                
                
                
                
                
                
                201,024Net
      Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,216,684
                
                
                
                3,216,684Balance
      December 31, 2005
                
                
                11,714,471
                
                
                
                8,180
                
                
                
                35,404,803
                
                
                
                (25,188,159
                )
                
                
                15,094,823
                
                
                
                25,319,647Tax
      benefits from options,
                  warrants
      & common stock
                
                
                
                
                
                
                
                
                
                
                2,484,330
                
                
                
                
                
                
                
                
                
                
                
                2,484,330Tax
      benefit allowance
                
                
                
                
                
                
                
                
                
                
                (2,484,330
                )
                
                
                
                
                
                
                
                
                
                
                (2,484,330
                )Proceeds
      from options and
                  warrants
      exercised
                
                
                1,011,155
                
                
                
                505
                
                
                
                1,957,630
                
                
                
                
                
                
                
                
                
                
                
                1,958,135Stock
      Cancellation
                
                
                (40,993
                )
                
                
                (20
                )
                
                
                20
                
                
                
                
                
                
                
                
                
                
                
                -Net
      Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (1,748,345
                )
                
                
                (1,748,345
                )Balance
      December 31, 2006
                
                
                12,684,633
                
                
                
                8,665
                
                
                
                37,362,453
                
                
                
                (25,188,159
                )
                
                
                13,346,478
                
                
                
                25,529,437Tax
      benefits from options,
                  warrants
      & common stock
                
                
                
                
                
                
                
                
                
                
                153,631
                
                
                
                
                
                
                
                
                
                
                
                153,631Tax
      benefit allowance
                
                
                
                
                
                
                
                
                
                
                (153,631
                )
                
                
                
                
                
                
                
                
                
                
                (153,631
                )Proceeds
      from options exercised
                
                
                168,500
                
                
                
                85
                
                
                
                173,070
                
                
                
                
                
                
                
                
                
                
                
                173,155Net
      Loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,458,337
                )
                
                
                (2,458,337
                )Balance
      December 31, 2007
                
                
                12,853,133
                
                
                $
                8,750
                
                
                $
                37,535,523
                
                
                $
                (25,188,159
                )
                
                $
                10,888,141
                
                
                $
                23,244,255
   See
accompanying notes to consolidated financial statements
 
  
 F-3
 Table of Contents
  THEQUIGLEY CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Year
      Ended
                  December
      31, 2007
                
                
                Year
      Ended
                  December
      31, 2006
                
                
                Year
      Ended
                  December
      31, 2005OPERATING
      ACTIVITIES:Net
      (loss) income
                
                $
                (2,458,337
                )
                
                $
                (1,748,345
                )
                
                $
                3,216,684Adjustments
      to reconcile net (loss) income to net cashprovided
      by continuing operations:Depreciation
      and amortization
                
                
                996,161
                
                
                
                1,326,920
                
                
                
                1,404,107(Gain)Loss on the sales of fixed assets
                
                
                19,737
                
                
                
                -
                
                
                
                (3,907
                )Bad
      debts provision
                
                
                19,806
                
                
                
                26,358
                
                
                
                98,751(Increase)
      decrease in assets:Accounts
      receivable
                
                
                (135,322
                )
                
                
                1,296,435
                
                
                
                (1,602,912
                )Inventory
                
                
                (549,523
                )
                
                
                (362,040
                )
                
                
                (445,382
                )Prepaid
      expenses and other current assets
                
                
                (48,421
                )
                
                
                365,754
                
                
                
                (896,552
                )Other
      assets
                
                
                82,841
                
                
                
                (69,282
                )
                
                
                3,748Increase
      (decrease) in liabilities:Accounts
      payable
                
                
                (347,785
                )
                
                
                113,829
                
                
                
                (206,582
                )Accrued
      royalties and sales commissions
                
                
                328,439
                
                
                
                451,048
                
                
                
                1,505,517Accrued
      advertising
                
                
                (770,498
                )
                
                
                (710,155
                )
                
                
                941,403Other
      current liabilities
                
                
                1,551,304
                
                
                
                266,421
                
                
                
                250,614Total
      adjustments
                
                
                1,146,739
                
                
                
                2,705,288
                
                
                
                1,048,805NET
      CASH (USED IN) PROVIDED BYOPERATING
      ACTIVITIES
                
                
                (1,311,598
                )
                
                
                956,943
                
                
                
                4,265,489INVESTING
      ACTIVITIES:Capital
      expenditures
                
                
                (533,034
                )
                
                
                (697,479
                )
                
                
                (531,213
                )Proceeds
      from the sale of fixed assets
                
                
                -
                
                
                
                118,276
                
                
                
                12,000NET
      CASH FLOWS USED IN INVESTINGACTIVITIES
                
                
                (533,034
                )
                
                
                (579,203
                )
                
                
                (519,213
                )FINANCING
      ACTIVITIES:Principal
      payments on debt
                
                
                -
                
                
                
                (1,464,286
                )
                
                
                (1,428,571
                )Stock
      options and warrants exercised
                
                
                173,155
                
                
                
                1,958,135
                
                
                
                201,024NET
      CASH FLOWS PROVIDED BY (USED IN)FINANCING
      ACTIVITIES
                
                
                173,155
                
                
                
                493,849
                
                
                
                (1,227,547
                )NET
      (DECREASE) INCREASE  IN CASH
                
                
                (1,671,477
                )
                
                
                871,589
                
                
                
                2,518,729CASH
      & CASH EQUIVALENTS, BEGINNING OFPERIOD
                
                
                17,756,759
                
                
                
                16,885,170
                
                
                
                14,366,441CASH
      & CASH EQUIVALENTS,END
      OF PERIOD
                
                $
                16,085,282
                
                
                $
                17,756,759
                
                
                $
                16,885,170SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATION:Cash
      paid for:Interest
                
                $
                0
                
                
                $
                21,644
                
                
                $
                100,326Taxes
                
                $
                0
                
                
                $
                88,599
                
                
                $
                65,000
 See
accompanying notes to consolidated financial statements
 
 
 F-4
 Table of Contents
 THE
QUIGLEYCORPORATION
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 NOTE 1 – ORGANIZATION AND
BUSINESS
 
 The
Company, headquartered in Doylestown, Pennsylvania, is a leading manufacturer,
marketer and distributor of a diversified range of homeopathic and health
products which comprise the Cold Remedy, Health and Wellness and Contract
Manufacturing segments.  The Company is also involved in the research
and development of potential prescription products that comprise the Ethical
Pharmaceutical segment.
 
 The
Company’s business is the manufacture and distribution of cold remedy products
to the consumer through the over-the-counter marketplace together with the sale
of proprietary health and wellness products through its direct selling
subsidiary. One of the Company’s key products in its Cold Remedy segment is
Cold-Eeze®,
a zinc gluconate glycine product proven in two double-blind clinical studies to
reduce the duration and severity of the common cold symptoms by nearly half.
Cold-Eeze® is now an established product in the health care and cold remedy
market.   Effective October 1, 2004, the Company acquired
substantially all of the assets of JoEl, Inc., the previous manufacturer of the
Cold-Eeze®
lozenge product.  This manufacturing entity, now called Quigley
Manufacturing Inc. (“QMI”), a wholly owned subsidiary of the Company, will
continue to produce lozenge product along with performing such operational tasks
as warehousing and shipping the Company’s Cold-Eeze®
products.  In addition, QMI produces a variety of hard and organic
candy for sale to third party customers in addition to performing contract
manufacturing activities for non-related entities.
 
 Darius International Inc.
(“Darius”), the Health and Wellness segment, a wholly owned subsidiary of the
Company, was formed in January 2000 to introduce new products to the marketplace
through a network of independent distributor representatives.  Darius
is a direct selling organization specializing in proprietary health and wellness
products, marketed through its wholly-owned subsidiary, Innerlight
Inc.  The formation of Darius has provided diversification to the
Company in both the method of product distribution and the broader range of
products available to the marketplace, serving as a balance to the seasonal
revenue cycles of the Cold-Eeze®branded
products.  On February 29, 2008, the Company sold Darius to InnerLight
Holdings, Inc.  (See Note 17, “Subsequent Events” for further
discussion.)
 
 In
January 2001, the Company formed an Ethical Pharmaceutical segment, Quigley
Pharma Inc. (“Pharma”), that is under the direction of its Executive Vice
President and Chairman of its Medical Advisory Committee.  Pharma was
formed for the purpose of developing naturally derived prescription drugs,
cosmeceuticals, and dietary supplements.  Pharma is currently
undergoing research and development activity in compliance with regulatory
requirements. The Company is in the initial stages of what may be a lengthy
process to develop these patent applications into commercial
products.
 
 Future
revenues, costs, margins, and profits will continue to be influenced by the
Company’s ability to maintain its manufacturing availability and capacity
together with its marketing and distribution capabilities and the requirements
associated with the development of Pharma’s potential prescription drugs in
order to continue to compete on a national and international
level.  The continued expansion of Darius is dependent on the Company
retaining existing independent distributor representatives and recruiting
additional active representatives both internationally and within the United
States, continued conformity with government regulations, a reliable information
technology system capable of supporting continued growth and continued reliable
sources for product and materials to satisfy consumer demand.
 
 The
business of the Company is subject to federal and state laws and regulations
adopted for the health and safety of users of the Company’s products. Cold-Eeze®
is a homeopathic remedy that is subject to regulations by various federal, state
and local agencies, including the FDA and the Homeopathic Pharmacopoeia of the
United States.
 
 NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
 
 Basis
of Presentation
  The
Consolidated Financial Statements include the accounts of the Company and its
wholly owned subsidiaries. All inter-company transactions and balances have been
eliminated.  Effective March 31, 2004, the financial statements
include consolidated variable interest entities (“VIEs”) of which the Company is
the primary beneficiary (see discussion in Note 4, “Variable Interest
Entity”).
 
 
 F-5
 Table of Contents
 Use
of Estimates
 
 The
Company’s consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United Sates of America.
In connection with the preparation of the consolidated financial statements, the
Company is required to make assumptions and estimates about future events, and
apply judgments that affect the reported amounts of assets, liabilities,
revenue, expenses and related disclosures. These assumptions, estimates and
judgments are based on historical experience, current trends and other factors
that management believes to be relevant at the time the consolidated financial
statements are prepared. Management reviews the accounting policies,
assumptions, estimates and judgments on a quarterly basis to ensure the
financial statements are presented fairly and in accordance with GAAP. However,
because future events and their effects cannot be determined with certainty,
actual results could differ from these assumptions and estimates, and such
differences could be material.
 
 The
Company is organized into four different but related business segments,
Cold-Remedy, Health and Wellness, Contract Manufacturing and Ethical
Pharmaceutical. When providing for the appropriate sales returns, allowances,
cash discounts and cooperative incentive program costs, each segment applies a
uniform and consistent method for making certain assumptions for estimating
these provisions that are applicable to each specific segment. Traditionally,
these provisions are not material to reported revenues in the Health and
Wellness and Contract Manufacturing segments and the Ethical Pharmaceutical
segment does not have any revenues.
 
 Provisions
to these reserves within the Cold Remedy segment include the use of such
estimates, which are applied or matched to the current sales for the period
presented. These estimates are based on specific customer tracking and an
overall historical experience to obtain an applicable effective rate. Estimates
for sales returns are tracked at the specific customer level and are tested on
an annual historical basis, and reviewed quarterly, as is the estimate for
cooperative incentive promotion costs. Cash discounts follow the terms of sales
and are taken by virtually all customers. Additionally, the monitoring of
current occurrences, developments by customer, market conditions and any other
occurrences that could affect the expected provisions for any future returns or
allowances, cash discounts and cooperative incentive promotion costs relative to
net sales for the period presented are also performed.
 
 Cash
Equivalents
 
 The
Company considers all highly liquid investments with an initial maturity of
three months or less at the time of purchase to be cash
equivalents.  Cash equivalents include cash on hand and monies
invested in money market funds. The carrying amount approximates the fair market
value due to the short-term maturity of these investments.
 
 Inventories
 
 Inventory
is valued at the lower of cost, determined on a first-in, first-out basis
(FIFO), or market. Inventory items are analyzed to determine cost and the market
value and appropriate valuation reserves are established. The consolidated
financial statements include a reserve for excess or obsolete inventory of
$868,710 and $430,926 as of December 31, 2007 and 2006,
respectively.  Inventories included raw material, work in progress and
packaging amounts of approximately $1,197,000 and $1,077,000 at December 31,
2007 and December 31, 2006, respectively, with the remainder comprising finished
goods.
 
 Property,
Plant  and Equipment
 
 Property,
plant and equipment are recorded at cost.  The Company uses a
combination of straight-line and accelerated methods in computing depreciation
for financial reporting purposes.  The annual provision for
depreciation has been computed in accordance with the following ranges of
estimated asset lives: building and improvements - twenty to thirty nine years;
machinery and equipment - five to seven years; computer software - three years;
and furniture and fixtures – seven years.
 
 Concentration
of Risks
 
 Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash investments and trade accounts
receivable.
 
 The
Company maintains cash and cash equivalents with several major financial
institutions. Since the Company maintains amounts in excess of guarantees
provided by the Federal Depository Insurance Corporation, the Company performs
periodic evaluations of the relative credit standing of these financial
institutions and limits the amount of credit exposure with any one
institution.
   F-6
 Table of Contents
 
 Trade
accounts receivable potentially subjects the Company to credit
risk.  The Company extends credit to its customers based upon an
evaluation of the customer’s financial condition and credit history and
generally does not require collateral. The Company’s broad range of customers
includes many large wholesalers, mass merchandisers and multi-outlet pharmacy
chains, five of which account for a significant percentage of sales volume,
representing 37% for the year ended December 31, 2007, 31% for the year ended
December 31, 2006, and 29% for the year ended December 31,
2005.  Customers comprising the five largest accounts receivable
balances represented 58% and 56% of total trade receivable balances at December
31, 2007 and 2006, respectively.  During 2007, 2006 and 2005,
approximately 11%, 9%, and 8%, respectively, of the Company’s revenues were
related to international markets.
 
 The
Company’s revenues are currently generated from the sale of the Cold-Remedy
products which approximated 65%, 59% and 55% of total revenues in the year ended
December 31, 2007, 2006 and 2005, respectively.  The Health and
Wellness segment approximated 29%, 36% and 38%, for the twelve month periods
ended December 31, 2007, 2006 and 2005, respectively.  The Contract
Manufacturing segment approximated 6%, 5% and 7% for the year ended December 31,
2007, 2006 and 2005, respectively.
 
 Raw materials used in the
production of the products are available from numerous sources.  Raw
materials for the Cold-Eeze®lozenge product
are currently procured from a single vendor in order to secure purchasing
economies.  In a situation where this one vendor is not able to supply
QMI with the ingredients, other sources have been identified.  Should
these product sources terminate or discontinue for any reason, the Company has
formulated a contingency plan in order to prevent such discontinuance from
materially affecting the Company’s operations.  Any such termination
may, however, result in a temporary delay in production until the replacement
facility is able to meet the Company’s production
requirements.
 
 Darius’
products for resale can be sourced from several suppliers.  In the
event that such sources were no longer in a position to supply Darius with
products, other vendors have been identified as reliable alternatives with
minimal adverse loss of business.
 
 Long-lived
Assets
 
 The
Company reviews its long-lived assets for impairment on an exception basis
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable through future undiscounted cash
flows.  If it is determined that an impairment loss has occurred based
on the expected cash flows compared to the related asset value, an impairment
loss would be recognized in the Statement of Operations.
 
 Revenue
Recognition
 
 Sales are recognized at
the time ownership is transferred to the customer, which for the Cold Remedy
segment is the time the shipment is received by the customer and for both the
Health and Wellness segment and the Contract Manufacturing segment, when the
product is shipped to the customer.  Revenue is reduced for trade
promotions, estimated sales returns, cash discounts and other allowances in the
same period as the related sales are recorded. The Company makes estimates of
potential future product returns and other allowances related to current period
revenue. The Company analyzes historical returns, current trends, and changes in
customer and consumer demand when evaluating the adequacy of the sales returns
and other allowances. The consolidated financial statements include reserves of
$356,606 for future sales returns and $347,102 for other allowances as of
December 31, 2007 and $534,176 and $429,546 at December 31, 2006, respectively.
The 2007 and 2006 reserve balances include a remaining returns provision at
December 31, 2007 and December 31, 2006 of zero and approximately $113,000,
respectively, in the event of future product returns following the
discontinuation of the Cold-Eeze®Cold Remedy Nasal
Spray product in September 2004.  The reserves also include an
estimate of the uncollectability of accounts receivable resulting in a reserve
of $178,144 at December 31, 2007 and $275,636 at December 31,
2006.
 
 Cost
of Sales
 
 For the
Cold Remedy Segment, in accordance with contract terms, payments calculated
based upon net sales collected to the patent holder of the Cold-Eeze formulation
and payments to the corporation founders (this agreement terminated in 2005) and
developers of the final saleable Cold-Eeze product (this agreement terminated in
2007) amounting to $317,871, $1,153,354 and $1,745,748, respectively, at
December 31, 2007, 2006 and 2005 are presented in the financial statements as
cost of sales.
   F-7
 Table of Contents
 
 In the
Health and Wellness Segment, agreements with Independent Distributor
Representatives (“IR’s”) require payments to them to be calculated based upon
net commissionable sales of other IR’s in their down-line and not on any of
their individual purchases of products including not taking title to the
products that are sold by other IR’s.  In accordance with EITF 01-9,
such payments to the IR’s do not qualify as a reduction of the selling price as
these payments are not offered as an allowance or as a percentage rebate of
direct purchases made, and the IR’s are not offered any cooperative incentive
promotions of any type.  Such payments, among other factors, are
related to expand the cycle of additional IR’s and for maintaining the
distribution channel for this segment’s products.
 
 Accordingly,
such distribution payments amounting to $4,295,609, $6,433,602 and $9,207,613,
respectively, at December 31, 2007, 2006 and 2005 are presented in the financial
statements as cost of sales.
 
 Operating
expenses
 
 Agreements
relating to the Cold Remedy segment with a major national sales brokerage firm
are for this firm to sell the manufactured Cold-Eeze product to our customers.
Such related costs are presented in the financial statements as selling
expenses.
 
 In the
Health and Wellness Segment, the Company includes payments in accordance with
agreements with the former owner of its acquired proprietary products, to be
calculated based upon net sales collected. These agreements provide for
exclusivity, consulting, marketing presentations, confidentiality and
non-compete arrangements with such payments being classified as administration
expense.
 
 Shipping
and Handling
 
 Product
sales relating to Health and Wellness products carry an additional identifiable
shipping and handling charge to the purchaser, which is classified as
revenue.  For the Cold Remedy and Contract Manufacturing segments,
such costs are included as part of the invoiced price.  In all cases
costs related to this revenue are recorded in cost of sales.
 
 Stock
Compensation
 
 Stock
options and warrants for purchase of the Company’s common stock have been
granted to both employees and non-employees since the date the Company became
publicly traded.  Options and warrants are exercisable during a period
determined by the Company, but in no event later than ten years from the date
granted.
 
 Expense
relating to options granted to non-employees has been appropriately recorded in
the periods presented based on fair values as determined by the Black-Scholes
pricing model dependent upon the circumstances relating to the specific
grants.
 
 The
Company used the Black-Scholes pricing model to determine the fair value of
stock options granted during the 2005 period presented using the following
assumptions: expected life of the option of 5 years and expected forfeiture rate
of 0%; expected stock price volatility of 58.3%; and expected dividend yield of
0% and risk-free interest rate of 4.46%.  The impact of applying SFAS
No. 123R in this pro forma disclosure is
not  indicative  of  the  impact  on  future  years’  reported
net  income as  SFAS No. 123R does not apply to stock
options granted prior to the beginning of fiscal year 2006 and additional stock
options awards may be granted in future years.  All options were
immediately vested upon grant.  No options or warrants were granted
during the years ended December 31, 2007 and 2006.
 
 Prior to
January 1, 2006, the Company applied Accounting Principles Board Opinion No. 25
(“APB 25”) in accounting for its grants of options to
employees.  Under the intrinsic value method prescribed by APB 25, no
compensation expense relating to grants to employees has been recorded by the
Company in periods reported.  If compensation expense for awards made
during the years ended December 31, 2005 had been determined under the fair
value method of Statement of Financial Accounting Standards (SFAS) No. 123,
“Accountingfor
Stock-Based Compensation,” the Company’s net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
   F-8
 Table of Contents
 
 Year
      Ended
                  December
      31, 2005Net
      incomeAs
      reported
                
                $
                3,216,684Add:
      Stock-based compensation expense included in reported net income as
      determined under the intrinsic value method
                
                
                -Deduct:
      Adjustment to stock-based employee compensation expense as determined
      under the fair value based method
                
                
                (3,884,400
                )Pro
      forma net loss
                
                $
                (667,716
                )Basic
      earnings (loss) per shareAs
      reported
                
                $
                0.28Pro
      forma
                
                $
                (0.06
                )Diluted
      earnings (loss) per shareAs
      reported
                
                $
                0.24Pro
      forma
                
                $
                (0.05
                )
  Expense
relating to warrants granted to non-employees has been appropriately recorded in
the periods presented based on fair values as determined by the Black Scholes
pricing model dependent upon the circumstances relating to the specific
grants.
 
 A total
of zero, zero, and 520,000 stock options were granted to employees and
non-employees in 2007, 2006 and 2005, respectively.
 
 Advertising
and Incentive Promotions
 
 Advertising
and incentive promotion costs are expensed within the period in which they are
utilized. Advertising and incentive promotion expense is comprised of media
advertising, presented as part of sales and marketing expense; co-operative
incentive promotions and coupon program expenses, which are accounted for as
part of net sales; and free product, which is accounted for as part of cost of
sales.  Advertising and incentive promotion costs incurred for the
years ended December 31, 2007, 2006 and 2005 were $7,290,065, $7,703,426, and
$8,688,233, respectively.  Included in prepaid expenses and other
current assets was $158,428 and $258,215 at December 31, 2007 and 2006 relating
to prepaid advertising and promotion expenses.
 
 Research
and Development
 
 Research and development
costs are charged to operations in the period incurred. Expenditures for the
years ended December 31, 2007, 2006 and 2005 were $6,490,367, $3,820,071 and
$3,784,221, respectively.  Principally, research and development costs
are related to Pharma’s study activities and costs associated with
Cold-Eeze®.
  Income
Taxes
 
 The
Company utilizes the asset and liability approach which requires the recognition
of deferred tax assets and liabilities for the future tax consequences of events
that have been recognized in the Company’s financial statements or tax returns.
In estimating future tax consequences, the Company generally considers all
expected future events other than enactments of changes in the tax law or
rates.  Until sufficient taxable income to offset the temporary timing
differences attributable to operations and the tax deductions attributable to
option, warrant and stock activities are assured, a valuation allowance equaling
the total deferred tax asset is being provided.  See Note 12 - Income
Taxes for further discussion.
 
 Effective
January 1, 2007, the Company adopted Financial Interpretation ("FIN") No. 48,
Accounting for Uncertainty in
Income Taxes-An Interpretation of FASB Statement No. 109. This
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation contains a two-step
approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit
as the largest amount which is more than fifty percent likely of being realized
upon ultimate settlement. The interpretation also provides guidance on
derecognition, classification, interest and penalties, and other matters. The
adoption did not have an effect on the consolidated financial
statements.
   F-9
 Table of Contents
  As a
result of the Company’s continuing tax losses, the Company has recorded a full
valuation allowance against a net deferred tax asset.  Additionally,
the Company has not recorded a liability for unrecognized tax benefits
subsequent to the adoption of FIN 48.
  The tax
years 2004-2007 remain open to examination by the major taxing jurisdictions to
which the Company is subject.
 
 Fair
Value of Financial Instruments
  Cash and
cash equivalents, accounts receivable and accounts payable are reflected in the
consolidated financial statements at carrying value which approximates fair
value because of the short-term maturity of these instruments.  The
fair value of past periods’ long-term debt was approximately equivalent to its
carrying value due to the fact that the interest rates then available to the
Company for debt with similar terms were approximately equal to the interest
rates for the Company’s debt.  Determination of the fair value of
related party payables is not practicable due to their related party
nature.
 
 Recently
Issued Accounting Standards
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 157, “Fair Value
Measurements”. SFAS 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP) and
expands disclosures about fair value measurements.  SFAS 157 is effective
for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years.  The adoption of this standard has not had a
significant impact on the Company’s consolidated financial position, results of
operations or cash flows.
 
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” - Including an amendment of FASB No.
115 ("FAS 159"). The Statement permits companies to choose to measure many
financial instruments and certain other items at fair value in order to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. FAS 159 is effective for the Company beginning January 1, 2008. The
Company is currently evaluating the impact, if any, of FAS 159 on its operating
results and financial position.
  
 In
December 2007, the FASB issued Statement of Financial Accounting Standard
No. 160,“Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB
No. 51” (“FAS 160”).  FAS 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
retained interest and gain or loss when a subsidiary is deconsolidated. This
statement is effective for financial statements issued for fiscal years
beginning on or after December 15, 2008 with earlier adoption prohibited.
The Company is currently evaluating the impact, if any, of FAS 160 on its
operating results and financial position.
  In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations,"(“SFAS 141R”) which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree. SFAS 141R also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of the business combination. SFAS
141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008, and interim periods within those fiscal years.
The Company is currently evaluating the impact, if any, of SFAS 141R on its
operating results and financial position.
 
 NOTE
3 –  VARIABLE INTEREST ENTITY
 
 In
December 2003, the Financial Accounting Standards Board (FASB or the “Board”)
issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest
Entities (FIN 46R), to address certain implementation
issues.  FIN 46R varies significantly from FASB Interpretation No. 46,
Consolidation of Variable
InterestEntities(“VIE”)(FIN 46), which it supersedes.  FIN 46R
requires the application of either FIN 46 or FIN 46R by “Public
Entities”  to
all  Special  Purpose  Entities (“SPEs”)
at  the  end  of the first interim or annual
reporting period ending after December 15, 2003.  FIN 46R is
applicable to all non-SPEs created prior to February 1, 2003 by Public Entities
that are not small business issuers at the end of the first interim or annual
reporting period ending after March 15, 2004.  Effective March 31,
2004, the Company adopted FIN 46R for VIE’s formed prior to February 1,
2003.  The Company has determined that Scandasystems, a related party,
qualifies as a variable interest entity and the Company has consolidated
Scandasystems beginning with the quarter ended March 31, 2004.  Due to
the fact that the Company has no long-term contractual commitments or
guarantees, the maximum exposure to loss is insignificant.  As a
result of consolidating the VIE of which the Company is the primary beneficiary,
the Company recognized a minority interest of approximately $53,092 and $63,563
on the Consolidated Balance Sheet in 2007 and 2006 which represents the
difference between the assets and the liabilities recorded upon the
consolidation of the VIE.
 
  F-10
 Table of Contents
 
 The
liabilities recognized as a result of consolidating the VIE do not represent
additional claims on the Company’s general assets.  Rather, they
represent claims against the specific assets of the consolidated
VIE.  Conversely, assets recognized as a result of consolidating this
VIE do not represent additional assets that could be used to satisfy claims
against the Company’s general assets.  Reflected on the Company’s
Consolidated Balance Sheet are $56,996 and $64,592 in 2007 and 2006 of VIE
assets, representing all of the assets of the VIE.  The VIE assists
the Company in acquiring licenses and research and development activities in
certain countries.
 
 
 NOTE
4 – PROPERTY, PLANT AND EQUIPMENT
 
 Consisted of the following as
of:
 
 December
      31, 2007
              
              
              December
      31, 2006Land
              
              $
              538,791
              
              
              $
              538,791Buildings
      and improvements
              
              
              2,690,658
              
              
              
              2,562,052Machinery
      and equipment
              
              
              5,275,039
              
              
              
              4,951,049Computer
      software
              
              
              533,317
              
              
              
              528,332Furniture
      and fixtures
              
              
              271,928
              
              
              
              283,5839,309,733
              
              
              
              8,863,807Less:
      Accumulated  depreciation
              
              
              4,954,520
              
              
              
              4,025,731Property,
      Plant and Equipment, net
              
              $
              4,355,213
              
              
              $
              4,838,076
  Depreciation
expense for the years ended December 31, 2007, 2006 and 2005 was $996,161,
$1,326,920, and $1,404,107, respectively.  During the year ended
December 31, 2007, the Company retired equipment with an original cost of
approximately $84,469 and accumulated depreciation of approximately
$67,732.
 
 NOTE
5 – PATENT RIGHTS AND RELATED ROYALTY COMMITMENTS
 
 The
Company has maintained a separate representation and distribution agreement
relating to the development of the zinc gluconate glycine product
formulation.  In return for exclusive distribution rights, the Company
must pay the developer a 3% royalty and a 2% consulting fee based on sales
collected, less certain deductions, throughout the term of this agreement, which
expired May 2007.  However, the Company and the developer are in
litigation (see Note 8) and as such no potential offset for these fees from such
litigation has been recorded.  A founder’s commission totaling 5%, on
sales collected, less certain deductions, has been paid to two of the officers,
who are also directors and stockholders of the Company, and whose agreements
expired in 2005, (see Note 14).
 
 The
expenses for the respective periods relating to such agreements amounted to
$293,266, $1,153,354 and $1,745,748, for the years ended December 31, 2007, 2006
and 2005, respectively.  Amounts accrued for these expenses at
December 31, 2007 and 2006 were $3,524,031 and $3,230,765, respectively, all non
related party balances.
 
 Amounts
included in accrued royalties and sales commissions in the balance sheets at
December 31, 2007 and 2006, are all non related party balances.
 
 NOTE
6 – LONG-TERM DEBT
 
 In
connection with the Company’s acquisition of certain assets of JoEl, Inc. in
October 2004, the Company entered into a term loan in the amount of $3 million
payable to PNC Bank, N.A. which was collateralized by mortgages on real property
located in each of Lebanon and Elizabethtown, Pennsylvania.   The
Company could elect interest rate options at either the Prime Rate or LIBOR plus
200 basis points.  The loan was payable in eighty-four equal monthly
principal payments of $35,714 that commenced on November 1, 2004.  In
April 2005, the Company prepaid an amount of $1.0 million against the
outstanding balance on the long-term loan.  In April 2006, the Company
prepaid the total outstanding balance of approximately $1.3
million.
 
 NOTE 7 – OTHER CURRENT
LIABILITIES
 
 Included
in other current liabilities are $1,276,839 and $234,208 related to accrued
compensation at December 31, 2007 and 2006, respectively.
 
 
 F-11
 Table of Contents
 NOTE 8 – COMMITMENTS AND
CONTINGENCIES
 
 Certain
operating leases for office and warehouse space maintained by the Company
resulted in rent expense for the years ended December 31, 2007, 2006 and 2005,
of $310,957, $336,914, and $227,701, respectively. The Company has approximate
future obligations over the next five years as follows:
  Year
                
                Research
      and Development
                
                
                Property
      and Other Leases
                
                
                Advertising
                
                
                Other
                
                
                Total2008
                
                $
                3,930,412
                
                
                $
                198,825
                
                
                $
                1,915,643
                
                
                
                -
                
                
                $
                6,044,8802009
                
                
                -
                
                
                
                116,583
                
                
                
                -
                
                
                
                -
                
                
                
                116,5832010
                
                
                -
                
                
                
                594
                
                
                
                -
                
                
                
                -
                
                
                
                5942011
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -2012
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                3,930,412
                
                
                $
                316,002
                
                
                $
                1,915,643
                
                
                
                -
                
                
                $
                6,162,057
  Additional
advertising and research and development costs are expected to be incurred
during the remainder of 2008.
 
 The
Company has an agreement with the former owners of the Utah based direct
marketing and selling company, whereby they receive payments, currently totaling
5% of net sales collected, for product exclusivity, consulting, marketing
presentations, confidentiality and non-compete arrangements.  Amounts
paid or payable under such agreement during the year ended December 31, 2007,
2006 and 2005 were $408,343, $630,723 and $838,607,
respectively.  Amounts payable under such agreement at December 31,
2007 and December 31, 2006 were $935,906 and $528,990,
respectively.   On February 29, 2008, the Company sold Darius to
InnerLight Holdings, Inc.  (See Note 17 “Subsequent Events” for
additional information.)
 
 The
Company has had several licensing and other contractual agreements, see Note
5.
 
 TESAURO
AND ELEY, ET AL. VS. THE QUIGLEY CORPORATION
 (CCP
of Phila., August Term 2000, No. 001011)
 
 In
September, 2000, the Company was sued by two individuals (Jason Tesauro and
Elizabeth Eley, both residents of Georgia), allegedly on behalf of a "nationwide
class" of "similarly situated individuals," in the Court of Common Pleas of
Philadelphia County, Pennsylvania.  The Complaint further alleges that
the plaintiffs purchased certain Cold-Eeze products between August, 1996, and
November, 1999, based upon cable television, radio and internet advertisements,
which allegedly misrepresented the qualities and benefits of the Company's
products.  The Complaint, as pleaded originally, requested an
unspecified amount of damages for violations of Pennsylvania's consumer
protection law, breach of implied warranty of merchantability and unjust
enrichment, as well as a judicial determination that the action be maintained as
a class action.  In October, 2000, the Company filed Preliminary
Objections to the Complaint seeking dismissal of the action.  The
court sustained certain objections, thereby narrowing plaintiffs'
claims.
 
 In May
2001, plaintiffs filed a motion to certify the putative class.  The
Company opposed the motion.  In November, 2001, the court held a
hearing on plaintiffs' motion for class certification.  In January,
2002, the court denied in part and granted in part plaintiffs'
motion.  The court denied plaintiffs' motion to certify a class based
on plaintiffs' claims under Pennsylvania's consumer protection law, under which
plaintiffs sought treble damages, effectively dismissing this cause of action;
however, the court certified a class based on plaintiffs' secondary breach of
implied warranty and unjust enrichment claims.  In August, 2002, the
court issued an order adopting a form of Notice of Class Action to be published
nationally.  Significantly, the form of Notice approved by the court
included a provision which limits the potential class members who may
potentially recover damages in this action to those persons who present a proof
of purchase of Cold-Eeze during the period August 1996 and November
1999.
 
 Afterward,
a series of pre-trial motions were filed raising issues concerning trial
evidence and the court's jurisdiction over the subject matter of the
action.  In March, 2005, the court held oral argument on these
motions.
 
 Significantly,
on November 8, 2006, the Court entered an Order dismissing the case in its
entirety on the basis that the action was preempted by federal
law.  The plaintiffs appealed the Court's decision in December, 2006
to the Superior Court of the Commonwealth of Pennsylvania.  On
February 19, 2008, the Superior Court upheld defendant's appeal and remanded the
case to the Philadelphia County Court of Common Pleas for trial.  The
Company has decided not to appeal to the Supreme Court of Pennsylvania and the
case is being prepared for trial.
 
 For the
reasons stated by the Court in dismissing the case, as well as for other
reasons, the Company believes that plaintiffs' case on appeal lacks merit;
however, no prediction as to the outcome of the appeal can be made.
 
 THE
QUIGLEY CORPORATION VS. JOHN C. GODFREY, ET AL.
 (Bucks
Co. CCP, No. 04-07776)
 
 In this
action, which was commenced in November 2004, the Company is seeking declaratory
and injunctive relief against John C. Godfrey, Nancy Jane Godfrey, and Godfrey
Science and Design, Inc. requesting injunctive relief regarding the Cold-Eeze
trade name and trademark; injunctive relief relating to the Cold-Eeze
formulations and manufacturing methods; injunctive relief for breach of the duty
of loyalty, and declaratory judgment pending the Company's payment of
commissions to defendants.  The Company's Complaint is based in part
upon the Exclusive Representation and Distribution Agreement and the Consulting
Agreement (together the "Agreements") entered into between the defendants and
the Company.  The Company terminated the Agreements for the
defendants' alleged material breaches of the Agreements.  Defendants
have answered the complaint and asserted counterclaims against the Company
seeking remedies relative to the Agreements.  The Company believes
that the defendants' counterclaims are without merit and is vigorously defending
those counterclaims and is prosecuting its action on its
complaint.  Discovery and depositions have been partially completed
and the case is scheduled to be put on the Trial List on or before June 1,
2008.
 
 At this
time no prediction as to the outcome of this action can be made.
 
 DARIUS
INTERNATIONAL INC., ET AL. VS. ROBERT O. YOUNG ET AL.
 (FEDERAL
DISTRICT COURT – EASTERN DISTRICT, PA)
 
 In this
action, the Company seeks injunctive relief and monetary damages against two
individuals for violation of a non-competition agreement between a wholly owned
subsidiary of the Company, Innerlight Inc., and the defendants, each of whom are
also under agreement to serve as consulting to the Company.
 
 In late
November, 2005, the Company learned that the defendants had launched a line of
nutritional supplement products that competed with Innerlight
products.  Defendants promoted their line of products by a website,
among other means.  The Company moved for a temporary restraining
order against the defendants, which the court denied; however, the court ordered
expedited discovery and scheduled a preliminary injunction
hearing.  Before the hearing, the Company amended its complaint to add
counts against defendants for unfair competition, trademark infringement and
other causes, which the court allowed.  In response, defendants
initially moved to dismiss the case.  The court denied the
motion.  Defendants answered the complaint and asserted nine
counterclaims, including: breach of contract; breach of covenant of good faith
and fair dealing; unjust enrichment, conversion; common law trademark
infringement; common law violation of the right to publicity; violation of abuse
of personal identity act; injunctive relief; and declaratory
relief.
 
 After the
preliminary injunction hearing, held in January, 2006, the parties briefed the
court on the significance of the hearing evidence in relation to the parties'
respective claims.  On February 17, 2006, the court held oral argument
on the motion for preliminary injunction.
 
 On April
20, 2006, the Court entered an Order enjoining defendants from competing against
the Company.  Thereafter, the parties engaged in pre-trial
discovery.
 
 A trial
on the merits of the case was held before the Court, without a jury, during
November 2006.  Following the presentation of evidence, the Company
renewed its claim for a permanent injunction and monetary damages against the
defendants.  Based upon the evidence presented at trial, the Company
believes the counterclaim actions are without merit.
 
 The Court
has not entered its ruling at this point, and at this time no prediction as to
the outcome can be made.
 
 NICODROPS,
INC. VS. QUIGLEY MANUFACTURING, INC.
 
 On
January 30, 2006, Quigley Manufacturing, Inc., a wholly-owned subsidiary of The
Quigley Corporation, was put on notice of a claim by Nicodrops,
Inc.  Nicodrops, Inc. has claimed that the packaging contained
incorrect expiration dates and caused it to lose sales through two (2)
retailers.  The total alleged sales of Nicodrops was approximately
$250,000 and Nicodrops is claiming unspecified damages exceeding
$2,000,000.
 
 No suit
has been filed.  The Company is investigating this
claim.  Based on its investigation to date, the Company believes the
claim is without merit.  However, at this time no prediction can be
made as to the outcome of this case.
   F-12
 Table of Contents
  THE
QUIGLEY CORPORATION VS. WACHOVIA INSURANCE SERVICES, INC. AND FIRST UNION
INSURANCE SERVICES AGENCY, INC.
 
 The
Quigley Corporation instituted a Writ of Summons against Wachovia Insurance
Services, Inc. and First Union Insurance Services Agency, Inc. on December 8,
2005.  The purpose of this suit was to maintain an action and toll the
statute of limitation against The Quigley Corporation's insurance broker who
failed to place excess limits coverage for the Company for the period from
November 29, 2003 until April 6, 2004.  As a result of the defendant's
failure to place insurance and to notify Quigley of its actions, certain pending
actions covered by Quigley's underlying insurance at the present time many
result in certain cases presently being defended by insurance counsel and the
underlying insurance carrier to cause an exhaustion of the underlying insurance
for the policy periods ending November 29, 2004 and November 29,
2005.  Any case in which an alleged action arose by the use of
COLD-EEZE Nasal Spray from November 29, 2003 to April 6, 2004 is not covered by
excess insurance.
 
 The
Company's claim against Wachovia Insurance Services, Inc. and First Union
Insurance Services Agency, Inc. is for negligence and for equitable insurance
for these claims in the event that Quigley's underlying policy limits are
exhausted.  Underlying coverage on certain actions has been exhausted
but there can be no determination as to the damage claim until the Polski case
appealed to the Eighth United States Circuit Court of Appeals has been
decided.
 
 At this
time no prediction can be made as to the outcome of any action against Wachovia
Insurance Services, Inc. and First Union Insurance Services Agency,
Inc.
 
 MONIQUE
FONTENOT DOYLE VS. THE QUIGLEY CORPORATION
 (U.S.D.C.,
W.D. La. Docket No.: 6:06CV1497)
 
 On August
31, 2006, the plaintiff filed an action against the Company in the United States
District Court for the Western District of Louisiana (Lafayette-Opelousas
Division).  The action alleges the plaintiff suffered certain losses
and injuries as a result of the Company’s nasal spray product.  Among
the allegations of plaintiff are breach of express warranties and damages
pursuant to the Louisiana Products Liability Act.
 
 A trial
date has been set for August 4, 2008.  Discovery is not yet
complete.  The Company believes the plaintiff’s claims are without
merit and is vigorously defending this lawsuit.
 
 HOWARD
POLSKI AND SHERYL POLSKI VS. THE QUIGLEY CORPORATION, ET AL.
 (U.S.D.C.,
D. Minn. Docket No.: 04-4199 PJS/JJG)
 
 On August
12, 2004, plaintiffs filed an action against the Company in the District Court
for Hennepin County, Minnesota, which was not served until September 2, 2004. On
September 17, 2004, the Company removed the case to the United States District
Court for the District of Minnesota. The action alleges that plaintiffs suffered
certain losses and injuries as a result of the Company's nasal spray product.
Among the allegations of plaintiffs are negligence, products liability, breach
of express and implied warranties, and breach of the Minnesota Consumer Fraud
Statute.
 
 The
Company believes the plaintiffs' claims are without merit and vigorously
defended this lawsuit. On September 5, 2007, the Company obtained a judgment in
its favor, as a matter of law, and that decision is currently on appeal; the
Company believes the appeal lacks merit, and that the judgment of the trial
court will be affirmed.
 
 At the
present time this matter is being defended by the Company's liability insurance
carrier.  Based upon the information the Company has at this time, it
believes the action will not have a material impact to the
Company.  However, at this time no prediction as to the outcome can be
made.
 
 CAROLYN
SUNDERMEIER VS. THE QUIGLEY CORPORATION
 (Pa.
C.C.P., Bucks County, Docket No.: 07-01324-26-2)
 
 On
February 16, 2007, plaintiff filed an action in the Court of Common Pleas of
Bucks County, Pennsylvania.  The complaint was served on the Company
on February 20, 2007.  The action alleges the plaintiff suffered
certain losses and injuries as a result of using the Company’s nasal spray
product.  Plaintiff’s complaint consists of counts for negligence,
strict products liability (failure to warn), strict products liability
(defective design), breach of express and implied warranties, and violations
under the Pennsylvania Unfair Trade Practices and Consumer Protection Law and
other consumer protection statutes.
 
  F-13
 Table of Contents
  Discovery
is not yet complete.  The Company believes the plaintiff's claims are
without merit and is vigorously defending this lawsuit.
 
 At the
present time this matter is being defended by the Company's liability insurance
carrier.  Based upon the information the Company has at this time, it
believes the action will not have a material impact to the
Company.  However, at this time no prediction as to the outcome can be
made.
 
 ROBERT
O. AND SHELLEY YOUNG VS. DARIUS INTERNATIONAL INC.
 AND
INNERLIGHT INC.,
 (UTAH
THIRD PARTY COMPLAINTS)
  On
September 14, 2005, a third-party complaint was filed by Shelley R. Young in
Fourth District Court in Provo, Utah against Innerlight Inc. and its parent
company, Darius.  Robert O. Young has filed a motion to intervene to
join as a third-party plaintiff with Shelley R. Young.  On November 3,
2005, Shelley and Robert Young filed a parallel suit also in Fourth District
Court in Provo, Utah.  The allegations in both complaints include, but
are not limited to, an alleged breach of contract by Innerlight Inc. for alleged
failures to make certain payments under an asset purchase agreement entered into
by all parties. Additional allegations stem from this alleged breach of contract
including unjust enrichment, trademark infringement and alleged violation of
rights of publicity. The plaintiffs are seeking both monetary and injunctive
relief.  Innerlight Inc. has objected to the complaint in the
third-party action based on procedural deficiencies and other
grounds.
 The
Fourth District Court of Utah has stayed both the September 14, 2005 and
November 3, 2005 actions pending the adjudication of the Federal District Court
action referenced above and has ordered that all disputes be determined in the
Federal District Court action in the Eastern District of
Pennsylvania.
  In
connection with the Utah actions the Company has sued the Youngs in United
States District Court for the Eastern District of Pennsylvania.  The
Company has alleged breach of contract, including but not limited to breach of
non-competition provisions in a consulting agreement between the parties and is
seeking unspecified damages and injunctive relief.
 
 INNERLIGHT
INC. VS. THE MATRIX GROUP, LLC
 (FOURTH
JUDICIAL DISTRICT COURT, UTHA COUNTY, STATE OF UTAH)
 
 On March
13, 2006, Innerlight Inc. filed a declaratory judgment action in the Fourth
Judicial District, Utah County, State of Utah, requesting a declaration that
there is no valid contract between the parties. The Matrix Group, LLC has
alleged there is a contract between the parties obligating Innerlight Inc. to
purchase $750,000 of products for the 12-month period commencing October 18,
2004 and ending October 17, 2005, $1,500,000 for the period commencing October
18, 2005 and ending October 17, 2006, and for each 12-month period thereafter,
through and including October 17, 2013, at least $4,000,000 of products from The
Matrix Group, LLC. The document on which Matrix relies was drafted by Matrix and
states that the acceptance of the appointment by distributor (Innerlight Inc.)
is conditioned upon distributor's written acceptance of the Company's product
price list.  No written acceptance of the product price list was ever
made by Innerlight Inc.
 
 The
Matrix Group, LLC filed a Utah Rule of Civil Procedure 12(b)(3) motion asking
that the complaint be dismissed. On July 13, 2006 the Court for the Fourth
Judicial District, Utah County, State of Utah, entered an order denying
defendant's motion to dismiss under Rule 12(b)(3) based on Innerlight's
assertion that a material condition precedent remains to be satisfied to
establish an enforceable agreement between the parties. The Utah County Court
has maintained jurisdiction of this action to make a final determination on the
merits of Innerlight's claim.
 
 Thereafter,
Matrix filed a counterclaim alleging that a contract did exist and that
Innerlight had breached this contract.  Both parties then agreed to
stay discovery, pending resolution of crossover motions for summary
judgment.
 
 On
January 17, 2007, arguments were presented to the Court on the parties' cross
motions for summary judgment and the Court ruled in Innerlight's favor, finding
that no contract existed between the parties and that Innerlight was entitled to
return over $150,000 in product to Matrix for reimbursement. The final Order
granting Innerlight's motion and rejecting Matrix's was entered by the Court on
April 10, 2007.
   F-14
 Table of Contents
 
 Matrix
appealed the Court's Order granting summary judgment on May 8, 2007. Matrix
requested a stay of the judgment in favor of Innerlight claiming that
Innerlight's possession of the surplus Sassoon products was sufficient security.
Innerlight opposed
Matrix's request to proceed without a bond and the Court denied Matrix's
request.  The Court entered a Judgment for Innerlight against Matrix
on June 25, 2007, in the amount of $202,292.72. Innerlight attempted to return
the surplus Sassoon products to Matrix pursuant to the Court's order, but when
Matrix refused receipt the Court authorized Innerlight to dispose of the Sassoon
products.
  Innerlight
filed a writ of execution on July 26, 2007, to foreclose on its Judgment against
Matrix. Matrix requested a hearing wherein it argued for a stay of execution on
the basis that collecting against Matrix was unconstitutional. On September 19,
2007, the Court denied Matrix's motion to stay. Matrix appealed this Order on
September 25, 2007, and requested a stay of execution from the Utah Court of
Appeals. The Utah Court of Appeals granted Matrix's motion to stay execution.
The parties are currently briefing the appeal before the Utah Court of Appeals.
Innerlight will continue to vigorously defend Matrix's appeal.
  For the
reasons stated by the Court in the case, as well as for other reasons, the
Company believes that Matrix's case on appeal lacks merit; however, no
prediction as to the outcome of the appeal can be made.
 
 INNERLIGHT
INC. VS. READYCASH HOLDINGS, LLC. AND
 GLOBAL
TRADE SOLUTIONS, INC. DBA READYCASH
 (FOURTH
JUDICIAL DISTRICT COURT, UTAH COUNTY, STATE OF UTAH)
 
 On April
20, 2007 Innerlight Inc. filed a complaint against ReadyCash, alleging claims
for breach of contract, unjust enrichment and conversion and for a constructive
trust and accounting over Innerlight Inc.'s funds. On June 8, 2007, ReadyCash
filed its answer denying liability and counterclaimed with claims of breach of
contract and unjust enrichment. On June 28, 2007, Innerlight Inc. answered the
counterclaims by denying liability. Discovery has commenced between the parties.
No opinion can be expressed at this time regarding the outcome of this
matter.
 
 TERMINATED
LEGAL PROCEEDINGS
 
 BRIGITTE
YVON KLAUS YVON VS. THE QUIGLEY CORPORATION, ET AL.
 
 On
October 12, 2005, the Plaintiffs instituted an action against Caribbean Pacific
Natural Products, Inc. and other defendants for personal injuries as a result of
being hit by a chair on the pool deck of Waikoloa Beach Marriott Hotel d/b/a
Outrigger Enterprises, Inc. in Honolulu, Hawaii.  On December 9, 2005,
The Quigley Corporation was added as an additional defendant without notice to
this case.  The main defendant in the case is Caribbean Pacific
Natural Products, Inc. in which The Quigley Corporation formerly held
stock.  On January 22, 2003, all shares of The Quigley Corporation
stock were sold to Suncoast Naturals, Inc. in return for stock of Suncoast
Naturals, Inc.  At the time of the accident, The Quigley Corporation
had no ownership interest in Caribbean Pacific Natural Products,
Inc.  On April 26, 2007, counsel for all parties entered into a
stipulation for partial dismissal without prejudice against The Quigley
Corporation.
 
 ZANG
ANGELFIRE, TRACEY ARVIN, SHANE HOHNSTEIN, TAMMY LAURENT, BARBARA SEOANE, DONNA
SMALLEY, AND JOHN WILLIAMS VS. THE QUIGLEY CORPORATION
 (Pa.
C.C.P., Bucks County, Docket No.: 2004-07364-27-2)
 
 On
November 4, 2004, the above plaintiffs filed an action in the Court of Common
Pleas of Bucks County against the Company.  The complaint was amended
on March 11, 2005.  The action alleged that the plaintiffs suffered
certain losses and injuries as a result of using the Company's nasal spray
product.  The plaintiffs claimed the Company was liable to them based
on the following allegations:  negligence, strict products liability
(failure to warn and defective design), breach of express warranty, breach of
implied warranty, and a violation of the Pennsylvania Unfair Trade Practices and
Consumer Protection Law and other consumer protection statutes.
 
 These
actions were recently settled at the direction of the insurance carrier out of
insurance proceeds.
 
 
 F-15
 Table of Contents
  DOMINIC
DOMINIJANNI, SONJA FORSBERG-WILLIAMS, VINT PAYNE,
 MURRAY
LOU ROGERS, AND RANDY STOVER VS.
 THE
QUIGLEY CORPORATION
 (Pa.
C.C.P., Bucks County, Docket No.: 060013427-1; Consolidated Under Docket No.:
2004-07364-27-2)
 
 On
January 6, 2006, five (5) plaintiffs filed an action in the Court of Common
Pleas of Bucks County, Pennsylvania, against the Company.  The action
alleges the plaintiffs suffered certain losses and injuries as a result of using
the Company's nasal spray product.  The complaint was served on the
Company on January 31, 2006.  Plaintiffs' complaint consists of counts
for negligence, strict products liability (failure to warn), strict products
liability (defective design), breach of express and implied warranties, and
violations under the Pennsylvania Unfair Trade Practices and Consumer Protection
Law and other consumer protection statutes.  The Dominic Dominijanni
and Murray Lou Rogers claims were settled at the direction of the carrier with
both insurance proceeds and company proceeds.  The settlement
contribution by the Company is a portion of the Company's claim against Wachovia
Insurance Services, Inc. and First Union Insurance Services Agency,
Inc.
 
 The Vint
Payne, Sonja Forsberg-Williams and Randy Stover claims were settled at the
direction of the carrier out of the insurance proceeds.
 
 GREG
SCRAGG VS. THE QUIGLEY CORPORATION, ET AL.
 (U.S.D.C.,
D. Colo. Docket No.: 06-00061 LTB-CBS)
 
 On
November 30, 2005, an action was brought in the District Court of Denver,
Colorado.  The complaint was served on the Company soon
thereafter.  The action alleges the plaintiff suffered certain losses
and injuries as a result of using the Company's nasal spray
product.  The complaint consists of counts for fraud and deceit
(fraudulent concealment), negligent misrepresentation, strict liability (failure
to warn), and strict product liability (design defect).
 
 This case
was turned over to The Quigley Corporation for defense and settlement and was
settled for less than the cost of defense after discovery was
completed.  The cost of defense and the settlement remain claims
against Wachovia Insurance Services, Inc. and First Union Insurance Services
Agency, Inc.  The Company's claim against Wachovia Insurance Services,
Inc. and First Union Insurance Services Agency, Inc. is for negligence and for
equitable insurance for this claim because of the exhaustion of the underlying
limits pertaining to it.  At this time no prediction as to the outcome
of the action against Wachovia Insurance Services, Inc. and First Union
Insurance Services Agency, Inc. can be made.
 
 BONNIE
L. HURD. VS. THE QUIGLEY CORPORATION
 (Pa.
C.C.P., Bucks County, Docket No.: 06-10055-13-2)
 
 On
October 31, 2006, plaintiff filed an action in the Court of Common Pleas of
Bucks County, Pennsylvania.  The complaint was served on the Company
soon thereafter.  The action alleges the plaintiff suffered certain
losses and injuries as a result of using the Company's nasal spray
product.  Plaintiff's complaint consists of counts for negligence,
strict products liability (failure to warn), strict products liability
(defective design), breach of express and implied warranties, and violations
under the Pennsylvania Unfair Trade Practices and Consumer Protection Law and
other consumer protection statutes.
 
 This
action was recently settled at the direction of the insurance carrier out of
insurance proceeds.
 
 CAROLYN
HENRY BAYNHAM VS. THE QUIGLEY CORPORATION, ET AL.
 (U.S.D.C,
E.D. Tex. Docket No.: 1:07CV0010)
 
 On
January 8, 2007, plaintiff filed an action in the United States District Court
for the Eastern District of Texas-Beaumont Division.  The complaint
was served on the Company on January 15, 2007.  The action alleges the
plaintiff suffered certain losses and injuries as a result of using the
Company's nasal spray product.  Plaintiff's complaint consists of
counts for negligence, strict products liability (failure to warn), strict
products liability (defective design), and breach of express and implied
warranties.
 
 This
action was recently settled at the direction of the insurance carrier out of
insurance proceeds.
   F-16
 Table of Contents
 
 THE
MATRIX GROUP, LLC VS. INNERLIGHT INC.
 (U.S.
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA)
 
 On July
6, 2006, The Matrix Group, LLC commenced an action against Innerlight Inc. in
the United States District Court for the Southern District of
Florida.  The action brought by The Matrix Group, LLC relates to the
same facts and circumstances as the action commenced in March of 2006 by
Innerlight Inc. against The Matrix Group, LLC in Utah County,
Utah.  The Matrix Group, LLC is claiming that according to the terms
of the alleged contract, Innerlight has the obligation to purchase $28,750,000
additional product from April 6, 2006 through October 17, 2013 and that The
Matrix Group, LLC is entitled to a judgment against Innerlight Inc. for alleged
obligations to purchase product in the amount of $744,050 from the period of
October 18, 2005 through April 17, 2006.  The United States District
Court for the Southern District of Florida has dismissed without prejudice this
action.
 
 NOTE
9 – TRANSACTIONS AFFECTING STOCKHOLDERS’ EQUITY
 
 On
September 8, 1998, the Company’s Board of Directors declared a dividend
distribution of Common Stock Purchase Rights  (the “Rights”),
thereby  creating  a  Stockholder  Rights  Plan  (the
“Plan”).  The  dividend  was  payable  to  the
stockholders of record on September 25, 1998.  Each Right entitles the
stockholder of record to purchase from the Company that number of Common Shares
having a combined market value equal to two times the Rights exercise price of
$45.  The Rights are not exercisable until the distribution date,
which will be the earlier of a public announcement that a person or group of
affiliated or associated persons has acquired 15% or more of the outstanding
common shares, or the announcement of an intention to make a tender or exchange
offer resulting in the ownership of 15% or more of the outstanding common shares
by a similarly constituted party.   The dividend has the effect
of giving the stockholder a 50% discount on the share’s current market value for
exercising such right. In the event of a cashless exercise of the Right, and the
acquirer has acquired less than a 50% beneficial ownership of the Company, a
stockholder may exchange one Right for one common share of the
Company.  The Final Expiration of the Plan is September 25,
2008.
 
 Since the
inception of the stock buy-back program in January 1998, the Board has
subsequently increased the authorization on five occasions, for a total
authorized buy-back of 5,000,000 shares or approximately 38% of the previous
shares outstanding.  Such shares are reflected as treasury stock and
will be available for general corporate purposes.  From the initiation
of the plan until December 31, 2007, 4,159,191 shares have been repurchased at a
cost of $24,042,801 or an average cost of $5.78 per share.  No shares
were repurchased during 2005 to 2007.
 
 In July
2004, the Company announced that its Board of Directors had approved a
distribution-in-kind to its stockholders of approximately 500,000 shares of
common stock of Suncoast Naturals, Inc., now called Patient Portal Technologies,
Inc. (OTCBB: PPRG), which it acquired through a sale of the Company’s 60% equity
interest in Caribbean Pacific Natural Products, Inc. These shares were
distributed on the basis of approximately .0434 shares of Suncoast common stock
for each share of the Company’s common stock owned of record on September 1,
2004, with fractional shares paid in cash. As a result of the Company’s
dividend-in-kind to stockholders and the issuance of 499,282 shares of common
stock of Suncoast in September 2004, representing approximately two-thirds of
its common stock ownership, the remaining 250,718 shares and subsequent shares
acquired through a conversion of Suncoast’s Preferred stock owned by the Company
and now totaling 1,100,718 shares, owned by the Company which are valued at
$26,455 and such amount is included in Other Assets in the Consolidated Balance
Sheet at December 31, 2007.
 
 NOTE
10 – STOCK COMPENSATION
 
 Stock
options for purchase of the Company’s common stock have been granted to both
employees and non-employees. Options are exercisable during a period determined
by the Company, but in no event later than ten years from the date
granted.
 
 On
December 2, 1997, the Company’s Board of Directors approved a new Stock Option
Plan (“Plan”) which was amended in 2005 and provides for the granting of up to
four million five hundred thousand shares of which 1,198,750 remain available
for grant at December 31, 2006.  Under this Plan, the Company may
grant options to employees, officers or directors of the Company at variable
percentages of the market value of stock at the date of grant.  No
incentive stock option shall be exercisable more than ten years after the date
of grant or five years where the individual owns more than ten percent of the
total combined voting power of all classes of stock of the
Company.  Stockholders approved the Plan in 1998.  A total
of zero, zero and 520,000 options were granted under this Plan during the years
ended December 31, 2007, 2006 and 2005, respectively.
   F-17
 Table of Contents
 A summary
of the status of the Company’s stock options and warrants granted to both
employees and non-employees as of December 31, 2007, 2006 and 2005 and changes
during the years then ended is presented below:
  Year
      Ended December 31, 2007:Employees
                  
                  
                  Non-Employees
                  
                  
                  TotalShares
                    (,000)
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Shares
                      (,000)
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Shares
                      (,000)
                  
                  
                  Weighted
      Average Exercise PriceOptions/warrants  outstanding
      at  beginning of period
                  
                  
                  3,072
                  
                  
                  $
                  7.71
                  
                  
                  
                  525
                  
                  
                  $
                  9.42
                  
                  
                  
                  3,597
                  
                  
                  $
                  7.96Additions/deductions:Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  169
                  
                  
                  
                  1.03
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  169
                  
                  
                  
                  1.03Cancelled
                  
                  
                  936
                  
                  
                  
                  9.87
                  
                  
                  
                  10
                  
                  
                  
                  9.68
                  
                  
                  
                  946
                  
                  
                  
                  9.87Options/warrants  outstanding
      at end of period
                  
                  
                  1,967
                  
                  
                  $
                  7.25
                  
                  
                  
                  515
                  
                  
                  $
                  9.42
                  
                  
                  
                  2,482
                  
                  
                  $
                  7.70Options/warrants  exercisable
      at end of period
                  
                  
                  1,967
                  
                  
                  $
                  7.25
                  
                  
                  
                  515
                  
                  
                  
                  9.42
                  
                  
                  
                  2,482
                  
                  
                  $
                  7.70Weighted
      average fair value of grants for the year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
  Price
      range of  options/warrants:Exercised
                  $0.81
      -  $1.26
                  -
                  $0.81
      -  $1.26Outstanding
                  $0.81
      - $13.80
                  $0.81  -  $13.80
                  $0.81
      - $13.80Exercisable
                  $0.81
      - $13.80
                  $0.81  -  $13.80
                  $0.81
      - $13.80
 
 Year Ended December 31,
      2006:Employees
                      
                      
                      Non-Employees
                      
                      
                      TotalShares
                          (,000)
                      
                      
                      Weighted
      Average Exercise Price
                      
                      
                      Shares
                          (,000)
                      
                      
                      Weighted
      Average Exercise Price
                      
                      
                      Shares
                          (,000)
                      
                      
                      Weighted
      Average Exercise PriceOptions/warrants  outstandingat  beginning
      of period
                      
                      
                      4,099
                      
                      
                      $
                      6.28
                      
                      
                      
                      525
                      
                      
                      $
                      9.42
                      
                      
                      
                      4,624
                      
                      
                      $
                      6.64Additions/deductions:Granted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      1,012
                      
                      
                      
                      1.94
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,012
                      
                      
                      
                      1.94Cancelled
                      
                      
                      15
                      
                      
                      
                      7.24
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15
                      
                      
                      
                      7.24Options/warrants  outstandingat
      end of period
                      
                      
                      3,072
                      
                      
                      $
                      7.71
                      
                      
                      
                      525
                      
                      
                      $
                      9.42
                      
                      
                      
                      3,597
                      
                      
                      $
                      7.96Options/warrants  exercisableat
      end of period
                      
                      
                      3,072
                      
                      
                      
                      
                      
                      
                      
                      525
                      
                      
                      
                      
                      
                      
                      
                      3,597Weighted
      average fair value ofgrants
      for the year
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
  Price
      range of  options/warrants:Exercised
                      $1.75
      -  $ 9.50
                      -
                      $1.75  -
      $ 9.50Outstanding
                      $0.81
      - $13.80
                      $0.81  -  $13.80
                      $0.81
      - $13.80Exercisable
                      $0.81
      - $13.80
                      $0.81  -  $13.80
                      $0.81
      - $13.80
 F-18
 Table of Contents
 Year
      Ended December 31, 2005:Employees
                  
                  
                  Non-Employees
                  
                  
                  TotalShares
                      (,000)
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Shares
                      (,000)
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Shares
                      (,000)
                  
                  
                  Weighted
      Average Exercise PriceOptions/warrants  outstandingat  beginning
      of period
                  
                  
                  3,880
                  
                  
                  $
                  5.35
                  
                  
                  
                  445
                  
                  
                  $
                  8.64
                  
                  
                  
                  4,325
                  
                  
                  $
                  5.68Additions/deductions:Granted
                  
                  
                  440
                  
                  
                  
                  13.80
                  
                  
                  
                  80
                  
                  
                  
                  13.80
                  
                  
                  
                  520
                  
                  
                  
                  13.80Exercised
                  
                  
                  112
                  
                  
                  
                  4.87
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  112
                  
                  
                  
                  4.87Cancelled
                  
                  
                  109
                  
                  
                  
                  4.80
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  109
                  
                  
                  
                  4.80Options/warrants  outstandingat
      end of period
                  
                  
                  4,099
                  
                  
                  $
                  6.28
                  
                  
                  
                  525
                  
                  
                  $
                  9.42
                  
                  
                  
                  4,624
                  
                  
                  $
                  6.64Options/warrants  exercisableat
      end of period
                  
                  
                  4,099
                  
                  
                  
                  
                  
                  
                  
                  525
                  
                  
                  
                  
                  
                  
                  
                  4,624Weighted
      average fair value of
                    grants
      for the year
                  
                  
                  
                  
                  
                  $
                  7.47
                  
                  
                  
                  
                  
                  
                  $
                  7.47
                  
                  
                  
                  
                  
                  
                  $
                  7.47
  Price
      range of  options/warrants:Exercised
                  $0.81  -
      $ 9.50
                  -
                  $0.81
      - $9.50Outstanding
                  $0.81
      - $13.80
                  $0.81  -  $13.80
                  $0.81
      - $13.80Exercisable
                  $0.81
      - $13.80
                  $0.81  -  $13.80
                  $0.81
      - $13.80
  The
following table summarizes information about stock options outstanding and stock
options exercisable, as granted to both employees and non-employees, at December
31, 2007:
 
 
 Employees
              Non-EmployeesRange
      of Exercise Prices
              Number
      Outstanding
              Weighted
      Average Remaining Contractual Life
              Weighted
      Average
                Exercise
      Price
              Number
      Outstanding
              Weighted
      Average Remaining
                Contractual
      Life
              Weighted
      Average Exercise Price$0.81
      - $5.49
              999,000
              
              3.2
              $  3.80
              75,000
              
              3.6
              $  3.23$8.11
      - $13.80
              1,218,000
              
              6.9
              $10.63
              190,000
              
              7.2
              $11.092,217,000
              
              
              
              265,000
 
 Options
and warrants outstanding as of December 31, 2007 expire from April 6, 2009
through December 11, 2015, depending upon the date of grant.
 
 The total
intrinsic value of options exercised during the year ended December 31, 2007 was
$477,821.  The aggregate intrinsic value of options outstanding and
exercisable at December 31, 2007 was approximately $2,004,188.
 
 NOTE
11 – DEFINED CONTRIBUTION PLANS
 
 During
1999, the Company implemented a 401(k) defined contribution plan for its
employees.  The Company’s contribution to the plan is based on the
amount of the employee plan contributions and compensation.  The
Company’s contribution to the plan in 2007, 2006 and 2005 was approximately
$501,000, $490,000, and $414,000, respectively.  The plan was amended
in October 2004 to accommodate the participation of employees of Quigley
Manufacturing Inc.
   F-19
 Table of Contents
 
 NOTE
12 – INCOME TAXES
 
 The
provision (benefit) for income taxes, consists of the following:
  Year
      Ended
                December
      31, 2007
              
              
              Year
      Ended
                December
      31, 2006
              
              
              Year
      Ended
                December
      31, 2005Current:Federal
              
              
              -
              
              
              $
              45,270
              
              
              $
              65,000State
              
              
              -
              
              
              
              43,329
              
              
              
              --
              
              
              $
              88,599
              
              
              $
              65,000Deferred:Federal
              
              $
              (38,821
              )
              
              $
              (1,331,679
              )
              
              $
              815,738State
              
              
              (34,021
              )
              
              
              106,030
              
              
              
              192,107$
              (72,842
              )
              
              $
              (1,225,649
              )
              
              $
              1,007,845Change
      in valuation allowance
              
              
              72,842
              
              
              
              1,225,649
              
              
              
              (1,007,845
              )Total
              
              $
              -
              
              
              $
              88,599
              
              
              $
              65,000
 
 A
reconciliation of the statutory federal income tax expense (benefit) to the
effective tax is as follows:
 Year
      Ended
                    December
      31, 2007
                  
                  
                  Year
      Ended
                    December
      31, 2006
                  
                  
                  Year
      Ended
                    December
      31, 2005Statutory
      rate - Federal
                  
                  $
                  (835,835
                  )
                  
                  $
                  (564,314
                  )
                  
                  $
                  1,115,773State
      taxes net of federal benefit
                  
                  
                  (22,454
                  )
                  
                  
                  (98,577
                  )
                  
                  
                  126,791Permanent
      differences and other
                  
                  
                  785,447
                  
                  
                  
                  (474,159
                  )
                  
                  
                  (169,719
                  )(72,842
                  )
                  
                  
                  (1,137,050
                  )
                  
                  
                  1,072,845Less
      change in valuation allowance
                  
                  
                  72,842
                  
                  
                  
                  1,225,649
                  
                  
                  
                  (1,007,845
                  )Total
                  
                  $
                  -
                  
                  
                  $
                  88,599
                  
                  
                  $
                  65,000
 The tax
effects of the primary “temporary differences” between values recorded for
assets and liabilities for financial reporting purposes and values utilized for
measurement in accordance with tax laws giving rise to the Company’s deferred
tax assets are as follows:
 
 Year
      Ended
                December
      31, 2007
              
              
              Year
      Ended
                December
      31, 2006
              
              
              Year
      Ended
                December
      31, 2005Net
      operating loss carry-forward
              
              $
              5,731,224
              
              
              $
              6,314,828
              
              
              $
              4,034,746Consulting–royalty
      costs
              
              
              1,739,375
              
              
              
              1,457,076
              
              
              
              317,850Bad
      debt expense
              
              
              109,532
              
              
              
              107,498
              
              
              
              138,439Other
              
              
              1,144,687
              
              
              
              618,943
              
              
              
              297,331Valuation
      allowance
              
              
              (8,724,818
              )
              
              
              (8,498,345
              )
              
              
              (4,788,366
              )Total
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 Certain
exercises of options and warrants, and restricted stock issued for services that
became unrestricted resulted in reductions to taxes currently payable and a
corresponding increase to additional-paid-in-capital for prior
years.  In addition, certain tax benefits for option and warrant
exercises totaling $6,735,088 are deferred and will be credited to
additional-paid-in-capital when the NOL’s attributable to these exercises are
utilized.  As a result, these NOL’s will not be available to offset
income tax expense.  The net operating loss carry-forwards that
currently approximate $15.0 million for federal purposes will be expiring
through 2027.  Additionally, there are net operating loss
carry-forwards of $16.7 million for state purposes that will be expiring through
2017.  Until sufficient taxable income to offset the temporary timing
differences attributable to operations, the tax deductions attributable to
option, warrant and stock activities and alternative minimum tax credits of
$110,270 are assured, a valuation allowance equaling the total deferred tax
asset is being provided.
  F-20
 Table of Contents
 
 NOTE
13 – EARNINGS PER SHARE
 
 Basic
earnings per share (“EPS”) excludes dilution and is computed by dividing income
available to common stockholders by the weighted - average number of common
shares outstanding for the period.  Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that shared in the earnings of the entity. Diluted EPS also
utilizes the treasury stock method which prescribes a theoretical buy back of
shares from the theoretical proceeds of all options and warrants outstanding
during the period.  Since there is a large number of options and
warrants outstanding, fluctuations in the actual market price can have a variety
of results for each period presented.
 
 A reconciliation of the applicable
numerators and denominators of the income statement periods presented is as
follows (millions, except earnings per share amounts):
  Year
      Ended
                  December
      31, 2007
                
                
                Year
      Ended
                  December
      31, 2006
                
                
                Year
      Ended
                  December
      31, 2005Loss
                
                
                Shares
                
                
                EPS
                
                
                Income
                
                
                Shares
                
                
                EPS
                
                
                Income
                
                
                Shares
                
                
                EPSBasic
      EPS
                
                $
                (2.5
                )
                
                
                12.7
                
                
                $
                (0.19
                )
                
                $
                (1.7
                )
                
                
                12.3
                
                
                $
                (0.14
                )
                
                $
                3.2
                
                
                
                11.7
                
                
                $
                0.28Dilutives:Options
      and
                  Warrants
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                
                
                
                
                -
                
                
                
                1.6
                
                
                
                (0.04
                )Diluted
      EPS
                
                $
                (2.5
                )
                
                
                12.7
                
                
                $
                (0.19
                )
                
                $
                (1.7
                )
                
                
                12.3
                
                
                $
                (0.14
                )
                
                $
                3.2
                
                
                
                13.3
                
                
                $
                0.24
 Options
and warrants outstanding at December 31, 2007, 2006 and 2005 were 2,482,000,
3,597,000, and 4,623,750 respectively.  Stock options and warrants
with exercise prices above average market price in the amount of 520,000 for the
year ended December 31, 2005 were not included in the computation of diluted
earnings per share as they are anti-dilutive.  No options and warrants
were included in the 2007 and 2006 computations of diluted earnings because the
effect would be anti-dilutive due to losses in the respective
years.
 
 NOTE
14 – RELATED PARTY TRANSACTIONS
 
 An agreement between the
Company and the founders Mr. Guy J. Quigley and Mr. Charles A. Phillips, both
officers and stockholders of the Company, was entered into on June 1,
1995.  The founders, in consideration of the acquisition of the
Cold-Eeze®cold therapy
product, shared a total commission of five percent (5%), on sales collected,
less certain deductions until this agreement expired on May 31,
2005.   For the years ended December 31, 2007, 2006 and 2005,
amounts of zero, zero and $366,788, respectively, were paid or payable under
such founder’s commission agreements.   Amounts payable under
such agreements at December 31, 2007 and 2006 were
zero.
 
 The
Company is in the process of acquiring licenses in certain countries through
related party entities whose stockholders include Mr. Gary Quigley, a relative
of the Company’s Chief Executive Officer. Fees amounting to $45,750, $145,500
and $266,882 have been paid to a related entity during 2007, 2006 and 2005,
respectively to assist with the regulatory aspects of obtaining such
licenses.
 
 NOTE
15 – SEGMENT INFORMATION
 
 The basis
for presenting segment results generally is consistent with overall Company
reporting. The Company reports information about its operating segments in
accordance with Financial Accounting Standard Board Statement No. 131,
“Disclosure About Segments of an Enterprise and Related Information,” which
establishes standards for reporting information about a company’s operating
segments. All consolidating items are included in Corporate &
Other.
 
 The Company’s operations
are divided into four reportable segments as follows: The Quigley Corporation
(Cold- Remedy), whose main product is Cold-Eeze®,
a proprietary zinc gluconate glycine lozenge for the common cold; Darius (Health
and Wellness), whose business is the sale and direct marketing of a range of
health and wellness products; Quigley Manufacturing (Contract Manufacturing),
which is the production facility for the Cold-Eeze®brand lozenge
product and also performs contract manufacturing services for third party
customers together with third party sales of its own products, and Pharma,
(Ethical Pharmaceutical), currently involved in research and development
activity to develop patent applications for potential pharmaceutical
products.  As discussed in Note 17 “Subsequent Events”, subsequent to
Balance Sheet date, the Company disposed of its Health and Wellness
segment.
   F-21
 Table of Contents
 Financial
information relating to 2007, 2006 and 2005 operations by business segment
follows:
  As
      of and for the year ended December 31, 2007
                
                Cold
      Remedy
                
                
                Health
      and
                  Wellness
                
                
                Contract
                  Manufacturing
                
                
                Ethical
                  Pharmaceutical
                
                
                Corporate
      &
                  Other
                
                
                TotalRevenuesCustomers-domestic
                
                $
                25,730,016
                
                
                $
                6,989,289
                
                
                $
                2,511,486
                
                
                $
                -
                
                
                $
                -
                
                
                $
                35,230,791Customers-international
                
                $
                -
                
                
                $
                4,244,590
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                4,244,590Inter-segment
                
                $
                -
                
                
                $
                -
                
                
                $
                6,660,694
                
                
                $
                -
                
                
                $
                (6,660,694
                )
                
                $
                -Segment
      operating profit
                  (loss)
                
                $
                4,801,260
                
                
                $
                (688,111
                )
                
                $
                (279,816
                )
                
                $
                (7,001,752
                )
                
                $
                (67,649
                )
                
                $
                (3,236,068
                )Depreciation
                
                $
                414,469
                
                
                $
                58,309
                
                
                $
                523,383
                
                
                $
                -
                
                
                $
                -
                
                
                $
                996,161Capital
      expenditures
                
                $
                187,137
                
                
                $
                11,747
                
                
                $
                334,150
                
                
                $
                -
                
                
                $
                -
                
                
                $
                533,034Total
      assets
                
                $
                38,429,506
                
                
                $
                7,746,622
                
                
                $
                6,106,567
                
                
                $
                -
                
                
                $
                (18,968,977
                )
                
                $
                33,313,718
  As
      of and for the year ended December 31, 2006
                  
                  Cold
      Remedy
                  
                  
                  Health
      andWellness
                  
                  
                  Contract
      Manufacturing
                  
                  
                  Ethical
      Pharmaceutical
                  
                  
                  Corporate
      &Other
                  
                  
                  TotalRevenuesCustomers-domestic
                  
                  $
                  24,815,850
                  
                  
                  $
                  11,378,290
                  
                  
                  $
                  2,034,179
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  38,228,319Customers-international
                  
                  $
                  -
                  
                  
                  $
                  3,896,650
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,896,650Inter-segment
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6,596,371
                  
                  
                  $
                  -
                  
                  
                  $
                  (6,596,371
                  )
                  
                  $
                  -Segment
      operating profit
                    (loss)
                  
                  $
                  3,588,285
                  
                  
                  $
                  (1,227,604
                  )
                  
                  $
                  (432,911
                  )
                  
                  $
                  (4,309,183
                  )
                  
                  $
                  (10,227
                  )
                  
                  $
                  (2,391,640
                  )Depreciation
                  
                  $
                  449,580
                  
                  
                  $
                  181,128
                  
                  
                  $
                  696,212
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,326,920Capital
      expenditures
                  
                  $
                  562,144
                  
                  
                  $
                  109,837
                  
                  
                  $
                  25,499
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  697,480Total
      assets
                  
                  $
                  38,125,367
                  
                  
                  $
                  4,169,565
                  
                  
                  $
                  6,065,104
                  
                  
                  $
                  -
                  
                  
                  $
                  (13,515,002
                  )
                  
                  $
                  34,845,034
 As
      of and for the year ended December 31, 2005
                  
                  Cold
      Remedy
                  
                  
                  Health
      and
                    Wellness
                  
                  
                  Contract
                    Manufacturing
                  
                  
                  Ethical
                    Pharmaceutical
                  
                  
                  Corporate
      &
                    Other
                  
                  
                  TotalRevenuesCustomers-domestic
                  
                  $
                  29,284,651
                  
                  
                  $
                  16,034,960
                  
                  
                  $
                  3,900,342
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  49,219,953Customers-international
                  
                  $
                  -
                  
                  
                  $
                  4,438,090
                  
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  4,438,090Inter-segment
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  7,090,523
                  
                  
                  $
                  -
                  
                  
                  $
                  (7,090,523
                  )
                  
                  $
                  -Segment
      operating profit
                    (loss)
                  
                  $
                  6,693,192
                  
                  
                  $
                  859,956
                  
                  
                  $
                  (80,419
                  )
                  
                  $
                  (4,044,162
                  )
                  
                  $
                  (449,137
                  )
                  
                  $
                  2,979,430Depreciation
                  
                  $
                  387,840
                  
                  
                  $
                  143,726
                  
                  
                  $
                  872,541
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,404,107Capital
      expenditures
                  
                  $
                  228,688
                  
                  
                  $
                  35,523
                  
                  
                  $
                  267,002
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  531,213Total
      assets
                  
                  $
                  38,171,897
                  
                  
                  $
                  4,918,271
                  
                  
                  $
                  7,042,169
                  
                  
                  $
                  -
                  
                  
                  $
                  (14,156,698
                  )
                  
                  $
                  35,975,639
 NOTE 16 – QUARTERLY INFORMATION
(UNAUDITED)
  Quarter
      EndedMarch
      31,
                  
                  
                  June
      30,
                  
                  
                  September
      30,
                  
                  
                  December
      31,2007Net
      Sales
                  
                  $
                  9,077,876
                  
                  
                  $
                  4,989,427
                  
                  
                  $
                  11,840,432
                  
                  
                  $
                  13,567,646Gross
      Profit
                  
                  $
                  5,010,020
                  
                  
                  $
                  2,102,489
                  
                  
                  $
                  6,938,956
                  
                  
                  $
                  8,596,854Administration
                  
                  $
                  3,212,155
                  
                  
                  $
                  3,471,056
                  
                  
                  $
                  2,682,998
                  
                  
                  $
                  4,050,453Operating
      expenses
                  
                  $
                  7,098,360
                  
                  
                  $
                  5,920,082
                  
                  
                  $
                  5,780,451
                  
                  
                  $
                  7,085,494(Loss)
      Income from operations
                  
                  $
                  (2,088,340
                  )
                  
                  $
                  (3,817,593
                  )
                  
                  $
                  1,158,505
                  
                  
                  $
                  1,511,360(Loss)
      Income from continuing operations
                  
                  $
                  (2,088,340
                  )
                  
                  $
                  (3,817,593
                  )
                  
                  $
                  1,158,505
                  
                  
                  $
                  1,511,360Net
      (Loss) Income
                  
                  $
                  (1,928,206
                  )
                  
                  $
                  (3,519,692
                  )
                  
                  $
                  1,328,823
                  
                  
                  $
                  1,660,738Basic
      EPS(Loss)
      Income  from continuing operations
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.28
                  )
                  
                  $
                  0.10
                  
                  
                  $
                  0.13Net
      (Loss) Income
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.28
                  )
                  
                  $
                  0.10
                  
                  
                  $
                  0.13Diluted
      EPS(Loss)
      Income from continuing operations
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.28
                  )
                  
                  $
                  0.10
                  
                  
                  $
                  0.12Net
      (Loss) Income
                  
                  $
                  (0.15
                  )
                  
                  $
                  (0.28
                  )
                  
                  $
                  0.10
                  
                  
                  $
                  0.12
 
 
 F-22
 Table of Contents
  
 
 Quarter
      EndedMarch
      31,
                  
                  
                  June
      30,
                  
                  
                  September
      30,
                  
                  
                  December
      31,2006Net
      Sales
                  
                  $
                  10,266,038
                  
                  
                  $
                  6,182,467
                  
                  
                  $
                  11,480,634
                  
                  
                  $
                  14,195,830Gross
      Profit
                  
                  $
                  5,312,584
                  
                  
                  $
                  2,309,415
                  
                  
                  $
                  6,259,667
                  
                  
                  $
                  8,996,699Administration
                  
                  $
                  3,705,761
                  
                  
                  $
                  3,100,378
                  
                  
                  $
                  3,195,182
                  
                  
                  $
                  3,122,416Operating
      expenses
                  
                  $
                  6,925,209
                  
                  
                  $
                  5,036,669
                  
                  
                  $
                  5,369,992
                  
                  
                  $
                  7,938,135(Loss)
      Income from operations
                  
                  $
                  (1,612,625
                  )
                  
                  $
                  (2,727,254
                  )
                  
                  $
                  889,675
                  
                  
                  $
                  1,058,564(Loss)
      Income from continuing operations
                  
                  $
                  (1,612,625
                  )
                  
                  $
                  (2,727,254
                  )
                  
                  $
                  889,675
                  
                  
                  $
                  1,058,564Net
      (Loss) Income
                  
                  $
                  (1,454,295
                  )
                  
                  $
                  (2,618,319
                  )
                  
                  $
                  1,078,634
                  
                  
                  $
                  1,245,635Basic
      EPS(Loss)
      Income  from continuing operations
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.21
                  )
                  
                  $
                  0.09
                  
                  
                  $
                  0.10Net
      (Loss) Income
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.21
                  )
                  
                  $
                  0.09
                  
                  
                  $
                  0.10Diluted
      EPS(Loss)
      Income from continuing operations
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.21
                  )
                  
                  $
                  0.08
                  
                  
                  $
                  0.09Net
      (Loss) Income
                  
                  $
                  (0.12
                  )
                  
                  $
                  (0.21
                  )
                  
                  $
                  0.08
                  
                  
                  $
                  0.09
 FOURTH
QUARTER SEGMENT DATA (UNAUDITED)
 
 As
      of and for the three months
                ended
      December 31, 2007
              
              Cold
      Remedy
              
              
              Health
      and
                Wellness
              
              
              Contract
                Manufacturing
              
              
              Ethical
                Pharmaceutical
              
              
              Corporate
      &
                Other
              
              
              TotalRevenuesCustomers-domestic
              
              $
              10,072,442
              
              
              $
              1,538,494
              
              
              $
              670,354
              
              
              $
              -
              
              
              $
              -
              
              
              $
              12,281,290Customers-international
              
              $
              -
              
              
              $
              1,286,356
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1,286,356Inter-segment
              
              $
              -
              
              
              $
              -
              
              
              $
              1,880,647
              
              
              $
              -
              
              
              $
              (1,880,647
              )
              
              $
              -Segment
      operating profit
                (loss)
              
              $
              3,275,343
              
              
              $
              (180,203
              )
              
              $
              (68,027
              )
              
              $
              (1,839,786
              )
              
              $
              324,033
              
              
              $
              1,511,360Depreciation
              
              $
              104,775
              
              
              $
              2,567
              
              
              $
              135,093
              
              
              $
              -
              
              
              $
              -
              
              
              $
              242,435Capital
      expenditures
              
              $
              18,833
              
              
              $
              408
              
              
              $
              61,215
              
              
              $
              -
              
              
              $
              -
              
              
              $
              80,456
 
 
 As
      of and for the three months
                ended
      December 31, 2006
              
              Cold
      Remedy
              
              
              Health
      and
                Wellness
              
              
              Contract
                Manufacturing
              
              
              Ethical
                Pharmaceutical
              
              
              Corporate
      &
                Other
              
              
              TotalRevenuesCustomers-domestic
              
              $
              10,697,062
              
              
              $
              2,107,799
              
              
              $
              527,072
              
              
              $
              -
              
              
              $
              -
              
              
              $
              13,331,933Customers-international
              
              $
              -
              
              
              $
              863,896
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              863,896Inter-segment
              
              $
              -
              
              
              $
              -
              
              
              $
              1,798,932
              
              
              $
              -
              
              
              $
              (1,798,932
              )
              
              $
              -Segment
      operating profit
                (loss)
              
              $
              2,645,269
              
              
              $
              (481,188
              )
              
              $
              (11,639
              )
              
              $
              (1,420,522
              )
              
              $
              326,644
              
              
              $
              1,058,564Depreciation
              
              $
              97,637
              
              
              $
              55,118
              
              
              $
              180,249
              
              
              $
              -
              
              
              $
              -
              
              
              $
              333,004Capital
      expenditures
              
              $
              220,632
              
              
              $
              1,883
              
              
              $
              7,604
              
              
              $
              -
              
              
              $
              -
              
              
              $
              230,119
 
 
 As
      of and for the three months
                ended
      December 31, 2005
              
              Cold
      Remedy
              
              
              Health
      and
                Wellness
              
              
              Contract
                Manufacturing
              
              
              Ethical
                Pharmaceutical
              
              
              Corporate
      &
                Other
              
              
              TotalRevenuesCustomers-domestic
              
              $
              12,144,783
              
              
              $
              3,752,464
              
              
              $
              694,137
              
              
              $
              -
              
              
              $
              -
              
              
              $
              16,591,384Customers-international
              
              $
              -
              
              
              $
              1,149,236
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1,149,236Inter-segment
              
              $
              -
              
              
              $
              -
              
              
              $
              2,623,396
              
              
              $
              -
              
              
              $
              (2,623,396
              )
              
              $
              -Segment
      operating profit
                (loss)
              
              $
              2,480,622
              
              
              $
              8,074
              
              
              $
              264,947
              
              
              $
              (956,382
              )
              
              $
              323,700
              
              
              $
              2,120,961Depreciation
              
              $
              99,142
              
              
              $
              35,848
              
              
              $
              225,355
              
              
              $
              -
              
              
              $
              -
              
              
              $
              360,345Capital
      expenditures
              
              $
              139,756
              
              
              $
              1,094
              
              
              $
              212,525
              
              
              $
              -
              
              
              $
              -
              
              
              $
              353,375
   F-23
 Table of Contents
  NOTE
17 – SUBSEQUENT EVENTS
 
 
 On
February 29, 2008, the Company sold Darius to InnerLight Holdings, Inc., whose
major shareholder is Mr. Kevin P. Brogan, the current president of
Darius.  Darius was formed by The Quigley Corporation in 2000 to
introduce new products to the marketplace through a network of independent
distributor representatives.  Darius markets health and wellness
products through its wholly owned subsidiary, Innerlight Inc. that constituted
the Health and Wellness segment of the Company.  The terms of the sale
agreement include a cash purchase price of $1,000,000 by InnerLight Holdings,
Inc. for the stock of Darius and its subsidiaries without guarantees, warranties
or indemnifications.
 
 Sales
(unaudited) of Darius for the years ended December 31, 2007, 2006 and 2005 were
$11,233,879, $15,274,940 and $20,473,048, respectively, net (losses) / income
(unaudited) for the same periods were ($602,065), ($1,200,692) and $877,743,
respectively.  The major classes of assets
(unaudited),  attributable to Darius at December 31, 2007 and 2006,
respectively, were, cash ($951,736 and $1,466,140), inventory ($676,116 and
$907,691), prepaid expenses and other current assets ($455,412 and $399,487),
and other current liabilities ($1,528,626 and $1,271,148).
   F-24
 Table of Contents
 RESPONSIBILITYFOR FINANCIAL
STATEMENTS
  The
management of The Quigley Corporation is responsible for the information and
representations contained in this report. Management believes that the financial
statements have been prepared in conformity with generally accepted accounting
principles and that the other information in this annual report is consistent
with those statements. In preparing the financial statements, management is
required to include amounts based on estimates and judgments, which it believes
are reasonable under the circumstances.
 
 In
fulfilling its responsibilities for the integrity of the data presented and to
safeguard the Company’s assets, management employs a system of internal
accounting controls designed to provide reasonable assurance, at appropriate
cost, that the Company’s assets are protected and that transactions are
appropriately authorized, recorded, and summarized. This system of control is
supported by the selection of qualified personnel, by organizational assignments
that provide appropriate delegation of authority and division of
responsibilities, and by the dissemination of policies and
procedures.
 
 
 
 
 /s/  Guy
      J. Quigley
                
                March
      4, 2008Guy
      J. Quigley, Chairman of the Board,
                  (President,
      Chief Executive Officer)
                
                Date/s/
      George J. Longo
                
                March
      4, 2008George
      J. Longo, Vice President, Chief Financial Officer (Principal Financial and
      Accounting Officer)
                
                Date
  F-25
 Table of Contents
 
 REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM
 
 To the
Board of Directors and
 Stockholders
of The Quigley Corporation
 
 We have
audited the accompanying consolidated balance sheets of The Quigley Corporation
as of December 31, 2007 and 2006, and the related statements of
operations, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2007.  We also have audited The
Quigley Corporation’s internal control over financial reporting as of December
31, 2007, based on
criteria established inInternal
Control-Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  The Quigley
Corporation’s management is responsible for these financial statements, for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying management’s report.  Our responsibility
is to express an opinion on these financial statements and an opinion on the
company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made my management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures, as we considered necessary in the circumstances.  We
believe that our audits provide a reasonable basis for our
opinions.
  A
company’s internal control over financial reporting is a process designed 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. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
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. 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.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of The Quigley Corporation as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2007 in
conformity with accounting principles generally accepted in the United States of
America.  Also in our opinion, The Quigley Corporation maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal
Control- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
 /s/ Amper Politziner & Mattia
P.C.
 Edison,
New Jersey
 
 March 7, 2008
   F-26
 Table of Contents
 
 ITEM 9.    CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None
 
 ITEM
9A.                      CONTROLS AND PROCEDURES
 
 Controls
and Procedures
 
 As of
December 31, 2007, the Company carried out an evaluation, under the supervision
and with the participation of our chief executive officer and chief financial
officer, of the effectiveness of the design and operations of our disclosure
controls and procedures, as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934.
 
 Our chief
executive officer and chief financial officer concluded that as of the
evaluation date, such disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports we file or
submit under the Exchange Act are recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission, and is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
 
 Management's
report on our internal controls over financial reporting can be found with the
attached financial statements. The Independent Registered Public Accounting
Firm's attestation report on our internal control over financial reporting can
also be found with the attached financial statements.
 
 Management's
Report on Internal Control Over Financial Reporting
 
 Our
management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting. Our system of internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America.
 
 Our
internal control over financial reporting includes those policies and procedures
that:
 
 ·
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect our transactions and dispositions of our
      assets;
 
 ·
              provide
      reasonable assurance that our transactions are recorded as necessary to
      permit preparation of our financial statements in accordance with
      accounting principles generally accepted in the United States of America,
      and that our receipts and expenditures are being made only in accordance
      with authorizations of our management and our directors;
    and
 
 ·
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of our assets that could
      have a material effect on the financial
  statements.
 
 Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time. Our system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
 
 Our
management conducted an evaluation of the effectiveness of the system of
internal control over financial reporting based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, our management concluded
that our system of internal control over financial reporting was effective as of
December 31, 2007. Our internal control over financial reporting has been
audited by Amper, Politziner & Mattia, P.C., an independent registered
public accounting firm, as stated in their report which is included
herein.
   39
 Table of Contents
 
 ITEM
9B.                      OTHER INFORMATION
 
 None
  PART III
 
 ITEM
10.                      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
 
 The
information required under this item is incorporated by reference to the
Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.
 
 ITEM
11.                      EXECUTIVE COMPENSATION
 
 The
information required under this item is incorporated by reference to the
Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.
  ITEM
12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  The
information required under this item is incorporated by reference to the
Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.
  ITEM
13.                    
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
  The
information required under this item is incorporated by reference to the
Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.
 
 ITEM
14.                      PRINCIPAL ACCOUNTANT FEES AND
SERVICES
 
 The
information required under this item is incorporated by reference to the
Company’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.
    40
 Table of Contents
 PART IV
   ITEM
15.                 
EXHIBITSAND
FINANCIAL STATEMENT SCHEDULES
 
 (a)
Exhibits:
  3.1
                Articles
      of Incorporation of the Company, as amended, (incorporated by reference to
      Exhibit 3.1 of Form 10-KSB/A filed on April 4, 1997).3.2
                By-laws
      of the Company as currently in effect (incorporated by reference to
      Exhibit 3.2 of Form 10-KSB/A filed on April 4, 1997, Exhibit 99.3 of the
      Company’s Current Report on Form 8-K filed on September 21, 1998 and
      Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November
      27, 2007).4.1
                Specimen
      Common Stock Certificate (incorporated by reference to Exhibit 4.1 of
      Form  10-KSB/A filed on April 4, 1997).10.1*
                1997
      Stock Option Plan (incorporated by reference to Exhibit 10.1 of the
      Company’s Registration Statement on Form S-8 (File No. 333-61313) filed on
      August 13, 1998).10.2
                Exclusive
      Representation and Distribution Agreement dated May 4, 1992 between the
      Company and Godfrey Science and Design, Inc. et al (incorporated by
      reference to Exhibit 10.2 of Form 10-KSB/A filed on April 4,
      1997).10.3*
                Employment
      Agreement dated June 1, 1995 between the Company and Guy J. Quigley
      (incorporated by reference to Exhibit 10.3 of Form 10-KSB/A filed on April
      4, 1997).10.4*
                Employment
      Agreement dated June 1, 1995 between the Company and Charles A. Phillips
      (incorporated by reference to Exhibit 10.4 of Form 10-KSB/A filed on April
      4, 1997).10.5
                United
      States Exclusive Supply Agreement dated March 17, 1997 (Portions of this
      exhibit are omitted and were filed separately with the Securities Exchange
      Commission pursuant to the Company’s application requesting confidential
      treatment in accordance with Rule 406 of Regulation C as promulgated under
      the Securities Act of 1933, incorporated by reference to Exhibit 10.5 of
      Form SB-2 dated September 29, 1997).  See exhibit
      10.14.10.6
                Consulting
      Agreement dated May 4, 1992 between the Company and Godfrey Science and
      Design, Inc. et al. (incorporated by reference to Exhibit 10.5 of Form
      10-KSB/A filed on April 4, 1997).10.7*
                Employment
      Agreement dated November 5, 1996, as amended, between the Company and
      George J. Longo (incorporated by reference to Exhibit 10.10 of Form 10-KSB
      filed on March 30, 1998.10.8
                Rights
      Agreement dated September 15, 1998 between the Company and American Stock
      Transfer and Trust Company (incorporated by reference to Exhibit 1 to the
      Company’s Registration Statement on Form 8-A filed on September 18,
      1998).10.9
                Consulting
      agreement dated March 7, 2002 between the Company and Forrester Financial
      LLC (incorporated by reference to Exhibit 99.1 of Form 8-K filed on April
      11, 2002).
 10.10
                Warrant
      agreement dated March 7, 2002 between the Company and Forrester Financial
      LLC (incorporated by reference to Exhibit 99.2 of Form 8-K filed on April
      11, 2002).10.11
                Agreement
      dated February 2, 2003 between the Company and Forrester Financial LLC
      (incorporated by reference to Exhibit 99.3 of Form 8-K filed on February
      18, 2003).10.12
                Amended
      and Restated Warrant Agreement dated February 2, 2003 between the Company
      and Forrester Financial LLC (incorporated by reference to Exhibit 99.4 of
      Form 8-K filed on February 18, 2003).10.13
                Share
      agreement effective as of December 31, 2002 between the Company and
      Suncoast Naturals, Inc. (incorporated by reference to Exhibit 2.1 of Form
      8-K filed on February 6, 2003)
   41
 Table of Contents
  10.14
                Third
      Amendment to United States Exclusive Supply Agreement (incorporated by
      reference to Exhibit 10.18 of Form 10-K filed on April 1,
      2004).10.15
                Asset
      Purchase and Sale Agreement dated August 18, 2004 by and between JoEl,
      Inc. and the Company (incorporated by reference to Exhibit 10.1 of Form
      8-K filed on August 20, 2004).10.16
                Addendum
      dated October 1, 2004 by and between the Company and JoEl, Inc. to the
      asset purchase and sale agreement dated August 18, 2004 (incorporated by
      reference to Exhibit 10.1 of Form 8-K filed on October 7,
      2004).10.17
                Term
      Note dated October 1, 2004 in the amount of $3.0 million executed by the
      Company in favor of PNC Bank, National Association (incorporated by
      reference to Exhibit 10.2 of Form 8-K filed on October 7,
      2004).10.18
                Open-End
      Mortgage and Security Agreement dated October 1, 2004 on real property
      located in Lebanon, Pennsylvania executed by Quigley Manufacturing Inc. in
      favor of PNC Bank, National Association (incorporated by reference to
      Exhibit 10.3 of Form 8-K filed on October 7, 2004).10.19
                Open-End
      Mortgage and Security Agreement dated October 1, 2004 on real property
      located in Elizabethtown, Pennsylvania executed by Quigley Manufacturing
      Inc. in favor of PNC Bank, National Association (incorporated by reference
      to Exhibit 10.4 of Form 8-K filed on October 7, 2004).10.20
                Registration
      Rights Agreement dated October 1, 2004 by and among the Company and the
      shareholders signatory thereto (incorporated by reference to Exhibit 10.5
      of Form 8-K filed on October 7, 2004).10.21*
                Employment
      Agreement dated October 1, 2004 between Quigley Manufacturing Inc. and
      David B. Deck (incorporated by reference to Exhibit 10.6 of Form 8-K filed
      on October 7, 2004).10.22*
                Employment
      Agreement dated October 1, 2004 between Quigley Manufacturing Inc. and
      David Hess (incorporated by reference to Exhibit 10.7 of Form 8-K filed on
      October 7, 2004).10.23
                Sale
      agreement of Darius to Innerlight Holdings, Inc. dated February 29, 2008
      (incorporated by reference to Exhibit 99.1 of Form 8-K filed on March 3,
      2008).14.1
                Code
      of Ethics (incorporated by reference to Exhibit II of the Proxy Statement
      on Schedule 14A filed on March 31, 2003).16.1*
                PricewaterhouseCoopers
      LLP letter dated March 30, 2005 (incorporated by reference to Exhibit 16.1
      of Form 10-K filed on March 31, 2005).21.1**
                Subsidiaries
      of The Quigley Corporation23.2**
                Consent
      of Amper, Politziner & Mattia, Independent Registered Public
      Accounting Firm, dated March 7, 2008.31.1**
                Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2**
                Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32.1**
                Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2**
                Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.*  Indicates
      a management contract or compensatory plan or arrangement
                  **Filed herewith
 
 
 42
 Table of Contents
 
 
 
 Signatures
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 THE
      QUIGLEY CORPORATION/s/  Guy
      J. Quigley
                
                March
      7, 2008Guy
      J. Quigley, Chairman of the Board, President,
                
                DateChief
      Executive Officer and Director
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
 
 
 Signature
                
                Title
                
                Date/s/
      Guy J. Quigley
                
                Chairman
      of the Board, President,
                
                March 7, 2008Guy
      J. Quigley
                
                Chief
      Executive Officer and Director/s/
      Charles A. Phillips
                
                Executive
      Vice President, Chief Operating
                
                March 7, 2008Charles
      A. Phillips
                
                Officer
      and Director/s/
      George J. Longo
                
                Vice
      President, Chief Financial
                
                March 7, 2008George
      J. Longo
                
                Officer
      and Director (PrincipalFinancial
      and Accounting Officer)/s/
      Jacqueline F. Lewis
                
                Director
                
                March 7, 2008Jacqueline
      F. Lewis/s/
      Rounsevelle W. Schaum
                
                Director
                
                March 7, 2008Rounsevelle
      W. Schaum/s/
      Stephen W. Wouch,
                
                Director
                
                March 7, 2008Stephen
      W. Wouch,/s/
      Terrence O. Tormey,
                
                Director
                
                March 7, 2008Terrence
      O. Tormey,
 
 43