**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
  
 **FORM
10-Q**
 
 x
    
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2005
 
 **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:
 
 **PATIENT
SAFETY TECHNOLOGIES, INC.**
 **(Exact
name of registrant as specified in its charter)**
 
 **Delaware**
    
    **13-3419202****(State
      of Incorporation)**
    
    **(I.R.S.
      Employer Identification Number)****100
      Wilshire Boulevard, Suite 1500**
      **Santa
      Monica, California 90401****(Address
      of principal executive offices)**
 
 **Registrant’s
telephone number, including area code:** **(310)
752-1442**
 
 **With
Copies To:**
 Marc J.
Ross, Esq.
 Sichenzia
Ross Friedman Ference LLP
 1065
Avenue of the Americas
 New York,
New York 10018
 (212)
930-9700
 
 Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act. Yes  ̈ No x
 
 
 **APPLICABLE
ONLY TO CORPORATE ISSUERS**
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
equity, as of the latest practicable date: On April
22, 2005, there were 5,404,783 shares outstanding of the Registrant’s
common stock, $0.33 par value.
 
 
 
   
 
 **PATIENT
SAFETY TECHNOLOGIES, INC.**
 
 **FORM
10-Q FOR THE THREE MONTHS**
 **ENDED
MARCH 31, 2005**
 
 **TABLE
OF CONTENTS**
 
 **Page****PART
      I - FINANCIAL INFORMATION**Item
      1. Condensed Consolidated Financial Statements
    1Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
    13Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
    30Item
      4. Controls and Procedures
    30**PART
      II - OTHER INFORMATION**Item
      1. Legal Proceedings
    30Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
    31Item
      3. Defaults Upon Senior Securities
    31Item
      4. Submission of Matters to a Vote of Security Holders
    31Item
      5. Other Information
    34Item
      6. Exhibits
    34**SIGNATURES**
    35
   
   **PART
I - FINANCIAL INFORMATION**
 
 **Item
1.**  **Financial
Statements.**
 
 **PATIENT
      SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Condensed
      Balance Sheets (Unaudited)****March
      31,**
    
    **December
      31,****2005**
    
    **2004
      *****ASSETS****CURRENT
      ASSETS**Cash
      and cash equivalents
    
    $
    10,741
    
    $
    846,404Marketable
      securities
    
    
    4,435,433
    
    
    3,487,719Other
      current assets
    
    
    269,452
    
    
    255,510**TOTAL
      CURRENT ASSETS**
    
    
    4,715,626
    
    
    4,589,633Property,
      plant and equipment, net
    
    
    34,818
    
    
    23,657Intangible
      assets, net
    
    
    4,657,497Long-term
      investments
    
    
    2,385,959
    
    
    2,320,953**TOTAL
      ASSETS**
    
    $
    11,793,900
    
    $
    6,934,243**LIABILITIES
      AND STOCKHOLDERS' EQUITY****CURRENT
      LIABILITIES**Notes
      payable
    
    $
    839,469
    
    $
    892,530Accounts
      payable and accrued liabilities
    
    
    1,137,833
    
    
    939,568Marketable
      securities, sold short
    
    
    
    
    
    1,075,100Due
      to broker
    
    
    2,564,749
    
    
    460,776**TOTAL
      CURRENT LIABILITIES**
    
    
    4,542,051
    
    
    3,367,974**STOCKHOLDERS'
      EQUITY**Convertible
      preferred stock, $1 par value, cumulative 7% dividend:1,000,000
      shares authorized; 10,950 issued and outstandingat
      March 31, 2005 and December 31, 2004(Liquidation
      preference $1,095,000)
    
    
    10,950
    
    
    10,950Common
      stock, $0.33 par value: 25,000,000 shares authorized;6,826,017
      shares issued and 5,374,278 shares outstanding as of March 31, 2005;
      6,128,067shares
      issued and 4,670,703 shares outstanding at December 31,
    2004
    
    
    2,252,586
    
    
    2,022,262Paid-in
      capital
    
    
    19,176,731
    
    
    13,950,775Accumulated
      deficit
    
    
    (11,597,835
    )
    
    (9,800,885
    )9,842,432
    
    
    6,183,102Deduct:
      1,451,739 and 1,457,364 shares of common stock held in
      treasury,at
      cost, at March 31, 2005 and December 31, 2004,
respectively
    
    
    (2,590,583
    )
    
    (2,616,833
    )**TOTAL
      STOCKHOLDERS' EQUITY**
    
    
    7,251,849
    
    
    3,566,269**TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY**
    
    $
    11,793,900
    
    $
    6,934,243*
      Restated to include the impact of share-based compensation
      expenseThe
      accompanying notes are an integral part of these condensed financial
      statements.
  1
  **PATIENT
      SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Condensed
      Statements of Operations (Unaudited)**
  **Three
      Months Ended****March 31,**
    
    
    **March 31,****2005**
    
    
    **2004****REVENUES**
    
    $
    —
    
    $
    —**EXPENSES**Salaries
      and employee benefits
    
    
    1,210,950
    
    
    128,901Professional
      fees
    
    
    556,971
    
    
    57,000Rent
    
    
    
    
    
    18,075Insurance
    
    
    19,551
    
    
    17,038Taxes
      other than income taxes
    
    
    22,035
    
    
    12,764Interest
      expense
    
    
    27,318
    
    
    8,926Amortization
      of patents
    
    
    27,078General
      and administrative
    
    
    257,770
    
    
    50,144**Operating
      expenses**
    
    
    2,121,673
    
    
    292,848**Operating
      loss**
    
    
    (2,121,673
    )
    
    (292,848
    )Interest,
      dividend income and other, net
    
    
    28,602
    
    
    165Realized
      gains (losses) on investments, net
    
    
    (34,728
    )
    
    49,478Unrealized
      gains (losses) on marketable securities, net
    
    
    343,587
    
    
    102,759**Net
      loss**
    
    
    (1,784,212
    )
    
    (140,446
    )**Preferred
      dividends**
    
    
    (12,738
    )
    
    (19,164
    )**Net
      loss attributable to common shareholders**
    
    $
    (1,796,950
    )
    $
    (159,610
    )**Basic
      and diluted net loss per common share**
    
    $
    (0.37
    )
    $
    (0.05
    )**Weighted
      average common shares outstanding**
    
    
    4,910,963
    
    
    3,060,300
  The
      accompanying notes are an integral part of these condensed financial
      statements.
  2
  **PATIENT
      SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Condensed
      Statements of Cash Flows (Unaudited)**
  **Three
      Months Ended****March 31,**
    
    
    **March 31,****2005**
    
    
    **2004**Cash
      flows from operating activities:Net
      loss
    
    
    $
    (1,784,212
    )
    $
    (140,446
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
    
    
    
    546Amortization
      of patents
    
    
    
    27,078Realized
      (gains) losses on investments, net
    
    
    
    34,728
    
    
    (49,478
    )Unrealized
      gain on marketable securities
    
    
    
    (343,587
    )
    
    (102,759
    )Stock
      based compensation
    
    
    
    1,224,101Changes
      in operating assets and liabilities:Purchases
      of marketable investment securities, net
    
    
    
    (1,727,528
    )
    
    5,324Other
      assets
    
    
    
    (13,942
    )
    
    5,543Accounts
      payable and accrued liabilities
    
    
    
    198,265
    
    
    58,043Due
      to broker
    
    
    
    2,103,973Total
      adjustments
    
    
    
    1,503,634
    
    
    (83,327
    )Net
      cash used in operating activities
    
    
    
    (280,578
    )
    
    (223,773
    )Cash
      flows from investing activities:Purchase
      of property and equipment
    
    
    
    (11,707
    )Purchase
      of SurgiCount
    
    
    
    (432,398
    )Proceeds
      from sale of long-term investments
    
    
    
    
    
    
    117,608Purchases
      of long-term investments
    
    
    
    (65,006
    )Net
      cash (used in) provided by investing activities
    
    
    
    (509,111
    )
    
    117,608Cash
      flows from financing activities:Proceeds
      from exercise of stock options
    
    
    
    26,250Payments
      of preferred dividends
    
    
    
    (19,163
    )
    
    (19,164
    )Decrease
      in note payable
    
    
    
    (53,061
    )Net
      cash used in financing activities
    
    
    
    (45,974
    )
    
    (19,164
    )Net
      decrease in cash and cash equivalents
    
    
    
    (835,663
    )
    
    (125,329
    )Cash
      and cash equivalents at beginning of period
    
    
    
    846,404
    
    
    224,225Cash
      and cash equivalents at end of period
    
    
    $
    10,741
    
    $
    98,896Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
    
    
    $
    19,574
    
    $
    76Issuance
      of common stock and warrants in connection with SurgiCount
      acquisition
    
    
    $
    4,232,178
    
    $
    —Dividends
      accrued
    
    
    $
    12,738
    
    $
    19,163
  The
      accompanying notes are an integral part of these condensed financial
      statements.
 3
  ****Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements - Unaudited**
**March
31, 2005****
**1. DESCRIPTION OF BUSINESS**

Until March 31, 2005, Patient Safety Technologies, Inc.
(***"PST"***, or the ***"Company"***)
(formerly known as Franklin Capital Corporation) was a Delaware corporation that
elected to be a Business Development Company (***“BDC”***)
under the Investment Company Act of 1940, as amended. On March 30, 2005,
stockholder approval was obtained to withdraw the Company’s election to be
treated as a BDC and on March 31, 2005, the Company filed an election to
withdraw its election with the Securities and Exchange Commission. Through its
operating subsidiaries, the Company is currently involved in providing capital
and managerial assistance to early stage companies in the medical products,
health care solutions, financial services and real estate industries.

Currently, the Company has three wholly-owned operating
subsidiaries: (1) SurgiCount Medical, Inc., a California corporation; (2)
Patient Safety Consulting Group, LLC, a Delaware Limited Liability Company; and
(3) Franklin Capital Properties, LLC, a Delaware Limited Liability
Company.

The Company, including its operating subsidiaries, is engaged in
the acquisition of controlling interests in companies and research and
development of products and services focused on the health care and medical
products field, particularly the patient safety markets, as well as the
financial services and real estate industries. SurgiCount Medical, Inc., a
provider of patient safety devices, Patient Safety Consulting Group, LLC, a
healthcare consulting services company, and Franklin Capital Properties, LLC, a
real estate development and management company, enhance the Company’s ability to
focus its efforts in each targeted industry.

**2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES**

**Basis of Presentation**

The accompanying condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and disclosures required by accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. The
accounting estimates that require management’s most difficult and subjective
judgments are the valuation of the non-marketable equity securities. The actual
results may differ from management’s estimates.

The interim condensed consolidated financial information is
unaudited, but reflects all normal adjustments that are, in the opinion of
management, necessary to provide a fair statement of results for the interim
periods presented. The condensed consolidated interim financial statements
should be read in connection with the consolidated financial statements in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
Certain amounts reported in the previous period have been reclassified to
conform to the current presentation reflecting the Company’s withdrawal of its
election to be treated as a BDC.

**Investments**

*Marketable Securities.*  The Company’s
investment in marketable securities that are bought and held principally for the
purpose of selling them in the near-term are classified as trading securities.
Trading securities are recorded at fair value on the balance sheet in current
assets, with the change in fair value during the period included in
earnings.

*Available-for-Sale Investments.*  Investments
designated as available-for-sale include both marketable equity and debt
(including redeemable preferred stock) securities.  Investments that are
designated as available-for-sale are reported at fair value, with unrealized
gains and losses, net of tax, recorded in stockholders’ equity. Realized gains
and losses on the sale or exchange of equity securities and declines in value
judged to be other than temporary are recorded in realized gains (losses) on
investments, net.

4
**Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements (continued)**
*Equity Method.*  Included in long-term investments
are investments in companies in which the Company has a 20% to 49% interest.
These investments are carried at cost, adjusted for the Company’s proportionate
share of their undistributed earnings or losses.

**Stock-Based
Compensation********

Prior to January 1, 2005, the Company accounted for
stock-based compensation in accordance with Accounting Principles Board (“APB”)
Opinion No. 25, *Accounting for Stock Issued to Employees*, and
related interpretations, as permitted by Statement of Financial Accounting
Standards (***“SFAS”***) No. 123, *Accounting for
Stock-Based Compensation*. In December 2004, SFAS No. 123(R),
“*Share-Based Payment*,” which addresses the accounting for employee
stock options, was issued. SFAS 123(R) revises the disclosure provisions of SFAS
123 and supercedes APB Opinion No. 25. SFAS 123(R) requires that the cost of all
employee stock options, as well as other equity-based compensation arrangements,
be reflected in the financial statements over the vesting period based on the
estimated fair value of the awards. This statement is effective for the Company
as of the beginning of the first interim or annual reporting period that begins
after January 1, 2006. The Company elected to adopt SFAS 123(R) as of January 1,
2005 using the modified retrospective application method as provided by SFAS
123(R) and accordingly, financial statement amounts for the prior periods in
which the Company granted employee stock options have been restated to reflect
the fair value method of expensing prescribed by SFAS 123(R). During the year
ended December 31, 2004, the entire amount of equity compensation expense
required to be recognized under the modified retrospective application method
was $5,094 relating to stock option grants that occurred in the second quarter
of 2004. During the three months ended March 31, 2005, the Company had
stock-based compensation expense included in reported net loss of $552,542. All
options that we granted in 2005 and 2004 were granted at the per share fair
market value on the grant date. Vesting of options differs based on the terms of
each option. The Company utilized the Black-Scholes option pricing model and the
assumptions used for each period are as follows:

**Three months ended March 31,****2005**
    
    
    **2004**Weighted average risk free interest rates
    
    
    3.75
    %
    
    3.0
    %Weighted average life (in years)
    
    
    3.0
    
    
    0.1Volatility
    
    
    83
    %
    
    102
    %Expected dividend yield
    
    
    0
    %
    
    0
    %Weighted average grant-date fair value per share of options
      granted
    
    $
    2.92

**3. LOSS PER COMMON SHARE**

Loss per common share is based on the weighted average number of
common shares outstanding. The Company complies with SFAS No. 128, *“Earnings
Per Share,”* which requires dual presentation of basic and diluted earnings
per share on the face of the statements of operations. Basic loss per share
excludes dilution and is computed by dividing income (loss) available to common
stockholders by the weighted-average common shares outstanding for the period.
Diluted loss per share reflects the potential dilution that could occur if
convertible preferred stock or debentures, options and warrants were to be
exercised or converted or otherwise resulted in the issuance of common stock
that then shared in the earnings of the entity.

Since the effects of outstanding options, warrants and convertible
preferred stock conversion are antidilutive in all periods presented it has been
excluded from the computation of loss per common share.

5
****Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements (continued)****
**4. EQUITY TRANSACTIONS**

On March 30, 2005, stockholders’ approval was obtained to (i)
decrease the authorized number of shares of Common Stock from 50,000,000 shares
to 25,000,000 shares, (ii) decrease the authorized number of shares of Preferred
Stock from 10,000,000 shares to 1,000,000 shares and (iii) to reduce the par
value of the Common Stock from $1.00 per share to $0.33 per share and effect a
three-for-one split of the Common Stock.

Stockholders’ equity has been restated to give retroactive
recognition to the stock split for all periods presented. In addition, all per
share and weighted average share amounts have been restated to reflect this
stock split.

During the three months ended March 31, 2005, the Company issued
5,625 shares of common stock held in treasury upon exercise of options under the
Company’s 1997 Stock Incentive Plan.

**5. ACQUISITION**

In February 2005, the Company invested $4,035,600, excluding
acquisition costs, to acquire 100% of the common stock of SurgiCount Medical,
Inc. (***”SurgiCount”***). SurgiCount’s operating results
from the closing date of the acquisition, February 25, 2005, through March 31,
2005, are included in the condensed consolidated financial statements.

At closing, the purchase price, including acquisition costs was
determined to be $4,684,576, comprised of $340,000 in cash payments and 600,000
shares of the Company’s common stock valued at $3,695,600 issued to SurgiCount’s
equity holders. Additionally, the Company incurred approximately $112,398 in
direct costs and issued 150,000 warrants, valued at $536,578, to purchase the
common stock of the Company to consultants providing advisory services for the
Merger. The value assigned to the stock portion of the purchase price is $6.16
per share based on the average closing price of the Company’s common stock for
the five days beginning two days prior to and ending two days after February 4,
2005, the date of the Agreement and Plan of Merger and Reorganization (the
“Merger”). In addition, in the event that prior to the fifth anniversary of the
closing of the Merger the cumulative gross revenues of SurgiCount exceed
$500,000 the Company is obligated to issue an additional 50,001 shares of the
Company’s common stock to certain SurgiCount shareholders. Should the cumulative
gross revenues exceed $1,000,000 during the five-year period the additional
shares would be increased by 50,001, for a total of 100,002 additional shares.
Such amount is not included in the aggregate purchase price and will be recorded
when and if issued.

The entire purchase price, including acquisition costs, has been
allocated to SurgiCount’s patents, with an approximate useful life of 14.4
years, on a preliminary basis and may change as additional information becomes
available.

The following pro forma data summarizes the results of operations
for the periods indicated as if the SurgiCount acquisition had been completed as
of the beginning of each period presented. The pro forma data gives effect to
actual operating results prior to the acquisition, adjusted to include the pro
forma effect of amortization of intangibles. These pro forma amounts do not
purport to be indicative of the results that would have actually been obtained
if the acquisition occurred as of the beginning of each period presented or that
may be obtained in future periods:

**Three months ended March
      31,****2005**
    
    
    
    **2004**Revenue
    
    
    —
    
    
    
    —Net loss
    
    $
    (1,885,000
    )
    
    $
    (235,000
    )Basic and diluted net loss per common share
    
    $
    (0.38
    )
    
    $
    (0.08
    )


6
****Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements (continued)****
**6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**

Accounts payable and accrued liabilities at March 31, 2005 and
December 31, 2004 are comprised of the following:

March 31,
    
    
    December 31,2005
    
    
    2004Professional fees -
      legal
    
    $
    518,131
    
    $
    351,867Accrued purchase price on investment
    
    
    165,240
    
    
    165,240Officer’s
      severance
    
    
    83,283
    
    
    160,142Accrued interest
    
    
    120,177
    
    
    112,432Professional fees - other
    
    
    72,500
    
    
    52,950Accrued - other
    
    
    178,502
    
    
    96,937$
    1,137,833
    
    $
    939,568


**7. MARKETABLE SECURITIES**

Marketable securities at March 31, 2005 and December 31, 2004 are
comprised of the following:

March 31,
    
    
    December 31,2005
    
    
    2004U.S.
      Treasuries
    
    $
    2,476,718
    
    $
    2,016,406IPEX, Inc.
    
    
    1,101,000Other Equities
    
    
    857,715
    
    
    1,471,313$
    4,435,433
    
    $
    3,487,719


*IPEX, Inc.*

At March 31, 2005, the Company held 575,000 shares of common stock
and warrants to purchase 220,000 shares of common stock at $1.50 per share and
warrants to purchase 220,000 shares of common stock at $2.00 per share of IPEX,
Inc. (***“IPEX”***), formerly Administration for
International Credit & Investments, Inc, valued at $1,101,000. IPEX's common
stock is traded on the OTC Bulletin Board, which reported a closing price, at
March 31, 2005, of $1.80. The warrants are exercisable for a period of five
years and are callable by IPEX in certain instances. IPEX operates an electronic
market for collecting, detecting, converting, enhancing and routing
telecommunication traffic and digital content. Members of the exchange
anonymously exchange information based on route quality and price through a
centralized, web accessible database and then route traffic. IPEX’s
fully-automatic, highly scalable Voice over Internet Protocol routing platform
updates routes based on availability, quality and price and executes the
capacity request of the orders using proprietary software and delivers them
through IPEX’s system. IPEX invoices and processes payments for its members’
transactions and offsets credit risk through its credit management programs with
third parties.

**8. LONG-TERM INVESTMENTS**

Long-term investments is primarily comprised of the following:

*Alacra Corporation*

At March 31, 2005, the Company had an investment in shares of
Series F convertible preferred stock of Alacra Corporation, valued at
$1,000,000. The Company has the right to have the Series F convertible preferred
stock redeemed by Alacra for face value plus accrued dividends on December 31,
2006. Alacra, based in New York, is a global provider of business and financial
information. Alacra provides a diverse portfolio of fast, sophisticated online
services that allow users to quickly find, analyze, package and present
mission-critical business information. Alacra's customers include more than 750
financial institutions, management consulting, law and accounting firms and
other corporations throughout the world.

7
**Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements (continued)**
*DigiCorp.*

At March 31, 2005, the Company held 4,001,027 shares, or 41%, of
the common stock of DigiCorp recorded at its cost of $563,211, or
approximately $0.14 per share. Digicorp's common stock is traded on the OTC
Bulletin Board, which reported a closing price, at March 31, 2005, of $0.25. The
Company accounts for its investment in Digicorp under the equity method of
accounting. The Company’s proportionate share of income or losses from this
investment is recorded in interest, dividend income and other, net.

*Excelsior Radio Networks, Inc.*

During the period from August 12, 2003 through October 22, 2004,
the Company liquidated its investment in Excelsior Radio Networks, Inc.
(***“Excelsior”***). The Company sold a total of 1,476,804
shares and warrants to purchase 87,111 shares of Excelsior common stock. Certain
of these sales are subject to potential adjustment whereby the Company would
receive additional proceeds in the event of certain circumstances. However, no
value has been ascribed to this right.

*Investments in Real Estate*

At March 31, 2005, the Company had several real estate
investments, recorded at its cost of $772,748. These investments are included in
long-term investments. The Company holds its real estate investments in Franklin
Capital Properties, LLC (***“Franklin Properties”***).
Franklin Properties primary focus is on the acquisition and management of income
producing real estate holdings. Franklin Properties’ real estate holdings
consist of eight vacant single family buildings and two multi-unit buildings in
Baltimore, Maryland, approximately 8.5 acres of undeveloped land in Heber
Springs, Arkansas, and various loans secured by real estate in Heber Springs,
Arkansas. Franklin Properties intends to renovate the single family and
multi-unit buildings and engage in an active rental program.

**9. NOTE PAYABLE**

The Company initially purchased Excelsior on August 28, 2001. As
part of the purchase price paid by the Company for its investment in Excelsior,
the Company issued a $1,000,000 note to Winstar. This note was due February 28,
2002 with interest at 3.54% but has a right of offset against certain
representations and warranties made by Winstar. The due date of the note has
been extended indefinitely until the lawsuit discussed in Note 13 is settled.
During 2005, approximately $53,000 of legal expenses were offset against the
amount due.

**10. STOCK OPTION PLANS**

On September 9, 1997, the Company’s stockholders approved two
Stock Option Plans: a Stock Incentive Plan (***“SIP”***) to
be offered to the Company’s consultants, officers and employees (including any
officer or employee who is also a director of the Company) and a Non-Statutory
Stock Option Plan (***“SOP”***) to be offered to the
Company’s “outside” directors, (i.e., those directors who are not also officers
or employees of The Company’). As of March 31, 2005, there were no outstanding
options to purchase the Company’s Common Stock and no options available for
future issuance under either the SIP or the SOP.

In December 2004, the Board of Directors of the Company approved
the 2005 Stock Option and Restricted Stock Plan (the ***“2005
SOP”***) and the Company’s stockholders approved the Plan in
March 2005. The Plan reserves 1,319,082 shares of common stock for grants
of incentive stock options, nonqualified stock options, and restricted stock
awards to employees, non-employee directors and consultants performing services
for the Company. Options granted under the Plan have an exercise price equal to
or greater than the fair market value of the underlying common stock at the date
of grant and become exercisable based on a vesting schedule determined at
the date of grant. The options expire 10 years from the date of grant.
Restricted stock awards granted under the Plan are subject to a vesting period
determined at the date of grant. As of March 31, 2005, the Company has
granted 266,490 shares of restricted stock of which 97,950 are vested. For the
three months ended March 31, 2005, the Company recorded compensation
expense of approximately $579,189, related to these shares of restricted
stock.

8
**Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements (continued)**
The following is a summary of the status of the Stock Option
Plans:

**Outstanding Options******
    
    
    **Shares Available for**
      **Grant**
    
    
    **Number of**
      **Shares**
    
    
    
    **Weighted Average**
      **Exercise Price****December 31, 2003**
    
    
    **22,500**
    
    
    **61,875**
    
    
    $
    3.80Grants
    
    
    (78,750
    )
    
    78,750
    
    
    $
    0.50Exercises
    
    
    
    
    
    (78,750
    )
    
    $
    0.50Cancellations
    
    
    56,250
    
    
    (56,250
    )
    
    $
    3.71**December 31, 2004**
    
    
    —
    
    
    **5,625**
    
    
    $
    4.67Adoption of 2005 SOP
    
    
    1,319,082Exercises
    
    
    
    
    
    (5,625
    )
    
    $
    4.67Restricted Stock Awards
    
    
    (266,490
    )Grants
    
    
    (621,000
    )
    
    621,000
    
    
    $
    5.27**March 31, 2005**
    
    
    **431,592**
    
    
    **621,000**
    
    
    $
    5.27Options exercisable at:December 31, 2003
    
    
    
    
    
    61,875
    
    
    $
    3.80December 31, 2004
    
    
    
    
    
    5,625
    
    
    $
    4.67March 31, 2005
    
    
    
    
    
    189,250
    
    
    $
    5.27
The outstanding options, all of which are issued under the 2005
SOP, have a remaining contractual life of approximately 10 years.

**11. WARRANTS**

On November 3, 2004, the Company entered into a Subscription
Agreement with several accredited investors (the
***"Investors"***), relating to the issuance and sale by the
Company of shares of its common stock (the ***"Shares"***)
and five-year warrants (the ***"Warrants"***) to purchase
additional shares of its common stock (the ***"Warrant
Shares"***) in one or more closings of a private placement (the
***"Private Placement"***).

During the period November 3, 2004 through December 21, 2004, the
Company held a series of four closings of the Private Placement. In conjunction
with the closings the Company issued and sold to the Investors an aggregate of
1,517,700 Shares and Warrants to purchase an aggregate of up to 758,841 Warrant
Shares pursuant to the terms of the Subscription Agreement. At March 31, 2005,
the Warrants weighted average exercise price was $3.86 with a remaining
contractual life of 4.6 years.

9
**Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements (continued)**
In March 2005, the Company issued 177,000 warrants (including
150,000 capitalized as part of the acquisition of the SurgiCount patents) to
purchase shares of common stock at $5.27 per share to various consultants. The
warrants are immediately exercisable and have a five-year life. The warrants
were valued at $633,163 and, depending on the nature of the consulting services
received by the Company, were either capitalized or expensed. Warrants were
valued using the Black-Scholes valuation model assuming expected dividend yield,
risk-free interest rate, expected life and volatility of 0%, 3.75%, five years
and 83%, respectively. As of March 31, 2005, all warrants issued to the
consultants remain outstanding.

**12. RELATED PARTY TRANSACTIONS**

*Tuxis Corporation*

On March 16, 2005, Ault Glazer filed a Schedule 13D with the SEC
relating to its holdings in Tuxis Corporation (“Tuxis”). Tuxis, a Maryland
corporation, currently is registered under the 1940 Act as a closed-end
management investment company. Tuxis previously received Board of Directors and
shareholder approval to change the nature of its business so as to cease to be
an investment company and on May 3, 2004, filed an application with the SEC to
de-register. At March 16, 2005, the Company directly held 36,000 shares and
indirectly, by virtue of its relationship with Ault Glazer, held 98,000 shares
of Tuxis common stock, which represented approximately 3.66% and 9.96%,
respectively, of the total outstanding shares. At December 31, 2004, Tuxis had
reportable net assets of approximately $9.1 million.

**13. COMMITMENTS AND CONTINGENCIES**

On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. filed a lawsuit (the ***“Leve Lawsuit”***)
against the Company, Sunshine Wireless, LLC
(***"Sunshine"***), and four other defendants affiliated
with Winstar Communications, Inc. (***“Winstar”***). On
February 25, 2003, the case against the Company and Sunshine was dismissed,
however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
Partnership, L.P. exercised their right to appeal. The initial lawsuit alleged
that the Winstar defendants conspired to commit fraud and breached their
fiduciary duty to the plaintiffs in connection with the acquisition of the
plaintiff's radio production and distribution business. The complaint further
alleges that the Company and Sunshine joined the alleged conspiracy. The
plaintiffs seek recovery of damages in excess of $10,000,000, costs and
attorneys' fees. An unfavorable outcome in an appeal, together with an
unfavorable outcome in the lawsuit, may have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes the lawsuit is without merit and intends to vigorously defend itself.
These condensed consolidated financial statements do not include any adjustments
for the possible outcome of this uncertainty.

**14. SEGMENT REPORTING**

The Company reports selected segment information in its financial
reports to shareholders in accordance with SFAS No. 131,
*“Disclosures about Segments of an Enterprise and Related Information.”*
The segment information provided reflects the three distinct lines of business
within the Company’s organizational structure: medical products, which consists
of SurgiCount, a provider of patient safety devices, health care solutions,
which consists of Patient Safety Consulting Group, LLC, and financial services
and real estate, which consists of Franklin Capital Properties, LLC. Unallocated
corporate expenses are centrally managed at the corporate level and not reviewed
by the Company’s chief operating decision maker in evaluating results by
segment.

Transactions between segments are not common and are not material
to the segment information. Some business activities that cannot be classified
in the aforementioned segments are shown under “corporate”.


10
**Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements (continued)**

Segment information for the three months ended March 31, 2005, and
2004 is as follows:

**Three Months
      Ended********March 31,**
    
    **March 31,****2005**
    
    **2004****Medical Products**Revenue
    
    
    —
    
    
    —Net loss
    
    $
    (220,730
    )
    
    —Total Assets
    
    $
    4,657,497**Health Care Solutions**Revenue
    
    
    —
    
    
    —Net loss
    
    $
    (127,725
    )
    
    —Total Assets
    
    
    —
    
    
    —**Financial Services and Real Estate**Revenue
    
    
    —
    
    
    —Net income
    
    $
    75,164
    
    $
    152,402Total Assets
    
    $
    6,805,884
    
    $
    3,057,121**Corporate**Revenue
    
    
    —
    
    
    —Net loss
    
    $
    (1,510,921
    )
    $
    (292,848
    )Total Assets
    
    $
    330,519
    
    $
    99,344**Total**Revenue
    
    
    —
    
    
    —Net loss
    
    $
    (1,784,212
    )
    $
    (140,446
    )Total Assets
    
    $
    11,793,900
    
    $
    3,156,465
**15. SUBSEQUENT EVENTS**

On April 5, 2005, the Company entered into a consulting agreement
with Health West Marketing Incorporated, a California corporation ("Health
West"). Under the agreement, Health West agreed to help the Company establish a
comprehensive manufacturing and distribution strategy for the Company's
Safety-SpongeTM System worldwide. The initial term of the
agreement is for a period of two years. After the initial two-year term, the
agreement will terminate unless extended by the parties for one or more
additional one-year periods.

In consideration for Health West's services, the Company agreed to
issue Health West 42,017 shares of the Company's common stock, to be issued as
follows: (a) 10,505 shares were issued upon signing the agreement; (b) if Health
West helps the Company structure a comprehensive manufacturing agreement with A
Plus Manufacturing by July 5, 2005, then the Company will issue Health West an
additional 15,756 shares; and (c) if Health West helps the Company develop a
regional distribution network to integrate the Safety-SpongeTM
System into the existing acute care supply chain by February 5, 2006, then
the Company will issue Health West the remaining 15,756 shares. As incentive for
entering into the agreement, the Company agreed to issue Health West a callable
warrant to purchase 150,000 (post 3:1 forward stock split) shares of the
Company's common stock at an exercise price of $5.95, exercisable for 5 years.
In addition, the Company agreed to issue a callable warrant to purchase 25,000
(post 3:1 forward stock split) shares of the Company's common stock at an
exercise price of $5.95, exercisable upon meeting specified milestones. In the
event of the death of Bill Adams, who is Health West's Chief Executive Officer,
the agreement will automatically terminate. The Company may terminate the
agreement at any time upon delivery to Health West of notice of a good faith
determination by the Company's Board of Directors that the agreement should be
terminated for cause or as a result of disability of Mr. Adams. Health West may
voluntarily terminate the agreement only after expiration of the initial
two-year term upon providing 30 days prior written notice to the Company.

11
**Patient
Safety Technologies, Inc. and Subsidiaries**
**Notes
to Condensed Consolidated Financial Statements (continued)**
On April 7, 2005, the Company issued a $1,000,000 principal amount
promissory note (the ***"Note"***) to Bodnar Capital
Management, LLC, in consideration for a loan from Bodnar Capital Management, LLC
to the Company in the amount of $1,000,000. Steven J. Bodnar is a managing
member of Bodnar Capital Management, LLC. Mr. Bodnar, through Bodnar Capital
Management, LLC, is a principal stockholder of the Company. The principal amount
of the Note and interest at the rate of 6% per annum is payable on May 31, 2006.
The obligations under the Note are collateralized by all real property owned by
the Company.

On April 22, 2005, the Company entered into a subscription
agreement pursuant to which the Company sold to an investor 20,000 shares of the
Company's common stock and warrants to purchase an additional 20,000 shares of
the Company's common stock. The warrants are exercisable for a period of five
years, have an exercise price equal to $6.05, and 50% of the warrants are
callable. In the event the closing sale price of the Company's common stock
equals or exceeds $7.50 for at least five consecutive trading days, the Company,
upon 30 days prior written notice, may call the callable warrants at a
redemption price equal to $0.01 per share of common stock then purchasable
pursuant to such warrants. Notwithstanding, such notice, the warrant holder may
exercise the callable warrant prior to the end of the 30-day notice period. The
Company received gross proceeds of $100,000 from the sale of stock and warrants.
The sale was made in a private placement exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506
promulgated thereunder.

On April 28, 2005, the Company purchased 0.61 acres of vacant land
in Springfield, Tennessee from a related party. The purchase price consisted of
approximately $90,000 in cash, 20,444 shares of common stock and 10,221 warrants
to purchase common stock.
 12
    **Item
2.**  **Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.**
 
 *The
following discussion should be read in conjunction with our condensed
consolidated financial statements and the notes thereto included elsewhere in
this form 10-Q. This form 10-Q contains forward-looking statements regarding the
plans and objectives of management for future operations. This information may
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
we cannot assure you that these projections included in these forward-looking
statements will come to pass. Our actual results could differ materially from
those expressed or implied by the forward-looking statements as a result of
various factors. We undertake no obligation to revise these forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.*
 
 **Critical
accounting policies and estimates**
 
 The below
discussion and analysis of Patient Safety Technologies’ financial condition and
results of operations are based upon the Company's financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Critical accounting policies are those that are both important to
the presentation of our financial condition and results of operations and
require management's most difficult, complex, or subjective judgments. Our most
critical accounting policy relates to the valuation of our non-marketable equity
securities.
 
 We invest
in illiquid equity securities acquired directly from the issuer in private
transactions. Our investments are generally subject to restrictions on resale or
otherwise are illiquid and generally have no established trading market.
Additionally, many of the securities that we may invest in will not be eligible
for sale to the public without registration under the Securities Act of 1933.
Because of the type of investments that we make and the nature of our business,
our valuation process requires an analysis of various factors.
 
 Investments
in non-marketable securities are inherently risky and a number of these
companies are expected to fail. Their success (or lack thereof) is dependent
upon product development, market acceptance, operational efficiency and other
key business success factors. In addition, depending on their future prospects,
they may not be able to raise additional funds when needed or they may receive
lower valuations, with less favorable investment terms than in previous
financings, and the investments would likely become impaired.
 
 We review
all of our investments quarterly for indicators of impairment; however, for
non-marketable equity securities, the impairment analysis requires significant
judgment to identify events or circumstances that would likely have a material
adverse effect on the fair value of the investment. The indicators that we use
to identify those events or circumstances includes as relevant, the nature and
value of any collateral, the portfolio company’s ability to make payments and
its earnings, the markets in which the portfolio company does business,
comparison to valuations of publicly traded companies, comparisons to recent
sales of comparable companies, the discounted value of the cash flows of the
portfolio company and other relevant factors. Because such valuations are
inherently uncertain and may be based on estimates, our determinations of fair
value may differ materially from the values that would be assessed if a ready
market for these securities existed.
 
 Investments
identified as having an indicator of impairment are subject to further analysis
to determine if the investment is other than temporarily impaired, in which case
we write the investment down to its impaired value. When a portfolio company is
not considered viable from a financial or technological point of view, we write
down the entire investment since we consider the estimated fair market value to
be nominal. If a portfolio company obtains additional funding at a valuation
lower than our carrying amount or requires a new round of equity funding to stay
in operation and the new funding does not appear imminent, we presume that the
investment is other than temporarily impaired, unless specific facts and
circumstances indicate otherwise. We did not recognize any impairments for the
three months ended March 31, 2005 and 2004.
 
 13
 
 
 Security
investments which are publicly traded on a national exchange or Nasdaq Stock
Market are stated at the last reported sales price on the day of valuation or,
if no sale was reported on that date, then the securities are stated at the last
quoted bid price. Our Board may determine, if appropriate, to discount the value
where there is an impediment to the marketability of the securities
held.
 
 **Accounting
Developments**
 
 In
December 2004, Statement of Financial Accounting Standards ( ***"SFAS"*** ) No.
123(R), " *Share-Based
Payment* ," which
addresses the accounting for employee stock options, was issued. SFAS 123(R)
revises the disclosure provisions of SFAS 123, " *Accounting
for Stock Based Compensation* " and
supercedes Accounting Principles Board ( ***"APB"*** ) Opinion
No. 25, " *Accounting
for Stock Issued to Employees* ." SFAS
123(R) requires that the cost of all employee stock options, as well as other
equity-based compensation arrangements, be reflected in the financial statements
based on the estimated fair value of the awards. The Company elected early
adoption of SFAS No. 123(R) as of January 1, 2005.
 
 **Overview**
 
 Until
March 31, 2005, Patient Safety Technologies, Inc. ( **"PST"** , or the **"Company"** ) was a
Delaware Corporation that elected to be a Business Development Company
( **“BDC”** ) under
the Investment Company Act of 1940, as amended. On March 30, 2005, stockholder
approval was obtained to withdraw our election to be treated as a BDC and on
March 31, 2005 we filed an election to withdraw our election with the Securities
and Exchange Commission.
 
 We are
currently engaged in the acquisition of controlling interests in companies and
research and development of products and services focused on the health care and
medical products field, particularly the patient safety markets, as well as the
financial services and real estate industries. SurgiCount Medical, Inc., a
provider of patient safety devices, Patient Safety Consulting Group, LLC, a
healthcare consulting services company, and Franklin Capital Properties, LLC, a
real estate development and management company, are wholly-owned operating
subsidiaries, which were either acquired or created to enhance our ability to
focus our efforts in each targeted industry.
 
 SurgiCount
is our first major acquisition in our plan to become a leader in the
multi-billion dollar patient safety field market. SurgiCount owns patents issued
in the United States and Europe related to patient safety, among them, the
Safety-Sponge TM System,
an innovation which management believes will allow us to capture a significant
portion of the $650 million in annual U.S. and European surgical sponge sales.
 
 The
Safety-Sponge TM System
allows for faster and more accurate counting of surgical sponges. SurgiCount has
obtained FDA 510k exempt status for the Safety-Sponge TM line.
The Safety-Sponge TM line of
sponges has passed required FDA biocompatibility tests including ISO
sensitization, cytotoxicity and skin irritation tests.
 
 The
Company, including its subsidiaries, also provides capital and managerial
assistance to early stage companies in the medical products, health care
solutions, financial services and real estate industries.
 
 Our
principal executive offices are located at 100 Wilshire Boulevard, Suite 1500,
Santa Monica, California 90401. Our telephone number is (310) 752-1416. Our
website is located at http://www.patientsafetytechnologies.com .
 
 **Financial
Condition**
 
 The
Company's cash and marketable securities were $4,446,174, at March 31, 2005,
versus $4,334,123 at December 31, 2004. Total current liabilities, were
$4,542,051 at March 31, 2005 versus $3,367,974 at December 31, 2004. Included in
current liabilities at March 31, 2005 and December 31, 2004 is a note payable,
and accrued interest on such note, payable to Winstar Communications, Inc. in
the amount of $959,646 and $1,004,962, respectively. As discussed in Note 9
in the Company’s notes to its condensed consolidated financial statements filed
with this Form 10-Q, the due date on the note payable to Winstar has been
extended indefinitely pending settlement of the Leve Lawsuit.
  14
 
 At March
31, 2005 and December 31, 2004, we had $10,741 and $846,404 in cash and cash
equivalents. Our Board has given our Chairman and Chief Executive Officer,
Milton "Todd" Ault III, the authority to invest our cash balances in the public
equity and debt markets as appropriate to maximize the short-term return on such
assets. The making of such investments entails risks related to the loss of
investment and price volatility.
 
 The
Company has a working capital surplus of $173,575 at March 31, 2005. The Company
continues to have recurring losses and has relied upon liquidating its portfolio
companies to fund operations. On April 7, 2005, subsequent to the quarter end,
the Company issued a $1,000,000 promissory note (the ***"Note"*** ) to
Bodnar Capital Management, LLC, in consideration of a $1,000,000 loan from
Bodnar Capital Management, LLC to the Company. Steven J. Bodnar is a managing
member of Bodnar Capital Management, LLC. Mr. Bodnar, through Bodnar Capital
Management, LLC, is a principal stockholder of the Company. The principal amount
of the Note and interest at the rate of 6% per annum is payable on May 31, 2006,
the maturity date of the Note. The obligations under the Note are secured by all
real property owned by the Company. Management believes that existing cash
resources, together with anticipated revenues from its operations, should be
adequate to fund its operations for the twelve months subsequent to March 31,
2005. However, long-term liquidity is dependent on the Company's ability to
attain future profitable operations. Management may undertake additional debt or
equity financings to better enable the Company to grow and meet its future
operating and capital requirements.
 
 On
November 3, 2004, the Company entered into a Subscription Agreement and sold an
aggregate of 405,625 shares (1,216,875 shares post 3:1 forward stock split) of
its Common Stock and warrants to purchase an aggregate of up to 202,810 shares
(608,430 shares post split) of its Common Stock in a private placement
transaction to certain accredited investors. Pursuant to the terms of the
Subscription Agreement, the Company held additional closings of the private
placement on November 15, 2004, December 2, 2004, and on December 27, 2004, and
sold an aggregate of 100,275 additional shares (300,825 shares post split) of
its Common Stock and warrants to purchase an aggregate of up to 50,137 shares
(150,411 shares post split) of its Common Stock. The Company received aggregate
net proceeds from all the closings of $3,924,786. The Company is required to
file a registration statement with the SEC on or before May 2, 2005, which is
180 days after closing of the first sale transaction, registering the resale of
the shares of our Common Stock (including the shares of common stock issuable
upon exercise of the warrants) sold in the private placement transactions on a
continuous or delayed basis under the Securities Act of 1933. We are required to
use our reasonable best efforts to cause the registration statement to become
effective within 90 days after the date we file such registration statement with
the SEC. If the registration statement has not been filed on or prior to the
180th day after the closing of the sale transaction, we will pay liquidated
damages to the purchasers of the 505,900 shares (1,517,700 shares post split) of
our Common Stock and the warrants to purchase 252,950 shares (758,841shares post
split) of our Common Stock equal to 1.0% per month of the aggregate gross
proceeds of $4,047,200. The registration statement was filed on May 3, 2005. We
intend to use the net proceeds from the private placement transaction primarily
for general corporate purposes and in buying controlling equity stakes in
companies and/or assets in the medical products, health care solutions,
financial services and real estate industries.
 
 As of
March 31, 2005, the Company had no commitments not reflected on its balance
sheet. As in prior acquisitions, we intend to use a combination of common stock
and warrants to purchase common stock as the primary means to acquire companies.
Accordingly, the Company’s need to raise significant amounts of cash can be
minimized, provided the companies we acquire are willing to accept non-cash
forms of consideration.
 
 **Investments**
 
 The
Company’s financial condition is dependent on the success of its investments.
The Company intends to invest a substantial portion of its assets in private
companies in the medical products, health care solutions and financial services
industries. These private businesses may be thinly capitalized, unproven, small
companies that lack management depth, are dependent on new, commercially
unproven technologies and have little or no history of operations. The following
is a discussion of our most significant investments at March 31,
2005.
  15
 **
 *Alacra
Corporation*
 
 At March
31, 2005, the Company had an investment in Alacra Corporation (“Alacra”), valued
at $1,000,000, which represents 8.5% of the Company’s total assets. Alacra,
based in New York, is a leading global provider of business and financial
information. Alacra provides a diverse portfolio of fast, sophisticated online
services that allow users to quickly find, analyze, package and present
mission-critical business information. Alacra’s customers include more than 750
leading financial institutions, management consulting, law and accounting firms
and other corporations throughout the world.
 
 On April
20, 2000, the Company purchased $1,000,000 worth of Alacra Series F Convertible
Preferred Stock. The Company has the right to have the preferred stock redeemed
by Alacra for face value plus accrued dividends on December 31, 2006. In
connection with this investment, the Company was granted observer rights on
Alacra board of directors meetings.
 
 *China
Nurse*
 
 On
November 23, 2004, the Company entered into a strategic relationship with China
Nurse LLC ("China Nurse"), an international nurse-recruiting firm based in New
York that focuses on recruiting and training qualified nurses from China and
Taiwan for job placement with hospitals and other health care facilities in the
United States. In connection with this strategic relationship, the Company has
agreed to provide referrals and other assistance and has also made a small
capital investment in that company.
 
 *Digicorp*
 
 At March
31, 2005, the Company had an investment in DigiCorp valued at its cost of
$563,211, which represents 4.8% of the Company’s total assets. On December 29,
2004, the Company entered into a Common Stock Purchase Agreement with certain
shareholders of DigiCorp (the "Agreement"), to purchase an aggregate of
3,453,527 shares of DigiCorp common stock. Of such shares, 1,224,000 shares of
DigiCorp common stock will be purchased from the selling shareholders at such
time as the shares are registered for resale with the SEC. The purchase price
for such shares is $.135 or $.145 per share, depending on when the closing
occurs. Digicorp’s common stock is traded on the OTC Bulletin Board, which
reported a closing price, at March 31, 2005, of $0.25. In connection with the
Agreement, the Company is entitled to designate two members to the Board of
Directors of Digicorp. The Company’s first designee, Melanie Glazer, was
appointed on December 29, 2004. The Company is currently evaluating several
strategic alternatives for the use of the DigiCorp entity, however, no
definitive plan has been decided upon at this time.
 
 *Excelsior
Radio Networks, Inc.*
 
 During
the period from August 12, 2003 through October 22, 2004, the Company liquidated
its investment in Excelsior Radio Networks, Inc. ( **“Excelsior”** ). The
Company sold a total of 1,476,804 shares and warrants to purchase 87,111 shares
of Excelsior common stock. The Company has stock appreciation rights on these
shares that begin to expire on August 8, 2005.
 
 *IPEX,
Inc.*
 
 At March
31, 2005, the Company held 575,000 shares of common stock and warrants to
purchase 220,000 shares of common stock at $1.50 per share and warrants to
purchase 220,000 shares of common stock at $2.00 per share of IPEX, Inc.
( ***“IPEX”*** ),
formerly Administration for International Credit & Investments, Inc, valued
at $1,101,000. IPEX's common stock is traded on the OTC Bulletin Board, which
reported a closing price, at March 31, 2005, of $1.80. The warrants are
exercisable for a period of five years and are callable by IPEX in certain
instances. IPEX operates an electronic market for collecting, detecting,
converting, enhancing and routing telecommunication traffic and digital content.
Members of the exchange anonymously exchange information based on route quality
and price through a centralized, web accessible database and then route traffic.
IPEX’s fully-automatic, highly scalable Voice over Internet Protocol routing
platform updates routes based on availability, quality and price and executes
the capacity request of the orders using proprietary software and delivers them
through IPEX’s system. IPEX invoices and processes payments for its members’
transactions and offsets credit risk through its credit management programs with
third parties.
 
 16
 **
 *Tuxis
Corporation*
 
 On March
16, 2005, Ault Glazer filed a Schedule 13D with the SEC relating to its holdings
in Tuxis Corporation ("Tuxis"). Tuxis, a Maryland corporation, currently is
registered under the 1940 Act, as a closed-end management investment company.
Tuxis previously received Board of Directors and shareholder approval to change
the nature of its business so as to cease to be an investment company and on May
3, 2004, filed an application with the SEC to de-register. At March 31, 2005,
the Company directly held 36,000 shares and indirectly, by virtue of its
relationship with Ault Glazer, held 98,000 shares of Tuxis common stock, which
represented approximately 3.66% and 9.96%, respectively, of the total
outstanding shares. At December 31, 2004, Tuxis had reportable net assets of
approximately $9.1 million.
 
 *Franklin
Capital Properties, LLC*
 
 At March
31, 2005, the Company had several real estate investments, valued at $772,748,
which represents 6.6% of the Company’s total assets. The Company holds its real
estate investments in Franklin Capital Properties, LLC ( ***“Franklin
Properties”*** ), a
Delaware limited liability company and a wholly owned subsidiary. Franklin
Properties primary focus is on the acquisition and management of income
producing real estate holdings. Franklin Properties real estate holdings consist
of eight vacant single family buildings and two multi-unit buildings in
Baltimore, Maryland, approximately 8.5 acres of undeveloped land in Heber
Springs, Arkansas, and various loans secured by real estate in Heber Springs,
Arkansas. Franklin Properties intends to renovate the single family and
multi-unit buildings and engage in an active rental program.
 
 **Results
of Operations**
 
 The
Company accounts for its operations under accounting principles generally
accepted in the United States. The principal measure of the Company’s financial
performance is captioned “Net loss attributable to common shareholders,” which
is comprised of the following:
 
 §
    "Revenues,"
      which is the amount the Company receives from sales of its
      products;
 
 §
    “Interest,
      dividend income and other, net,” which is the amount the Company receives
      from interest and dividends from its short term investments and money
      market accounts, and its proportionate share of income or losses from
      investments accounted for under the equity method of
      accounting;
 
 §
    “Operating
      expenses,” are the related costs and expenses of operating the business;
 
 §
    “Realized
      gain (loss) on investments, net,” which is the difference between the
      proceeds received from dispositions of investments and their stated cost;
      and
 
 §
    “Unrealized
      gain (loss) on marketable securities, net,” which is the net change in the
      fair value of the Company’s marketable securities, net of any (decrease)
      increase in deferred income taxes that would become payable if the
      unrealized appreciation were realized through the sale or other
      disposition of the investment portfolio.
 
 “Realized
gain (loss) on investments, net” and “Unrealized gain (loss) on marketable
securities, net” are directly related. When a security is sold to realize a
gain, the net unrealized gain decreases and the net realized gain increases.
When a security is sold to realize a loss, the net unrealized gain increases and
the net realized gain decreases.
 
 The
Company generally earns interest income from loans, preferred stocks, corporate
bonds and other fixed income securities. The amount of interest income varies
based upon the average balance of the Company's fixed income portfolio and the
average yield on this portfolio.
 
 **Investment
Income**
 
 The
Company had investment income of $28,602 and $165 for the three months ended
March 31, 2005 and March 31, 2004, respectively.
 
 17
 
 The
increase in investment income for the three months ended March 31, 2005 when
compared to March 31, 2004, was primarily the result of an increased amount of
fixed income investments. At March 31, 2005, the Company held in marketable
securities approximately $2.5 million in U.S. Treasuries, whereas, at March 31,
2004, the Company’s primary contributing asset to investment income was its cash
balance of $98,896.
 
 **Expenses**
 
 Operating
expenses were $2,121,673 and $292,848 for the three months ended March 31, 2005
and March 31, 2004, respectively.
 
 The
increase in operating expenses for the three months ended March 31, 2005 when
compared to March 31, 2004, was primarily the result of legal fees and stock
based compensation expenses, and to a lesser extent printing and stock exchange
fees.
 
 Legal
fees for the three months ended March 31, 2005 were $343,837, an increase of
$313,837 over the three months ended March 31, 2004. The increase in legal fees
is attributable to work performed on the Company’s proxy statement and annual
report filed with the SEC, as well as other corporate matters. Additionally, the
Company experienced an increase in ancillary fees as a direct result of the
proxy statement and the related annual meeting of shareholders. These ancillary
fees included an increase in printing fees of $46,242 and AMEX stock exchange
fees of $62,283 compared to the prior comparable period.
 
 A
majority of the Company's operating expenses consist of employee compensation,
office expense, other expenses related to identifying and reviewing investment
opportunities and professional fees. Included in stock based compensation
expense, which is a component of both employee compensation and professional
fees, for the three months ended March 31, 2005, was approximately $96,584
relating to the issuance of warrants to a consultant of the Company, as well as
$552,542 relating to grants of nonqualified stock options and $574,975 related
to restricted stock awards to the Company’s employees, non-employee directors
and consultants performing services for the Company, all of which were expensed
in accordance with SFAS 123(R). During the three months ended March 31, 2004,
the Company had no stock based compensation expense.
 
 **Realized
(losses) gains on investments, net**
 
 During
the three months ended March 31, 2005, the Company realized net losses of
$34,728 from trades of marketable securities.
 
 During
the three months ended March 31, 2004, the Company realized net gains of $49,478
primarily from the disposition of a portion of the Company's equity interest in
Excelsior.
 
 The
Company has relied and continues to rely to a large extent upon proceeds from
sales of investments rather than investment income to defray a significant
portion of its operating expenses. Because such sales cannot be predicted with
certainty, the Company attempts to maintain adequate working capital to provide
for fiscal periods when there are no such sales.
 
 **Unrealized
gains (losses) on marketable securities, net**
 
 Unrealized
gains increased by $343,587 during the three months ended March 31, 2005,
primarily due to the Company’s investment in IPEX, Inc. which had an unrealized
gain of $418,000 for the period then ended.
 
 Unrealized
gains increased by $102,759 during the three months ended March 31, 2004
primarily due to the receipt of shares in Principal Financial Group
( ***“PFG”*** ), offset
by an unrealized loss due to the sale of a portion of the Company’s Excelsior
holdings. In 2001, the Company maintained group life and dental insurance with
PFG. Upon the demutualization of PFG in October 2001, the Company received 4,338
common shares of PFG. However, the Company did not receive any notification for
the receipt of such shares. In the first quarter of 2004 the Company became
aware of its ownership of PFG common shares, and recorded the fair market value
of such shares within unrealized gains
 
 18
 ****
 **Taxes**
 
 The
Company is taxed under Title 26, Chapter 1, Subchapter C of the Internal Revenue
Code of 2004, as amended, and therefore subject to federal income tax on the
portion of its taxable income.
 
 At
December 31, 2004, the Company has a net operating loss carryforward of
approximately $8.6 million to offset future taxable income for federal income
tax purposes. The utilization of the loss carryforward to reduce any such future
income taxes will depend on the Company’s ability to generate sufficient taxable
income prior to the expiration of the net operating loss carryforwards. The
carryforward expires beginning on 2011.
 
 A change
in the ownership of a majority of the fair market value of the Company’s common
stock can delay or limit the utilization of existing net operating loss
carryforwards pursuant to the Internal Revenue Code Section 382. The Company
believes that such a change occurred during the year ended December 31, 2004.
Based upon a detail analysis of purchase transactions of our equity securities,
the Company believes that its net operating loss carryforward utilization is
limited to approximately $755,000 per year.
 
 **Risk
Factors**
 
 *An
investment in our securities involves a high degree of risk relating to our
business, strategy, structure and investment objectives. The risks set out below
are not the only risks we face, and we face other risks which are not yet
predictable or identifiable. If any of the following risks occur, our business,
financial condition and results of operations could be materially adversely
affected. In addition to the risk factors described below, other factors that
could cause actual results to differ materially include:*
 
 *•*
    *changes
      in the economy;****•*
    *risk
      associated with possible disruption in the Company’s operations due to
      terrorism;****•*
    *future
      regulatory actions and conditions in the Company’s operating areas or
      target industries for investments and****•*
    *other
      risks and uncertainties as may be detailed from time to time in the
      Company’s public announcements and SEC
filings.*
 
 **Risks
Relating to our Business and Structure**
 
 **We
recently restructured our investment strategy and objective and have limited
operating history under our new structure. If we cannot successfully implement
our new business structure the value of your investment in our business could
decline.**
 
 Upon the
change of control that occurred in October 2004, we restructured our business
strategy and objective to focus on the medical products, healthcare solutions,
financial services and real estate industries instead of the radio and
telecommunications industries. We have a limited operating history under this
new structure. Historically, we have not typically invested in these industries
and therefore our historical results of operations should not be relied upon as
an indication of our future financial performance. If we do not successfully
implement our new business structure the value of your investment in our
business could decline substantially.
 
 **Withdrawal
of the Company’s election to be treated as a BDC may increase the risks to our
shareholders since we are no longer subject to many of the regulatory
restrictions imposed by, or receive the financial reporting benefits, of the
1940 Act (the** ***“1940
Act”).***
 
 Since we
withdrew our election to be treated as a BDC, we are no longer subject to
regulation under the 1940 Act, which is designed to protect the interests of
investors in investment companies. As a non-BDC, we are no longer subject to
many of the regulatory, financial reporting and other requirements and
restrictions imposed by the 1940 Act including, but not limited to, limitations
on the amounts, types and prices at which we may issue securities, participation
in related party transactions, the payment of compensation to executives, and
the scope of eligible investments.
 
 19
 
 The
nature of our business is changing from investing in radio and
telecommunications companies with the goal of achieving gains on appreciation
and dividend income, to actively operating businesses in the medical products,
health care solutions, financial services and real estate industries, with the
goal of generating income from the operations of those businesses. No assurance
can be given that our business strategy or investment objectives will be
achieved by withdrawing our election to be treated as a BDC.
 
 Further,
our election to withdraw as a BDC under the 1940 Act will result in a
significant change in our method of accounting. BDC financial statement
presentation and accounting utilizes the value method of accounting used by
investment companies, which allows BDCs to recognize income and value their
investments at market value as opposed to historical cost. As an operating
company, the required financial statement presentation and accounting for
securities held will be either fair value, historical cost or equity methods of
accounting, depending on the classification of the investment, our intent with
respect to the period of time we intend to hold the investment and our 
ownership interest in the investment.
 
 A change
in our method of accounting could reduce the market value of our investments in
privately held companies by eliminating our ability to report an increase in the
value of our holdings as they occur. Also, as an operating company, we will have
to consolidate our financial statements with subsidiaries, thus eliminating the
portfolio company reporting benefits available to BDCs.
 
 **We
may need to undertake additional financings to meet our growth, operating and/or
capital needs, which may result in dilution to your ownership and voting
rights.**
 
 We
anticipate that revenue from our operations for the foreseeable future may not
be sufficient to meet our growth, operating and/or capital requirements. We
believe that we currently have the financial resources to meet our operating
requirements for the next twelve months. We may however undertake additional
equity or debt financings to better enable us to meet our future growth,
operating and/or capital requirements. We currently have no commitments for any
such financings. Any equity financing may be dilutive to our stockholders, and
debt financing, if available, may involve restrictive covenants or other adverse
terms with respect to raising future capital and other financial and operational
matters. We may not be able to obtain additional financing in sufficient amounts
or on acceptable terms when needed, which could adversely affect our operating
results and prospects. If we fail to arrange for sufficient capital in the
future, we may be required to reduce the scope of our business activities until
we can obtain adequate financing.
 
 **There
are significant potential conflicts of interest, with our officers, directors,
and our affiliated entities which could adversely affect our results of
operations.**
 
 Certain
of our officers, directors and/or their family members have existing
responsibilities and, in the future, may have additional responsibilities, to
act and/or provide services as executive officers, directors, owners and/or
managers of Ault Glazer & Company Investment Management LLC. In particular,
Milton "Todd" Ault, III, our Chairman and Chief Executive Officer, Melanie
Glazer, Manager of our subsidiary Franklin Capital Properties, LLC, and Lynne
Silverstein, our President and Secretary, are all principals of Ault Glazer
& Company Investment Management LLC. Mr. Ault and Ms. Silverstein devote
approximately 85% of their time to our business, based on a 60-hour, 6-day
workweek. Ms. Glazer works full time for Franklin Capital Properties, LLC. Ms.
Silverstein is the stepdaughter of Louis Glazer, one of our Directors and Chief
Health and Science Officer of Patient Safety Consulting Group, LLC. Accordingly,
certain conflicts of interest may arise from time to time with our officers,
directors and Ault Glazer & Company Investment Management LLC. Because of
these possible conflicts of interest, such individuals may direct potential
business and investment opportunities to other entities rather than to us, which
may not be in the best interest of our stockholders. We will attempt to resolve
any such conflicts of interest in our favor.
 
 Our Board
of Directors does not believe that we currently have any conflicts of interest
with the business of Ault Glazer & Company Investment Management LLC, other
than certain of our officers' responsibility to provide management and
administrative services to Ault Glazer & Company Investment Management LLC.
and its clients from time-to-time. However, subject to applicable law, we may
engage in transactions with Ault Glazer & Company Investment Management LLC.
and other related parties in the future. These related party transactions may
raise conflicts of interest and, although we do not have a formal policy to
address such conflicts of interest, our Audit Committee intends to evaluate
relationships and transactions involving conflicts of interest on a case-by-case
basis and the approval of our Audit Committee is required for all such
transactions. The Audit Committee intends that any related party transactions
will be on terms and conditions no less favorable to us than terms and
conditions reasonably obtainable from third parties and in accordance with
applicable law.
 
 20
 ****
 **Our
management has limited experience in managing and operating a public company.
Any failure to comply or adequately comply with federal securities laws, rules
or regulations could subject us to fines or regulatory actions, which may
materially adversely affect our business, results of operations and financial
condition.**
 
 Prior to
the change in control that occurred in October 2004, our current senior
management was primarily engaged in operating a private investment management
firm. In this capacity they developed a general understanding of the
administrative and regulatory environment in which public companies operate.
However, our senior management lacks practical experience operating a public
company and relies in many instances on the professional experience and advice
of third parties including its consultants, attorneys and accountants. Failure
to comply or adequately comply with any laws, rules, or regulations applicable
to our business may result in fines or regulatory actions, which may materially
adversely affect our business, results of operation, or financial condition.
 
 **We
are dependent upon our Chief Executive Officer for our future success. The
departure of our Chief Executive Officer could materially adversely affect our
ability to run our business.**
 
 Our
future success is dependent on the personal efforts, performance and abilities
of Milton "Todd" Ault, III, our Chairman and Chief Executive Officer. Mr. Ault
is an integral part of our daily operations. Although Mr. Ault does not
currently have any plans to retire or leave our company in the near future, he
is not currently subject to an employment contract with us. The departure of Mr.
Ault as our Chief Executive Officer could have a material adverse effect on our
ability to implement our business strategy or achieve our investment
objective.
 
 **Our
Chief Executive Officer controls a significant portion of our outstanding common
stock and his ownership interest may conflict with our outside stockholders who
may be unable to influence management and exercise control over our
business.**
 
 As of
April 26, 2005, Milton "Todd" Ault, III, our Chief Executive Officer and
Chairman, beneficially owned approximately 27.2% of our common stock. As a
result, Mr. Ault may be able to exert significant influence over our management
and policies to:
 
 ·
    elect
      or defeat the election of our directors;
 ·
    amend
      or prevent amendment of our certificate of incorporation or
      bylaws;
 ·
    effect
      or prevent a merger, sale of assets or other corporate transaction;
      and
 ·
    control
      the outcome of any other matter submitted to the shareholders for
      vote.
 
 Accordingly,
our outside stockholders may be unable to influence management and exercise
control over our business.
 
 **Provisions
of the Delaware General Corporation Law and of our charter and bylaws could
deter takeover attempts and have an adverse impact on the price of our common
stock.**
 
 Our
charter and bylaws, as well as certain statutory and regulatory requirements,
contain certain provisions that may have the effect of discouraging a third
party from making an acquisition proposal for us. These anti-takeover provisions
may inhibit a change of control in circumstances that could give the holders of
our common stock the opportunity to realize a premium over the market price for
our common stock.
 
 
 21
  **Our
financial condition and results of operations will depend on our ability to
manage our future growth effectively.**
 
 As part
of the Restructuring Plan, we changed our business strategy and objective and
are currently recapitalizing our business. As such, our success in achieving our
business objective will depend on our ability to grow effectively and
efficiently. As we grow, we will need to hire, train, supervise and manage new
employees. Our failure to manage our future growth effectively could have a
material adverse effect on our business, financial condition and results of
operations.
 
 **Risks
related to our medical products and healthcare-related
business**
 
 **We
rely on third party manufacturers and suppliers, the loss of which may interrupt
our operations.**
 
 We rely
on third parties to supply raw materials and components and to manufacture our
products. We cannot assure you that we will be able to maintain our existing
supplier and manufacturer relationships or secure additional suppliers and
manufacturers as needed. The loss of a major supplier or manufacturer, the
deterioration of our relationship with a major supplier or manufacturer, changes
by in the specifications of components used in our products, or our failure to
establish good relationships with major new suppliers or manufacturers could
have a material adverse effect on our business, financial condition and results
of operations.
 
 **The
unpredictable product cycles of the medical device and healthcare-related
industries and uncertain demand for products could cause our revenues to
fluctuate.**
 
 Our
target customer base includes hospitals, physicians, nurses and clinics. The
medical device and healthcare-related industries are subject to rapid
technological changes, short product life cycles, frequent new product
introductions and evolving industry standards, as well as economic cycles. If
the market for our products does not grow as rapidly as our management expects,
our revenues could be less than expected. We also face the risk that changes in
the medical device industry, for example, cost-cutting measures, changes to
manufacturing techniques or production standards, could cause our manufacturing,
design and engineering capabilities to lose widespread market acceptance. If our
products do not gain market acceptance or suffer because of competing products,
unfavorable regulatory actions, alternative treatment methods or cures, product
recalls or liability claims, they will no longer have the need for our products
and we may experience a decline in revenues. Adverse economic conditions
affecting the medical device and healthcare-related industries, in general, or
the market for our products in particular, could result in diminished sales,
reduced profit margins and a disruption in our business.
 
 **We
are subject to changes in the regulatory and economic environment in the
healthcare industry, which could adversely affect our
business.**
 
 The
healthcare industry in the United States continues to experience change. In
recent years, the United States Congress and state legislatures have introduced
and debated various healthcare reform proposals. Federal, state and local
government representatives will, in all likelihood, continue to review and
assess alternative healthcare delivery systems and payment methodologies, and
ongoing public debate of these issues is expected. Cost containment initiatives,
market pressures and proposed changes in applicable laws and regulations may
have a dramatic effect on pricing or potential demand for medical devices, the
relative costs associated with doing business and the amount of reimbursement by
both government and third-party payers to persons providing medical services. In
particular, the healthcare industry is experiencing market-driven reforms from
forces within the industry that are exerting pressure on healthcare companies to
reduce healthcare costs. Managed care and other healthcare provider
organizations have grown substantially in terms of the percentage of the
population in the United States that receives medical benefits through such
organizations and in terms of the influence and control that they are able to
exert over an increasingly large portion of the healthcare industry. Managed
care organizations are continuing to consolidate and grow, increasing the
ability of these organizations to influence the practices and pricing involved
in the purchase of medical devices, including our products, which is expected to
exert downward pressure on product margins. Both short-and long-term cost
containment pressures, as well as the possibility of continued regulatory
reform, may have an adverse impact on our business, financial condition and
operating results.
 
 22
 ****
 **We
are subject to government regulation in the United States and abroad, which can
be time consuming and costly to our business.**
 
 Our
products and operations are subject to extensive regulation by numerous
governmental authorities, including, but not limited to, the FDA and state and
foreign governmental authorities. In particular, we must obtain specific
clearance or approval from the FDA before we can market new products or certain
modified products in the United States. The FDA administers the Food, Drug and
Cosmetics Act (the ***"FDC
Act"*** ). Under
the FDC Act, most medical devices must receive FDA clearance through the Section
510(k) notification process ( ***"510(k)"*** ) or the
more lengthy premarket approval ( ***"PMA"*** ) process
before they can be sold in the United States. To obtain 510(k) marketing
clearance, a company must show that a new product is "substantially equivalent"
in terms of safety and effectiveness to a product already legally marketed and
which does not require a PMA. Therefore, it is not always necessary to prove the
actual safety and effectiveness of the new product in order to obtain 510(k)
clearance for such product. To obtain a PMA, we must submit extensive data,
including clinical trial data, to prove the safety, effectiveness and clinical
utility of our products. The process of obtaining such clearances or approvals
can be time-consuming and expensive, and there can be no assurance that all
clearances or approvals sought by us will be granted or that FDA review will not
involve delays adversely affecting the marketing and sale of our products. FDA's
quality system regulations also require companies to adhere to certain good
manufacturing practices requirements, which include testing, quality control,
storage, and documentation procedures. Compliance with applicable regulatory
requirements is monitored through periodic site inspections by the FDA. In
addition, we are required to comply with FDA requirements for labeling and
promotion. The Federal Trade Commission also regulates most device advertising.
 
 In
addition, international regulatory bodies often establish varying regulations
governing product testing and licensing standards, manufacturing compliance,
such as compliance with ISO 9001 standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements and pricing and reimbursement levels. Our inability or failure to
comply with the varying regulations or the imposition of new regulations could
restrict our ability to sell our products internationally and thereby adversely
affect our business, financial condition and operating results.
 
 Failure
to comply with applicable federal, state or foreign laws or regulations could
subject us to enforcement actions, including, but not limited to, product
seizures, injunctions, recalls, possible withdrawal of product clearances, civil
penalties and criminal prosecutions, any one or more of which could have a
material adverse effect on our business, financial condition and operating
results. Federal, state and foreign laws and regulations regarding the
manufacture and sale of medical devices are subject to future changes, as are
administrative interpretations of regulatory requirements. Any such changes may
have a material adverse effect on our business, financial condition and
operating results.
 
 **We
are subject to intense competition in the medical products and health-care
related markets, which could harm our business.**
 
 The
medical products and healthcare solutions industry is highly competitive. We
compete against other medical products and healthcare solutions companies, some
of which are much larger and have significantly greater financial resources,
management resources, research and development staffs, sales and marketing
organizations and experience in the medical products and healthcare solutions
industries than us. In addition, these companies compete with us to acquire
technologies from universities and research laboratories. We also compete
against large companies that seek to license medical products and healthcare
solutions technologies for themselves. We cannot assure you that we will be able
to successfully compete against these competitors in the acquisition,
development, or commercialization of any medical products and healthcare
solutions, funding of medical products and healthcare solutions companies or
marketing of our products and solutions. If we cannot compete effectively
against our competitors, our business, financial condition and results of
operations may be materially adversely affected.
  23
 
 **Our
patents are a key element to the success of our business. In the event we cannot
adequately enforce our patents we may experience a material adverse affect to
our business.**
 
 We own
patents issued in the United States and Europe related to patient safety, among
them, the Safety-Sponge TM System. These patents are a key element to the success
of SurgiCount and our Company as a whole could be materially impacted if the
patent is compromised. Our ability to enforce our patents is subject to general
litigation risks as well as uncertainty as to the enforceability in various
countries We believe that the duration of the applicable patents are adequate
relative to the expected life of the product.
 
 **We
may be subject to product liability claims and if our insurance is not
sufficient to cover product liability claims our business and financial
condition will be materially adversely affected** .
 
 The
nature of our business exposes us to potential product liability risks, which
are inherent in the distribution of medical equipment and healthcare products.
We may not be able to avoid product liability exposure, since third parties
develop and manufacture our equipment and products. If a product liability claim
is successfully brought against us or any third party manufacturer then we would
experience adverse consequences to our reputation, we might be required to pay
damages, our insurance, legal and other expenses would increase, we might lose
customers and/or suppliers and there may be other adverse results.
 
 Through
our subsidiary SurgiCount Medical, Inc. we are in the process of obtaining
general liability insurance to cover claims up to $1,000,000. This insurance, if
obtained, will cover the clinical trial/time study relating to the bar coding of
surgical sponges only. In addition, A Plus International, Inc., the manufacturer
of our surgical sponges, maintains general liability insurance for claims up to
$4,000,000 that covers product liability claims against SurgiCount Medical, Inc.
There can be no assurance that one or more liability claims will not exceed the
coverage limits of any of such policies. If we or our manufacturer are subjected
to product liability claims, the result of such claims could harm our reputation
and lead to less acceptance of our products in the healthcare products market.
In addition, if our insurance or our manufacturer's insurance is not sufficient
to cover product liability claims, our business and financial condition will be
materially adversely affected.
 
 **Risks
related to our real estate holdings**
 
 **The
value of real estate fluctuates depending on conditions in the general economy
and the real estate business. These conditions may limit revenues from our real
estate properties and available cash.**
 
 The value
of our real estate holdings is affected by many factors including, but not
limited to: national, regional and local economic conditions; consequences of
any armed conflict involving or terrorist attacks against the United States; our
ability to secure adequate insurance; local conditions such as an oversupply of
space or a reduction in demand for real estate in a particular area; competition
from other available space; whether tenants consider a property attractive; the
financial condition of tenants, including the extent of tenant bankruptcies or
defaults; whether we are able to pass some or all of any increased operating
costs through to tenants; how well we manage our properties; fluctuations in
interest rates; changes in real estate taxes and other expenses; changes in
market rental rates; the timing and costs associated with property improvements
and rentals; changes in taxation or zoning laws; government regulation;
potential liability under environmental or other laws or regulations; and
general competitive factors. The rents we expect to receive and the occupancy
levels at our properties may not materialize as a result of adverse changes in
any of these factors. If our rental revenue fails to materialize, we generally
would expect to have less cash available to pay our operating costs. In
addition, some expenses, including mortgage payments, real estate taxes and
maintenance costs, generally do not decline when the related rents
decline.
 
 **Our
current real estate holdings are concentrated in Baltimore, Maryland and Heber
Springs, Arkansas. Adverse circumstances affecting these areas generally could
adversely affect our business.**
 
 A
significant proportion of our real estate investments are in Baltimore, Maryland
and Heber Springs, Arkansas and are affected by the economic cycles and risks
inherent to those regions. Like other real estate markets, the real estate
markets in these areas have experienced economic downturns in the past, and we
cannot predict how the current economic conditions will impact these markets in
both the short and long term. Further declines in the economy or a decline in
the real estate markets in these areas could hurt our financial performance and
the value of our properties. The factors affecting economic conditions in these
regions include: business layoffs or downsizing; industry slowdowns; relocations
of businesses; changing demographics; and any oversupply of or reduced demand
for real estate.
 
 24
 ****
 **Risks
related to our common stock**
 
 **Our
historic stock price has been volatile and the future market price for our
common stock may continue to be volatile. Further, the limited market for our
shares will make our price more volatile. This may make it difficult for you to
sell our common stock for a positive return on your
investment.**
 
 The
public market for our common stock has historically been very volatile. Over the
past two fiscal years and the interim quarterly periods, the market price for
our common stock has ranged from $0.50 to $14.75. Any future market price for
our shares may continue to be very volatile. This price volatility may make it
more difficult for you to sell shares when you want at prices you find
attractive. We do not know of any one particular factor that has caused
volatility in our stock price. However, the stock market in general has
experienced extreme price and volume fluctuations that often are unrelated or
disproportionate to the operating performance of companies. Broad market factors
and the investing public's negative perception of our business may reduce our
stock price, regardless of our operating performance. Further, the market for
our common stock is limited and we cannot assure you that a larger market will
ever be developed or maintained. Our common stock is currently listed on the
American Stock Exchange ("AMEX"). The average daily trading volume of our common
stock over the past three months was approximately 16,909 shares. The last
reported sales price for our common stock on April 26, 2005, was $4.51 per
share. Market fluctuations and volatility, as well as general economic, market
and political conditions, could reduce our market price. As a result, this may
make it difficult or impossible for you to sell our common stock.
 
 **There
are a large number of shares of common stock and shares underlying outstanding
warrants from our recent private placement that may be available for future sale
and the sale of these shares may depress the market price of our common
stock.**
 
 As of
April 26, 2005, we had 5,276,328 shares of common stock outstanding. There are
1,517,700 outstanding shares of common stock and 758,841 shares of common stock
issuable upon exercise of outstanding warrants from our recent private placement
being offered pursuant to a Form S-3 filed with the SEC on May 3, 2005. All of
these shares may be sold without restriction. The sale of these shares may
adversely affect the market price of our common stock.
 
 **The
issuance of shares upon exercise of outstanding warrants may cause immediate and
substantial dilution to our existing stockholders.**
 
 The
issuance of shares upon exercise of our outstanding warrants may result in
substantial dilution to the interests of other stockholders since the selling
stockholders may ultimately exercise and sell the full amount issuable on
exercise.
 
 **The
sale or issuance of securities to interested stockholders may be dilutive to our
existing shareholders**
 
 The
Company may from time to time issue common stock, warrants to purchase common
stock, or other securities representing indebtedness to Milton “Todd” Ault III,
Lynne Silverstein, Louis Glazer or Melanie Glazer. Any sale of equity securities
may be dilutive to the Company’s stockholders, and debt financing, if available,
may involve restrictive covenants with respect to raising future capital and
other financial and operational matters. The securities which may be issued to
Milton “Todd” Ault III, Lynne Silverstein, Louis Glazer or Melanie Glazer may
have a material adverse effect on the market price of the Common Stock as a
result of the potential for dilution created by the issuance of additional
common stock, warrants to purchase common stock, or other securities
representing indebtedness. In addition, resales by Milton “Todd” Ault III, Lynne
Silverstein or Louis and Melanie Glazer may be made at times that are adverse to
the interests of other stockholders. Such sales could further consolidate voting
control in Milton “Todd” Ault III, Lynne Silverstein or Louis and Melanie
Glazer.
 
 25
 ****
 **If
we fail to meet continued listing standards of AMEX, our common stock may be
delisted which would have a material adverse effect on the price of our common
stock.**
 
 Our
common stock is currently traded on the American Stock Exchange ("AMEX") under
the symbol "PST". In order for our securities to be eligible for continued
listing on AMEX, we must remain in compliance with certain listing standards.
Among other things, these standards require that we remain current in our
filings with the SEC and comply with certain provisions of the Sarbanes-Oxley
Act of 2002. If we were to become noncompliant with AMEX's continued listing
requirements, our common stock may be delisted which would have a material
adverse affect on the price of our common stock.
 
 **If
we are delisted from AMEX, our common stock may be subject to the "penny stock"
rules of the SEC, which would make transactions in our common stock cumbersome
and may reduce the value of an investment in our stock.**
 
 The
Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the
definition of a "penny stock," for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, Rule 15g-9
require:
 
 ·
    that
      a broker or dealer approve a person's account for transactions in penny
      stocks; and
 ·
    the
      broker or dealer receives from the investor a written agreement to the
      transaction, setting forth the identity and quantity of the penny stock to
      be purchased.
 
 In order
to approve a person's account for transactions in penny stocks, the broker or
dealer must:
 
 ·
    obtain
      financial information and investment experience objectives of the person;
      and
 ·
    make
      a reasonable determination that the transactions in penny stocks are
      suitable for that person and the person has sufficient knowledge and
      experience in financial matters to be capable of evaluating the risks of
      transactions in penny stocks.
 
 The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
 
 ·
    sets
      forth the basis on which the broker or dealer made the suitability
      determination; and
 ·
    that
      the broker or dealer received a signed, written agreement from the
      investor prior to the transaction.
 
 Generally,
brokers may be less willing to execute transactions in securities subject to the
"penny stock" rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
 
 Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
 
 **Risks
related to our financial services business**
 
 **We
operate in a highly competitive market for investment
opportunities.**
 
 A large
number of entities compete with us to make the types of investments that we make
in technology-related companies. We compete with a large number of private
equity and venture capital funds, other equity and non-equity based investment
funds, investment banks and other sources of financing, including traditional
financial services companies such as commercial banks and specialty finance
companies. Many of our competitors are substantially larger and have
considerably greater financial, technical and marketing resources than we do.
For example, some competitors may have a lower cost of funds and access to
funding sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
relationships than us. There can be no assurance that the competitive pressures
we face will not have a material adverse effect on our business, financial
condition and results of operations. Also, as a result of this competition, we
may not be able to take advantage of attractive investment opportunities from
time to time, and we can offer no assurance that we will be able to identify and
make investments that are consistent with our investment objective.
   26
  **Our
business model depends upon the development of strong referral relationships
with private equity and venture capital funds and investment banking
firms.**
 
 If we
fail to maintain our relationships with key firms, or if we fail to establish
strong referral relationships with other firms or other sources of investment
opportunities, we will not be able to grow our portfolio of private companies
and achieve our investment objective. In addition, persons with whom we have
informal relationships are not obligated to provide us with investment
opportunities, and therefore there is no assurance that such relationships will
lead to the origination of equity or other investments.
 
 **We
may experience fluctuations in our quarterly results.**
 
 We may
experience fluctuations in our quarterly operating results due to a number of
factors, including the rate at which we identify and make new investments, the
success rate of our new investments, the level of our expenses, variations in
and the timing of the recognition of realized and unrealized gains or losses,
the degree to which we encounter competition in our markets and general economic
conditions. As a result of these factors, results for any period should not be
relied upon as being indicative of performance in future periods.
 
 **Economic
recessions or downturns could impair our portfolio companies and harm our
operating results.**
 
 Many of
the companies in which we have made or will make investments may be susceptible
to economic slowdowns or recessions. An economic slowdown may affect the ability
of a company to engage in a liquidity event such as a sale, recapitalization, or
initial public offering. Our nonperforming assets are likely to increase and the
value of our portfolio is likely to decrease during these periods. These
conditions could lead to financial losses in our portfolio and a decrease in our
revenues, net income, and assets.
 
 Our
business of making private equity investments and positioning them for liquidity
events also may be affected by current and future market conditions. The absence
of an active senior lending environment may slow the amount of private equity
investment activity generally. As a result, the pace of our investment activity
may slow. In addition, significant changes in the capital markets could have an
effect on the valuations of private companies and on the potential for liquidity
events involving such companies. This could affect the amount and timing of
gains realized on our investments.
 
 **The
inability of our portfolio companies to successfully market their products would
have a negative impact on our investment returns**
 
 Even if
our portfolio companies are able to develop commercially viable products and
services, the market for new products and services is highly competitive and
rapidly changing. Commercial success is difficult to predict and the marketing
efforts of our portfolio companies may not be successful.
 
 **Investing
in private companies involves a high degree of risk** .
 
 The
Company’s portfolio may include investments in private companies. Investments in
private businesses involve a high degree of business and financial risk, which
can result in substantial losses and accordingly should be considered
speculative. Because of the speculative nature and the lack of a public market
for these investments, there is significantly greater risk of loss than is the
case with traditional investment securities. The Company has invested a
substantial portion of its assets in small private companies or start-up
companies. These private businesses tend to be thinly capitalized and unproven,
with risky technologies that lack management depth and have not attained
profitability or have no history of operations. There is generally no publicly
available information about the companies in which we invest, and we rely
significantly on the diligence of our employees and agents to obtain information
in connection with our investment decisions. In addition, some smaller
businesses have narrower product lines and market shares than their competition
and may be more vulnerable to customer preferences, market conditions, loss of
key personnel, or economic downturns, which may adversely affect the return on,
or the recovery of, our investment in such businesses.
  27
  The
Company expects that some of its investments will be a complete loss or will be
unprofitable and that some will appear to be likely to become successful but
never realize their potential. The Company has been risk seeking rather than
risk averse in its approach to its investments. Neither the Company's
investments nor an investment in the Company is intended to constitute a
balanced investment program. The Company has in the past relied, and continues
to rely to a large extent, upon proceeds from sales of investments rather than
investment income or revenue generated from its operating activities to defray a
significant portion of its operating expenses.
 
 **Our
investments in our portfolio companies may be concentrated in one or more
industries and if these industries should decline or fail to develop as expected
our investments will be lost.**
 
 Our
investments in our portfolio companies may be concentrated in one or more
industries. This concentration will mean that our investments will be
particularly dependent on the development and performance of those industries.
Accordingly, our investments may not benefit from any advantages, which might be
obtained with greater diversification of the industries in which our portfolio
companies operate. If those industries should decline or fail to develop as
expected, our investments in our portfolio companies in those industries will be
subject to loss.
 
 **The
lack of liquidity in our investments may adversely affect our
business.**
 
 A portion
of the Company's investments consist of securities acquired directly from the
issuer in private transactions. They may be subject to restrictions on resale or
otherwise be illiquid. We anticipate that there may not be an established
trading market for such securities. Additionally, many of the securities that
the Company may invest in will not be eligible for sale to the public without
registration under the Securities Act of 1933, which could prevent or delay any
sale by the Company of such investments or reduce the amount of proceeds that
might otherwise be realized therefrom. Restricted securities generally sell at a
price lower than similar securities not subject to restrictions on resale.
Further, even if a portfolio company registers its securities and becomes a
reporting corporation under the Securities Exchange Act of 1934, the Company may
be considered an insider by virtue of its board representation and would be
restricted in sales of such corporation's securities.
 
 We
typically exit our investments when the portfolio company has a liquidity event
such as a sale, recapitalization, or initial public offering of the company. The
illiquidity of our investments may adversely affect our ability to dispose of
debt and equity securities at times when it may be otherwise advantageous for us
to liquidate such investments. In addition, if we were forced to immediately
liquidate some or all of the investments in the portfolio, the proceeds of such
liquidation would be significantly less than the value at which we acquired
those investments.
 
 **Our
failure to make follow-on investments in our portfolio companies could impair
the value of our portfolio.**
 
 Following
its initial investments in portfolio companies, the Company may make additional
investments in such portfolio companies as "follow-on" investments, in order to
increase its investment in a portfolio company, and exercise warrants, options
or convertible securities that may be acquired in the original financing. Such
follow-on investments may be made for a variety of reasons including: 1) to
increase the Company's exposure to a portfolio company, 2) to acquire securities
issued as a result of exercising convertible securities that were purchased in a
prior financing, 3) to preserve or reduce dilution of the Company's
proportionate ownership in a subsequent financing, or 4) in an attempt to
preserve or enhance the value of the Company's investment.
 
 There can
be no assurance that the Company will make follow-on investments or have
sufficient funds to make such investments; the Company will have the discretion
to make any follow-on investments as it determines, subject to the availability
of capital resources. The failure to make such follow-on investments may, in
certain circumstances, jeopardize the continued viability of a portfolio company
and the Company's initial investment, or may result in a missed opportunity for
the Company to increase its participation in a successful operation. Even if the
Company has sufficient capital to make a follow-on investment, we may elect not
to make the follow-on investment because we may not want to increase our
concentration of risk or because we prefer other opportunities.
 
 28
 ****
 **We
may not realize gains from our equity investments.**
 
 We
primarily invest in the equity securities of other companies. However, these
equity interests may not appreciate in value and, in fact, may decline in value.
Accordingly, we may not be able to realize gains from our equity interests, and
any gains that we do realize on the disposition of any equity interests may not
be sufficient to offset any other losses we experience.
 
 **There
is uncertainty regarding the value of our investments that are not publicly
trades securities, which could adversely affect the determination of our asset
value.**
 
 The fair
value of investments that are not publicly traded securities is not readily
determinable. Therefore, we value these securities at fair value as determined
in good faith by our Board of Directors based upon the recommendation of its
Valuation Committee. The types of factors that the Valuation Committee takes
into account in providing its fair value recommendation to the Board of
Directors includes, as relevant, the nature and value of any collateral, the
portfolio company’s ability to make payments and its earnings, the markets in
which the portfolio company does business, comparison to valuations of publicly
traded companies, comparisons to recent sales of comparable companies, the
discounted value of the cash flows of the portfolio company and other relevant
factors. Because such valuations are inherently uncertain and may be based on
estimates, our determinations of fair value may differ materially from the
values that would be assessed if a ready market for these securities
existed.
 
 **Our
financial results could be negatively affected if a significant portfolio
investment fails to perform as expected.**
 
 We
acquire controlling equity stakes in companies and our total debt and equity
investment in controlled companies may be significant individually or in the
aggregate. Investments in controlled portfolio companies are generally larger
and in fewer companies than our investments in companies that we do not control.
As a result, if a significant investment in one or more controlled companies
fails to perform as expected, our financial results could be more negatively
affected and the magnitude of the loss could be more significant than if we had
made smaller investments in more companies.
 
 **We
borrow money, which magnifies the potential for gain or loss on amounts invested
and may increase the risk of investing in us.**
 
 Borrowings,
also known as leverage, magnify the potential for gain or loss on amounts
invested and, therefore, increase the risks associated with investing in our
securities. We may borrow from and issue senior debt securities to banks,
insurance companies, and other lenders. Lenders of these senior securities have
fixed dollar claims on our consolidated assets that are superior to the claims
of our common shareholders. If the value of our consolidated assets increases,
then leveraging would cause the value of our consolidated assets to increase
more sharply than it would have had we not leveraged. Conversely, if the value
of our consolidated assets decreases, leveraging would cause the value of our
consolidated net assets to decline more sharply than it otherwise would have had
we not leveraged. Similarly, any increase in our consolidated income in excess
of consolidated interest payable on the borrowed funds would cause our net
income to increase more than it would without the leverage, while any decrease
in our consolidated income would cause net income to decline more sharply than
it would have had we not borrowed. Leverage is generally considered a
speculative investment technique.
 
 **Changes
in interest rates may affect our cost of capital and net investment
income.**
 
 Because
we may borrow money to make investments, our net income is partially dependent
upon the difference between the rate at which we borrow funds and the rate at
which we invest these funds. As a result, there can be no assurance that a
significant change in market interest rates will not have a material adverse
effect on our net income. In periods of rising interest rates, our cost of funds
would increase, which would reduce our net income. We may use a combination of
long-term and short-term borrowings and equity capital to finance our investing
activities. We may use interest rate risk management techniques in an effort to
limit our exposure to interest rate fluctuations. Such techniques may include
various interest rate hedging activities. Accordingly, no assurances can be
given that such changes will not have a material adverse effect on the return
on, or the recovery of, the Company’s investments.
 
 29
 ****
 **Item
3.**  **Quantitative
and Qualitative Disclosures About Market Risk.**
 
 The
Company's business activities contain elements of risk. The Company considers a
principal type of market risk to be valuation risk. Investments and other assets
are valued at fair value as determined in good faith by the Board of Directors.
 
 The
Company has invested a substantial portion of its assets in private development
stage or start-up companies. These private businesses tend to be thinly
capitalized, unproven, small companies that lack management depth and have not
attained profitability or have no history of operations. Because of the
speculative nature and the lack of public market for these investments, there is
significantly greater risk of loss than is the case with traditional investment
securities. The Company expects that some of its venture capital investments
will be a complete loss or will be unprofitable and that some will appear to be
likely to become successful but never realize their potential.
 
 Because
there is typically no public market for the equity interests of the small
companies in which the Company invests, the valuation of the equity interests in
the Company's portfolio is subject to the estimate of the Company's Board of
Directors. In making its determination, the Board may consider valuation
information provided by an independent third party or the portfolio company
itself. In the absence of a readily ascertainable market value, the estimated
value of the Company's portfolio of equity interests may differ significantly
from the values that would be placed on the portfolio if a ready market for the
equity interests existed. Any changes in valuation are recorded in the Company's
consolidated statements of operations as "Net increase (decrease) in unrealized
appreciation on investments."
 
 **Item
4.**  **Controls
and Procedures.**
 
 As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and chief
financial officer of our disclosure controls and procedures (as defined in Rule
13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
our chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms. There was no change in
our internal controls or in other factors that could affect these controls
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
 **PART
II - OTHER INFORMATION**
 
 **Item
1.**  **Legal
Proceedings.**
 
 On
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin Capital Corp. (n/k/a Patient Safety
Technologies, Inc.), Sunshine Wireless, LLC, and four other defendants
affiliated with Winstar Communications, Inc. On February 25, 2003, the case
against Franklin Capital and Sunshine Wireless was dismissed. However, on
October 19, 2004, the plaintiffs exercised their right to appeal. The initial
lawsuit alleged that the Winstar Communications defendants conspired to commit
fraud and breached their fiduciary duty to the plaintiffs in connection with the
acquisition of the plaintiffs' radio production and distribution business. The
complaint further alleged that Franklin Capital and Sunshine Wireless joined the
alleged conspiracy. The plaintiffs seek recovery of damages in excess of
$10,000,000, costs and attorneys' fees. An unfavorable outcome in an appeal,
together with an unfavorable outcome in the lawsuit may have a material adverse
effect on Franklin Capital's business, financial condition and results of
operations. The Company believes the lawsuit is without merit and intends to
vigorously defend itself.
 
 30
 ****
 **Item
2.**  **Unregistered
Sales of Equity Securities and Use of Proceeds.**
 
 On
February 25, 2005, in connection with the acquisition of SurgiCount Medical,
Inc., a California corporation, issued the former shareholders of SurgiCount
Medical an aggregate of 190,000 shares (570,000 shares post 3:1 forward stock
split) of common stock. An additional 10,000 shares (30,000 shares post 3:1
forward stock split) of common stock otherwise issuable to the shareholders
pursuant to the merger agreement were deposited into an escrow account to be
held for a period of six months following the completion of the transaction to
secure certain rights to indemnification from the shareholders based on breaches
or inaccuracies of the representations and warranties made by the shareholders
in connection with the acquisition.
 
 In
addition, in the event that, prior to the fifth anniversary of the closing of
the acquisition of SurgiCount Medical, the cumulative gross revenues of
SurgiCount Medical exceed $500,000, the shareholders are entitled to receive an
additional 16,667 shares (50,000 shares post 3:1 forward stock split) (for a
total of 216,667 shares, 650,000 shares post 3:1 forward stock split) of common
stock. Likewise, in the event that, prior to the fifth anniversary of the
closing of the transaction, the cumulative gross revenues of SurgiCount Medical
exceed $1,000,000, the shareholders will be entitled to receive an additional
16,667 shares (50,000 shares post 3:1 forward stock split) (for a total of
233,334 shares, or 700,000 shares post 3:1 forward stock split) of common
stock.
 
 The
foregoing issuances were made in reliance upon the exemption provided in Section
4(2) of the Securities Act and the safe harbor of Rule 506 under Regulation D
promulgated under the Securities Act. No form of general solicitation or general
advertising was conducted in connection with the Private Placement. Each of the
certificates representing shares of Common Stock sold and issued in connection
with the Merger contains a restrictive legend preventing the sale, transfer or
other disposition of such shares, unless registered under the Securities Act,
and each Shareholder was informed by the Company of these restrictions prior to
the issuance of the shares.
 
 **Item
3.**  **Defaults
Upon Senior Securities.**
 
 None
 
 **Item
4.**  **Submission
of Matters to a Vote of Security Holders.**
 
 The
following proposals were submitted to shareholders at our annual meeting of
stockholders held March 30, 2005 and were approved by a majority of the shares
present at the meeting.
 
 1. To
elect Lytle Brown III as a Class I Director to hold office for a three-year term
expiring in 2007, or until his successor has been duly elected and qualified or
until his earlier death, resignation or removal, in accordance with the
Company’s bylaws, as amended. This proposal was approved. Results of the voting
were as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Shares
      Withheld**
    
    **Broker
      non-votes**Common
      Stock
    
    1,661,164
    
    8,022
    
    N/APreferred
      Stock
    
    10,750
    
    0
    
    N/ACommon
      Stock and Preferred Stock
    
    1,671,914
    
    8,022
   31
 
 2. To
ratify the appointment by the Board of Directors of Rothstein, Kass &
Company, P.C. to serve as independent auditors for the fiscal year ended
December 31, 2004. This proposal was approved. Results of the voting were as
follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,658,634
    
    9,858
    
    694
    
    0Preferred
      Stock
    
    10,750
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,669,384
    
    9,858
    
    694
    
    0
 
 3. The
authorization and approval of the stock option component of the stock option and
restricted stock plan. This proposal was approved. Results of the voting were as
follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,404,218
    
    18,461
    
    26,131
    
    220,376Preferred
      Stock
    
    10,750
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,414,968
    
    18,461
    
    26,131
    
    220,376
 
 4. The
authorization and approval of the restricted stock component of the stock option
and restricted stock plan. This proposal was approved. Results of the voting
were as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,428,791
    
    18,888
    
    1,131
    
    220,376Preferred
      Stock
    
    10,750
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,439,541
    
    18,888
    
    1,131
    
    220,376
 
 5. To
authorize and approve the payment of cash and equity compensation to Milton
“Todd” Ault III, Lynne Silverstein, and Louis Glazer and Melanie Glazer, each of
whom may be deemed to be an “interested stockholder” (as defined in Section 203
of the Delaware General Corporate Law (“DGCL”)) of the Company. This proposal
was approved. Results of the voting were as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,062,547
    
    21,407
    
    1,429
    
    220,376Preferred
      Stock
    
    0
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,062,547
    
    21,407
    
    1,429
    
    220,376
   32
 
 6. To
authorize and approve the sale of common stock, warrants to purchase common
stock and other securities representing indebtedness convertible into common
stock to Mr. Ault, Ms. Silverstein and the Mr. and Ms. Glazer, on terms that are
approved by the Board consistent with its fiduciary duties and market terms
existing at the time of such offering, including those relating to price per
share, interest rate, warrant coverage and registration rights for such
issuances and the requirements of applicable law, including the Investment
Company Act of 1940, as amended (the “Investment Company Act”). This proposal
was approved. Results of the voting were as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,063,659
    
    20,218
    
    1,506
    
    220,376Preferred
      Stock
    
    0
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,063,659
    
    20,218
    
    1,506
    
    220,376
 
 7. To
authorize and approve a certificate of amendment to the Amended and Restated
Certificate of Incorporation of the Company to reduce the par value of the
Common Stock from $1.00 per share to $0.33 per share and effect a three-for-one
forward split of the common stock. This proposal was approved. Results of the
voting were as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,665,354
    
    2,853
    
    979
    
    0Preferred
      Stock
    
    10,750
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,676,104
    
    2,853
    
    979
    
    0
 
 
 8. To
authorize and approve the prospective issuance of bonds, notes or other
evidences of indebtedness that are convertible into common stock in accordance
with the requirements of the Investment Company Act. This proposal was approved.
Results of the voting were as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,438,999
    
    9,020
    
    791
    
    220,376Preferred
      Stock
    
    10,750
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,449,749
    
    9,020
    
    791
    
    220,376
 
 9. To
authorize and approve the Board to withdraw the Company’s election to be treated
as a business development company (“BDC”) pursuant to Section 54(c) under the
Investment Company Act. This proposal was approved. Results of the voting were
as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,433,357
    
    14,722
    
    731
    
    220,376Preferred
      Stock
    
    10,750
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,444,107
    
    14,722
    
    731
    
    220,376
 
 33
 
 10. To
authorize and approve a Certificate of Amendment to change the name of the
Company to “Patient Safety Technologies, Inc.” This proposal was approved.
Results of the voting were as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,440,603
    
    5,565
    
    2,642
    
    220,376Preferred
      Stock
    
    10,750
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,451,353
    
    5,565
    
    2,642
    
    220,376
 
 11. To
authorize and approve a Certificate of Amendment to decrease the authorized
number of shares of common stock from 50,000,000 shares to 25,000,000 shares and
decrease the authorized number of shares of preferred stock from 10,000,000
shares to 1,000,000 shares. This proposal was approved. Results of the voting
were as follows:
 
 **No.
      of Shares****Shares
      For**
    
    **Against**
    
    **Abstain**
    
    **Broker
      non-votes**Common
      Stock
    
    1,661,508
    
    4,311
    
    3,367
    
    0Preferred
      Stock
    
    10,750
    
    0
    
    0
    
    0Common
      Stock and Preferred Stock
    
    1,672,258
    
    4,311
    
    3,367
    
    0
 
 No other
matters were submitted to a vote of security holders during the first quarter
ended March 31, 2005.
 
 **Item
5.**  **Other
Information.**
 
 None.
 
 **Item
      6.**
    **Exhibits.**
 
 **Exhibit
      Number**
    
    **Description**31.1
    
    Certification
      by Chief Executive Officer and Chief Financial Officer, required by Rule
      13a-14(a) or Rule 15d-14(a) of the Exchange Act, promulgated pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification
      by Chief Executive Officer and Chief Financial Officer, required by Rule
      13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of
      Chapter 63 of Title 18 of the United States Code, promulgated pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.
   34
   **SIGNATURES**
 
 Pursuant
to the requirements 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.
  ****PATIENT
      SAFETY TECHNOLOGIES, INC.****Date: May 16, 2005
    By:
    /s/ Milton “Todd” Ault
      IIIMilton “Todd” Ault IIIChairman
      & Chief Executive Officer
 
 35