**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-Q/A**


**Amendment
      No. 2**







x
            
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




FOR
      THE
      QUARTERLY PERIOD ENDED SEPTEMBER 30, 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)****1800
                Century Park East, Ste. 200**
              **Los
                Angeles, California 90067**
              **(Address
                of principal executive
                offices)**




**Registrant’s
      telephone number, including area code:** **(310)
      895-7750**




**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





Indicate
      by check mark whether the registrant is a shell company (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
      November 7, 2005, there were 5,626,708 shares outstanding of the Registrant’s
      common stock, $0.33 par value.











**PATIENT
      SAFETY TECHNOLOGIES, INC.**




**FORM
      10-Q FOR THE NINE MONTHS**


**ENDED
      SEPTEMBER 30, 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
            18Item
                3. Quantitative
                and
                Qualitative Disclosures About Market Risk
            40Item
                4. Controls and
                Procedures
            40**PART
                II - OTHER INFORMATION**Item
                1. Legal
                Proceedings
            41Item
                2. Unregistered
                Sales of
                Equity Securities and Use of Proceeds
            41Item
                3. Defaults Upon
                Senior
                Securities
            41Item
                4. Submission of
                Matters to a
                Vote of Security Holders
            41Item
                5. Other
                Information
            41Item
                6. Exhibits
            42**SIGNATURES**
            43








**PART
      I - FINANCIAL INFORMATION**





**Item
      1.**  **Financial
      Statements.**




**PATIENT
                        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Condensed
                        Consolidated Balance Sheets (Unaudited)****September
                        30,**
                    
                    **December
                        31,****2005**
                    
                    **2004
                        *****ASSETS****CURRENT
                        ASSETS**Cash
                        and cash equivalents
                    
                    $
                    162,980
                    
                    $
                    846,404Restricted
                        cash
                    
                    
                    237,731Accounts
                        receivable
                    
                    
                    937,500Marketable
                        securities
                    
                    
                    1,110,695
                    
                    
                    3,487,719Other
                        current assets
                    
                    
                    307,684
                    
                    
                    255,510**TOTAL
                        CURRENT ASSETS**
                    
                    
                    2,756,590
                    
                    
                    4,589,633Property
                        and equipment, net
                    
                    
                    202,171
                    
                    
                    23,657Patents,
                        net
                    
                    
                    4,495,027Long-term
                        investments
                    
                    
                    3,344,335
                    
                    
                    2,320,953**TOTAL
                        ASSETS**
                    
                    $
                    10,798,123
                    
                    $
                    6,934,243**LIABILITIES
                        AND STOCKHOLDERS' EQUITY****CURRENT
                        LIABILITIES**Notes
                        payable
                    
                    $
                    1,815,504
                    
                    $
                    892,530Accounts
                        payable and accrued liabilities
                    
                    
                    1,544,086
                    
                    
                    939,568Marketable
                        securities, sold short
                    
                    
                    
                    
                    
                    1,075,100Due
                        to broker
                    
                    
                    874,500
                    
                    
                    460,776**TOTAL
                        CURRENT LIABILITIES**
                    
                    
                    4,234,090
                    
                    
                    3,367,974**COMMITMENTS
                      AND CONTINGENCIES****STOCKHOLDERS'
                        EQUITY**Convertible
                        preferred stock, $1 par value, cumulative 7% dividend:1,000,000
                        shares authorized; 10,950 issued and outstandingat
                        September 30, 2005 and December 31, 2004(Liquidation
                        preference $1,095,000)
                    
                    
                    10,950
                    
                    
                    10,950Common
                        stock, $0.33 par value: 25,000,000 shares authorized;6,969,948
                        shares issued and 5,603,283 shares outstanding as of September
                        30, 2005;
                        6,128,067shares
                        issued and 4,670,703 shares outstanding at December 31,
                        2004
                    
                    
                    2,300,083
                    
                    
                    2,022,262Paid-in
                        capital
                    
                    
                    21,879,775
                    
                    
                    13,950,775Other
                        comprehensive income
                    
                    
                    478,125Accumulated
                        deficit
                    
                    
                    (15,566,179
                    )
                    
                    (9,800,885
                    )9,102,754
                    
                    
                    6,183,102Deduct:
                        1,366,665 and 1,457,364 shares of treasury stock,at
                        cost, at September 30, 2005 and December 31, 2004,
                        respectively
                    
                    
                    (2,538,721
                    )
                    
                    (2,616,833
                    )**TOTAL
                        STOCKHOLDERS' EQUITY**
                    
                    
                    6,564,033
                    
                    
                    3,566,269**TOTAL
                        LIABILITIES AND STOCKHOLDERS' EQUITY**
                    
                    $
                    10,798,123
                    
                    $
                    6,934,243
  *
                        Restated to include the impact of share-based compensation
                        expense
  The
                        accompanying notes are an integral part of these condensed
                        consolidated
                        financial
                        statements.
  1
  **PATIENT
                      SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Condensed
                      Consolidated Statements of Operations and Comprehensive Income
                      (Loss)
                      (Unaudited)**
  **Three
                        Months Ended**
                    
                    
                    **Nine
                        Months Ended****September 30,**
                    
                    
                    **September 30,**
                    
                    
                    **September 30,**
                    
                    
                    **September 30,****2005**
                    
                    
                    **2004**
                    
                    
                    **2005**
                    
                    
                    **2004****REVENUES**
                    
                    $
                    29,693
                    
                    $
                    —
                    
                    $
                    616,320
                    
                    $
                    —**EXPENSES**Salaries
                        and employee benefits
                    
                    
                    1,105,152
                    
                    
                    611,871
                    
                    
                    3,215,248
                    
                    
                    873,802Professional
                        fees
                    
                    
                    497,984
                    
                    
                    579,200
                    
                    
                    1,952,929
                    
                    
                    820,322Rent
                    
                    
                    35,367
                    
                    
                    18,653
                    
                    
                    59,845
                    
                    
                    55,607Insurance
                    
                    
                    27,594
                    
                    
                    17,038
                    
                    
                    71,172
                    
                    
                    51,113Taxes
                        other than income taxes
                    
                    
                    34,385
                    
                    
                    5,972
                    
                    
                    80,367
                    
                    
                    24,772Amortization
                        of patents
                    
                    
                    81,235
                    
                    
                    
                    
                    
                    189,549General
                        and administrative
                    
                    
                    346,715
                    
                    
                    54,581
                    
                    
                    807,744
                    
                    
                    139,409**Operating
                        expenses**
                    
                    
                    2,128,432
                    
                    
                    1,287,315
                    
                    
                    6,376,854
                    
                    
                    1,965,025**Operating
                        loss**
                    
                    
                    (2,098,739
                    )
                    
                    (1,287,315
                    )
                    
                    (5,760,534
                    )
                    
                    (1,965,025
                    )Interest,
                        dividend income and other, net
                    
                    
                    1,234
                    
                    
                    155
                    
                    
                    41,321
                    
                    
                    369Equity
                        in income (loss) of investee
                    
                    
                    (59,796
                    )
                    
                    
                    
                    
                    (76,816
                    )Realized
                        gains on investments, net
                    
                    
                    149,204
                    
                    
                    150,000
                    
                    
                    252,848
                    
                    
                    650,878Interest
                        expense
                    
                    
                    (23,899
                    )
                    
                    (8,850
                    )
                    
                    (85,460
                    )
                    
                    (26,778
                    )Unrealized
                        losses on marketable securities, net
                    
                    
                    (123,318
                    )
                    
                    (150,000
                    )
                    
                    (80,115
                    )
                    
                    (66,256
                    )**Net
                        loss**
                    
                    
                    (2,155,314
                    )
                    
                    (1,296,010
                    )
                    
                    (5,708,756
                    )
                    
                    (1,406,812
                    )**Preferred
                        dividends**
                    
                    
                    (19,162
                    )
                    
                    (19,162
                    )
                    
                    (56,538
                    )
                    
                    (57,488
                    )**Net
                        loss attributable to common shareholders**
                    
                    $
                    (2,174,476
                    )
                    $
                    (1,315,172
                    )
                    $
                    (5,765,294
                    )
                    $
                    (1,464,300
                    )**Basic
                        and diluted net loss per common share**
                    
                    $
                    (0.39
                    )
                    $
                    (0.42
                    )
                    $
                    (1.09
                    )
                    $
                    (0.47
                    )**Weighted
                        average common shares outstanding**
                    
                    
                    5,515,360
                    
                    
                    3,139,050
                    
                    
                    5,287,831
                    
                    
                    3,094,626**Comprehensive
                        income (loss):****Net
                        loss**
                    
                    $
                    (2,155,314
                    )
                    $
                    (1,296,010
                    )
                    $
                    (5,708,756
                    )
                    $
                    (1,406,812
                    )**Other
                        comprehensive income (loss)**
                    
                    
                    (680,625
                    )
                    
                    
                    
                    
                    478,125**Comprehensive
                        loss**
                    
                    $
                    (2,835,939
                    )
                    $
                    (1,296,010
                    )
                    $
                    (5,230,631
                    )
                    $
                    (1,406,812
                    )
 *
                      Restated to include the impact of share-based compensation
                      expenseThe
                      accompanying notes are an integral part of these condensed
                      consolidated
                      financial statements.
  2
  **PATIENT
                          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Condensed
                          Consolidated Statements of Cash Flows (Unaudited)**
  **Nine
                            Months Ended****September 30,**
                        
                        **September 30,****2005**
                        
                        **2004
                            ***Cash
                            flows from operating activities:Net
                            loss
                        
                        $
                        (5,708,756
                        )
                        $
                        (1,406,812
                        )Adjustments
                            to reconcile net loss to net cash (used in) provided
                            by operating
                            activities:Depreciation
                        
                        
                        13,207Amortization
                            of patents
                        
                        
                        189,549Realized
                            gains on investments, net
                        
                        
                        (252,848
                        )
                        
                        (650,878
                        )Unrealized
                            loss on marketable securities
                        
                        
                        80,115
                        
                        
                        66,256Stock
                            based compensation to employees and directors
                        
                        
                        2,518,047
                        
                        
                        5,094Stock
                            based compensation to consultants
                        
                        
                        1,191,232Stock
                            received for services
                        
                        
                        (10,000
                        )Loss
                            on investee
                        
                        
                        76,816Changes
                            in operating assets and liabilities:Restricted
                            cash
                        
                        
                        (237,731
                        )Accounts
                            receivable
                        
                        
                        (937,500
                        )Purchases
                            of marketable investment securities, net
                        
                        
                        1,576,299
                        
                        
                        1,024,332Other
                            current assets
                        
                        
                        (72,174
                        )
                        
                        35,873Accounts
                            payable and accrued liabilities
                        
                        
                        567,143
                        
                        
                        920,650Due
                            to broker
                        
                        
                        413,724Net
                            cash used in operating activities
                        
                        
                        (592,877
                        )
                        
                        (5,485
                        )Cash
                            flows from investing activities:Purchase
                            of property and equipment
                        
                        
                        (124,827
                        )Purchase
                            of SurgiCount
                        
                        
                        (432,398
                        )Proceeds
                            from sale of long-term investments
                        
                        
                        376,720Purchases
                            of long-term investments
                        
                        
                        (903,173
                        )Net
                            cash used in investing activities
                        
                        
                        (1,083,678
                        )Cash
                            flows from financing activities:Proceeds
                            from issuance of common stock and warrants
                        
                        
                        100,000Proceeds
                            from exercise of stock options
                        
                        
                        26,250
                        
                        
                        39,375Cash
                            proceeds related to 16B filing
                        
                        
                        
                        
                        
                        2,471Purchases
                            of treasury stock
                        
                        
                        (36,931
                        )Payments
                            of preferred dividends
                        
                        
                        (19,162
                        )
                        
                        (57,488
                        )Proceeds
                            from notes payable
                        
                        
                        1,000,000Payments
                            and decrease in notes
                        
                        
                        (77,026
                        )
                        
                        (12,795
                        )Net
                            cash provided by (used in) financing activities
                        
                        
                        993,131
                        
                        
                        (28,437
                        )Net
                            decrease in cash and cash equivalents
                        
                        
                        (683,424
                        )
                        
                        (33,922
                        )Cash
                            and cash equivalents at beginning of period
                        
                        
                        846,404
                        
                        
                        224,225Cash
                            and cash equivalents at end of period
                        
                        $
                        162,980
                        
                        $
                        190,303Supplemental
                            disclosures of cash flow information:Cash
                            paid during the period for interest
                        
                        $
                        33,904
                        
                        $
                        228Issuance
                            of common stock and warrants in connection with SurgiCount
                            acquisition
                        
                        $
                        4,232,178
                        
                        $
                        —Issuance
                            of common stock in connection with asset purchase
                            agreement
                        
                        $
                        66,895
                        
                        $
                        —Issuance
                            of common stock in connection with land acquisition
                        
                        $
                        85,619
                        
                        $
                        —Issuance
                            of common stock in connection with purchase of marketable
                            securities
                        
                        $
                        101,640
                        
                        $
                        —Dividends
                            accrued
                        
                        $
                        56,538
                        
                        $
                        19,163
  *
                            Restated to include the impact of share-based compensation
                            expenseThe
                            accompanying notes are an integral part of these condensed
                            consolidated
                            financial statements.
 3
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Condensed Consolidated Financial Statements - Unaudited**
 **September
          30, 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 and health care solutions
          industries.
 
 Currently,
          the Company has four wholly-owned operating subsidiaries: (1) SurgiCount
          Medical, Inc., a California corporation; (2) Patient Safety Consulting
          Group,
          LLC, a Delaware Limited Liability Company; (3) Ault
          Glazer Bodnar Capital Properties, LLC ,
          a
          Delaware Limited Liability Company; and (4) Ault Glazer Bodnar Merchant
          Capital,
          Inc., a Delaware corporation.
 
 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. SurgiCount Medical, Inc., a provider of patient
          safety
          devices and Patient Safety Consulting Group, LLC, a healthcare consulting
          services company, focus on the Company’s primary target industries, the health
          care and medical products field. Ault Glazer Bodnar Merchant Capital, Inc.
          ( ***“AGB
          Merchant Capital”*** )
          was
          formed on June 27, 2005, to hold the Company’s non-patient safety related
          assets, such as Ault
          Glazer Bodnar Capital Properties, LLC ( ***“AGB
          Properties”*** ),
          a real
          estate development and management company. AGB Merchant Capital is in the
          process of divesting the Company’s investments in the financial services and
          real estate industries.
 
 **Liquidity**
 
 The
          Company has a working capital deficiency of approximately $1.5 million
          at
          September 30, 2005. For the nine months ended September 30, 2005, the Company
          has incurred a loss of approximately $5.8 million and has utilized approximately
          $0.6 million in cash in its operations. Further, as of September 30, 2005
          and
          through the date hereof, the Company has yet to generate revenues from
          its
          medical products and healthcare solutions segments. During the nine months
          ended
          September 30, 2005, the Company has relied on liquidating investments and
          certain financing to fund its operations. Management believes, however
          no
          assurances can be made, that these avenues will continue to be available
          to the
          Company to fund its operations for the 12 months subsequent to September
          30,
          2005, or until the fruition of adequate cash flow from its medical products
          and
          healthcare solutions segments. However, long-term liquidity is dependent
          on the
          Company’s ability to attain future profitable operations.
 
 **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.
  4
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
  **Reclassifications**
  Certain
          amounts reported in the condensed consolidated financial statements, as
          of
          September 30, 2004, have been reclassified to conform with the presentation
          adopted to report September 30, 2005 results.
 
 **Revenue
          Recognition**
  Consulting
          service contract revenue is recognized when the service is performed.
          Consequently, the recognition of such revenue is deferred until each phase
          of
          the contract is complete. This method is predominately used by the Financial
          Services and Real Estate segment. Service activities may include the following:
          financial advice on mergers, acquisitions, restructurings and similar corporate
          finance matters.
  **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.
 
 *Equity
          Method.* Included
          in long-term investments are investments in companies in which the Company
          has a
          20% to 50% interest. These investments are carried at cost, adjusted for
          the
          Company’s proportionate share of their undistributed earnings or losses. The
          Company’s proportionate share of income or losses are recorded in equity in
          income (loss) of investee.
 
 **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
          and
          nine months ended September 30, 2005, the Company had stock-based compensation
          expense included in reported net loss of $340,103 and $1,230,551, respectively. 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:
  5
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial
            Statements (continued)**
  **Nine
                    months ended September 30,****2005**
                
                **2004**Weighted
                    average risk free interest rates
                
                
                
                3.75%
                
                3.00%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
                
                
                
                
                $
                5.03
                
                $
                0.50
 
 **Comprehensive
          Income (Loss)**
 
 The
          Company applies SFAS No. 130, *“Reporting
          Comprehensive Income.”* Comprehensive
          income (loss) consists of the after tax net change in unrealized gains
          and
          losses on securities classified as available for sale by the Company during
          the
          three and nine months ended September 30, 2005 and 2004 that have been
          excluded
          from net loss and reflected instead in stockholders’ equity. At September 30,
          2005, the only investments designated as available for sale were the Company’s
          restricted holdings in IPEX, Inc. **(** ***“IPEX”*** **)** and its
          investment in Alacra Corporation **(** ***“Alacra”*** **)** .
 
 **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.
 
 Options
          and warrants outstanding as of September 30, 2005 to purchase 719,000 and
          1,249,683 shares of common stock, respectively, and 246,375 shares issuable
          upon
          conversion of outstanding convertible preferred stock were not included
          in the
          computation of diluted net loss per common share for the three and nine
          months
          ended September 30, 2005, as their inclusion would have been antidilutive.
 
 Options
          outstanding as of September 30, 2004 to purchase 61,875 shares of common
          stock,
          and 246,375 shares issuable upon conversion of outstanding convertible
          preferred
          stock were not included in the computation of diluted net loss per common
          share
          for the three and nine months ended September 30, 2004, as their inclusion
          would
          have been antidilutive.
 
 **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.
  6
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial
            Statements (continued)**
 During
          the nine months ended September 30, 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 and 20,444 shares of common stock held in treasury
          to
          purchase 0.61 acres of vacant land in Springfield, Tennessee.
 
 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-Sponge TM 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 valued at $62,505 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-Sponge TM System  into
          the
          existing acute care supply chain by February 5, 2006, then the Company
          will
          issue Health West the remaining 15,756 shares. On August 17, 2005, the
          Company
          entered into a comprehensive manufacturing agreement with A Plus Manufacturing
          and at that time agreed to issue 15,756 shares, valued at $93,748, to Health
          West. As an additional incentive the Company granted Health West warrants
          to
          purchase a total of 175,000 shares of the Company’s common stock as discussed in
          Note 13. 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.
 
 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
          held
          in treasury 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
          May
          12, 2005, the Company entered into an asset purchase agreement whereby
          the
          Company purchased all of the assets of Cinapse Digital Media, a sole
          proprietorship, for the issuance of 17,241 shares of common stock held
          in
          treasury and 8,621 warrants to purchase common stock at an exercise price
          of
          $5.80 and a contractual life of 5 years. The assets were valued at $66,895
          and
          consisted primarily of computers and equipment utilized in the production
          of
          digital video. Simultaneously with the asset purchase, the Company formed
          Cinapse Digital Media, LLC, a 50% owned Delaware limited liability company,
          and
          contributed the acquired assets. The Company consolidates its investment
          in
          Cinapse Digital Media, LLC. Cinapse Digital Media, LLC produces digital
          video
          for corporate clients and will also produce digital training videos for
          the
          Company’s patient safety devices.
 
 On
          July
          19, 2005, the Company entered into a stock purchase agreement pursuant
          to which
          the Company sold to an investor 38,000 shares of the Company's common stock
          held
          in treasury. As consideration the Company received 12,000 shares of Tuxis
          Corporation **(** ***“Tuxis”*** **)** common
          stock valued at approximately $102,000.
 
 7
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial
            Statements (continued)**
  **5.
          STOCK REPURCHASE PROGRAM**
 
 In
          May
          2005, the Board of Directors authorized a stock repurchase program under
          which
          up to 150,000 shares of the Company’s common stock could be repurchased from
          time to time with available funds. The primary purpose of the stock repurchase
          program is to allow the Company the flexibility to repurchase its common
          stock
          to potentially reduce stock dilution and seek to improve its long-term
          earnings
          per share. Repurchases may be made in the open market or in privately negotiated
          transactions, subject to regulatory considerations, and may be discontinued
          at
          any time. During the three and nine months ended September 30, 2005, the
          Company
          repurchased 10,611 shares of common stock for $36,931. During the year
          ended December 31, 2004, the Company did not repurchase any shares of
          common stock. Although the Company’s stock repurchase program remains in place,
          the Company does not currently intend to make a material amount of repurchases.
          Future repurchases, if any, will depend on subsequent developments, corporate
          needs and market conditions. If subsequent developments occur or corporate
          needs
          and market conditions change that might cause the Company to make one or
          more
          repurchases, the Company would not necessarily make a public announcement
          about
          it at that time.
 
 **6.
          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”*** ).
          The
          Company acquired SurgiCount for its patents related to the
          Safety-Sponge TM System,
          an innovation which the Company believes will allow it to capture a significant
          portion of the United States and European surgical sponge sales. SurgiCount’s
          operating results from the closing date of the acquisition, February 25,
          2005,
          through September 30, 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 September 30,**
                **Nine
                    months ended September 30,******2005****
                
                
                **2004**
                
                
                **2005**
                
                
                **2004**Revenue
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (2,168,000
                )
                $
                (1,390,000
                )
                $
                (5,801,000
                )
                $
                (1,690,000
                )Basic
                    and diluted net loss per common share
                
                $
                (0.39
                )
                $
                (0.44
                )
                $
                (1.10
                )
                $
                (0.55
                )
  8
 **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Condensed Consolidated Financial
              Statements (continued)**
 **7.
          MARKETABLE SECURITIES**
 
 Marketable
          securities at September 30, 2005 and December 31, 2004 are comprised of
          the
          following:
  **September
                      30,**
                  ****
                  ****
                  **December
                      31,**
                  ********
                  ****
                  ****
                  **2005**
                  ****
                  ****
                  **2004**U.S.
                      Treasuries
                  
                  $
                  —
                  
                  $
                  2,016,406IPEX,
                      Inc.
                  
                  
                  178,125Tuxis
                      Corporation
                  
                  
                  932,450
                  
                  
                  1,471,313Other
                      Equities
                  
                  
                  120$
                  1,110,695
                  
                  $
                  3,487,719
  *IPEX,
          Inc.*
 
 At
          September 30, 2005, the Company held 545,000 shares of common stock and
          warrants
          to purchase 225,000 shares of common stock at $1.50 per share and warrants
          to
          purchase 225,000 shares of common stock at $2.00 per share of IPEX, formerly
          Administration for International Credit & Investments, Inc. The Company
          acquired 450,000 shares of the common stock and all of the warrants directly
          from IPEX in March 2005 and, until such time as the sale of the securities
          is
          either registered with the SEC or the securities are eligible to be sold
          without
          restriction pursuant to Rule 144(k) promulgated pursuant to the Securities
          Exchange Act of 1934, the Company is restricted from publicly selling these
          securities except in accordance with Rule 144. The remaining 95,000 shares
          of
          common stock are valued at $178,125 and included in marketable securities.
          The
          Company has borrowed against these 95,000 shares and has therefore pledged
          these
          shares to a financial institution as discussed in Note 11. IPEX's common
          stock
          is traded on the OTC Bulletin Board, which reported a closing price, at
          September 30, 2005, of $2.50. The Company has valued its holdings in IPEX
          at a
          25% discount to the $2.50 closing price, or $1.875 per share, due to the
          limited
          average number of shares traded on the OTC Bulletin Board as well as other
          trading restrictions on the Company’s unregistered holdings in IPEX. 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.
 
 *Tuxis
          Corporation*
 
 At
          September 30, 2005, the Company held 109,700 shares of common stock of
          Tuxis as
          discussed in Note 14. The Company has borrowed against 20,000 of these
          shares
          and has therefore pledged 20,000 shares to a financial institution as discussed
          in Note 11.
  9
  **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Condensed Consolidated Financial
              Statements (continued)**
  **8.
          LONG-TERM INVESTMENTS**
 
 Long-term
          investments at September 30, 2005 and December 31, 2004 are comprised of
          the
          following:
  **September
                      30,**
                
                
                **December
                      31,****2005**
                
                
                **2004**Alacra
                    Corporation
                
                $
                1,000,000
                
                $
                1,000,000Automotive
                    Services Group
                
                
                297,844Digicorp
                
                
                492,301
                
                
                532,435IPEX,
                    Inc.
                
                
                928,125Real
                    Estate
                
                
                576,065
                
                
                738,518China
                    Nurse
                
                
                50,000
                
                
                50,000$
                3,344,335
                
                $
                2,320,953
 
 *Alacra
          Corporation*
 
 At
          September 30, 2005, the Company had an investment in shares of Series F
          convertible preferred stock of Alacra Corporation, valued at $1,000,000,
          and
          classified as an available-for-sale investment. 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.
 
 *Automotive
          Services Group, LLC*
 
 During
          July 2005, Ault Glazer Bodnar Merchant Capital, Inc. purchased a 50% interest
          in
          Automotive Services Group ( ***“ASG”*** ),
          LLC,
          an Alabama Limited Liability Company for $300,000. The Company has recorded
          its
          investment in ASG at its cost, as adjusted for the Company’s proportionate share
          of ASG’s losses, or $297,844. ASG was formed to develop and operate automated
          car wash sites with the first location under development in Birmingham,
          Alabama. The
          Company accounts for its investment in ASG under the equity method of accounting
          since the controlling interest resides with the president of ASG who, in
          addition to owning a 50% interest in ASG, manages all of the operating
          activities of ASG. The Company’s proportionate share of income or losses from
          this investment is recorded in equity in income (loss) of investee.
 
 *Digicorp*
 
 At
          September 30, 2005, the Company held 4,016,027 shares, or 28%, of the common
          stock of Digicorp recorded at its cost, as adjusted for the Company’s
          proportionate share of Digicorp’s losses, of $492,301, or approximately $0.12
          per share. The Company has borrowed against 600,000 of these shares and
          has
          therefore pledged 600,000 shares to a financial institution as discussed
          in Note
          11. 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 equity in income (loss) of investee.
 
 *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.
  10
  **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Condensed Consolidated Financial
              Statements (continued)**
 *Investments
          in Real Estate*
 
 At
          September 30, 2005, the Company had several real estate investments, recorded
          at
          its cost of $576,065. These investments are included in long-term investments.
          The Company holds its real estate investments in AGB Properties. AGB Properties
          real estate holdings consist of two vacant single family buildings and
          one
          multi-unit building in Baltimore, Maryland, approximately 8.5 acres of
          undeveloped land in Heber Springs, Arkansas, 0.61 acres of undeveloped
          land in
          Springfield, Tennessee, and various loans secured by real estate in Heber
          Springs, Arkansas. AGB Properties is in the process of liquidating its
          real
          estate holdings.
 
 **9.
          NOTES 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 in accordance with the agreement has a right of offset
          against certain representations and warranties made by Winstar. The due
          date of
          the note is extended until the lawsuit discussed in Note 15 is settled.
          At
          September 30, 2005, the Company had incurred a total of approximately $184,496
          in legal expenses, of which $77,026 was incurred during the nine months
          ended
          September 30, 2005. These amounts have been offset against the amount due.
 
 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.
 
 **10.
          ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**
 
 Accounts
          payable and accrued liabilities at September 30, 2005 and December 31,
          2004 are
          comprised of the following:
  **September
                      30,**
                
                **December
                      31,****2005**
                
                **2004**Professional
                    fees - legal
                
                $
                393,109
                
                $
                351,867Accrued
                    purchase price on investment
                
                
                165,240
                
                
                165,240Officer's
                    severance
                
                
                26,728
                
                
                160,142Accrued
                    interest
                
                
                163,988
                
                
                112,432Professional
                    fees - other
                
                
                53,800
                
                
                52,950Deferred
                    revenue
                
                
                331,180Other
                
                
                410,041
                
                
                96,937$
                1,544,086
                
                $
                939,568
  11
  **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Condensed Consolidated Financial
              Statements (continued)**
 **11.
          DUE TO BROKER**
 
 In
          August
          2005, the Company entered into an agreement with a financial institution
          to
          borrow against securities. The agreement, which extends for 53 weeks, is
          subject
          to a premium of up to 6% of the amount of the borrowings which is amortized
          on a
          straight line basis over the term of the agreement. To the extent the agreement
          is terminated early, the Company does not incur a premium for the amount
          of time
          that the agreement is terminated. The agreement also provides that in addition
          to the securities held by the financial institution, the Company pledge
          a total
          of 25% of the value of the securities in cash. The pledged cash is reduced
          daily
          by the amount of the earned premium and protects the financial institution
          from
          decreases in the market value of the securities. Any decrease in the market
          value of the pledged securities in excess of 5% over the securities notional
          value would require the Company to fund additional monies, such that 25%
          of the
          initial borrowing, as adjusted by the earned premium, was covered. If the
          Company failed to fund additional monies the financial institution has
          the right
          to liquidate the pledged securities. In the event the proceeds from liquidation
          are insufficient to cover the amount of the borrowings, the financial
          institution’s sole recourse is against the pledged cash. During the nine months
          ended September 30, 2005, the Company received proceeds from such borrowings
          of
          $874,500 and consequently recorded a liability at September 30, 2005 of
          $874,500
          which is included in current liabilities under the heading “Due to broker.”
Additionally, the Company has recorded $237,731 as restricted cash related
          to
          borrowings under this agreement.
 
 **12.
          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 September 30, 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 September 30, 2005, the Company has granted 462,239
          shares
          of restricted stock of which 241,881 are vested. For the three and nine
          months
          ended September 30, 2005, the Company recorded compensation expense of
          approximately $769,602 and $1,719,475, respectively, related to these shares
          of
          restricted stock.
  12
 **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**
                
                $
                **3.80**Grants
                
                
                (78,750
                )
                
                78,750
                
                $
                0.50Exercises
                
                
                
                
                
                (78,750
                )
                $
                0.50Cancellations
                
                
                56,250
                
                
                (56,250
                )
                $
                3.71**December
                    31, 2004**
                
                
                —
                
                
                **5,625**
                
                $
                **4.67**Adoption
                    of 2005 SOP
                
                
                1,319,082Exercises
                
                
                
                
                
                (5,625
                )
                $
                4.67Restricted
                    Stock Awards
                
                
                (462,239
                )Grants
                
                
                (719,000
                )
                
                719,000
                
                $
                5.03**September
                    30, 2005**
                
                
                **137,843**
                
                
                **719,000**
                
                $
                **5.03**Options
                    exercisable at:December
                      31, 2003
                
                
                
                
                
                61,875
                
                $
                3.80December
                    31, 2004
                
                
                
                
                
                5,625
                
                $
                4.67September
                    30, 2005
                
                
                
                
                
                202,375
                
                $
                5.27
  The
          outstanding options, all of which are issued under the 2005 SOP, have a
          remaining contractual life of approximately 9.55 years.
 
 **13.
          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. On April 22, 2005, the Company
          entered
          into a Subscription Agreement with an accredited investor whereby the Company
          sold an additional 20,000 Shares and Warrants to purchase an additional
          20,000
          Warrant Shares. At September 30, 2005, the Warrants, including those granted
          on
          April 22, 2005, weighted average exercise price was $3.91 with a remaining
          contractual life of 4.1 years.
 
 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.
  13
  **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Condensed Consolidated Financial
              Statements (continued)**
 In
          April
          2005, the Company entered into a consulting agreement with Health West
          Marketing
          Incorporated and 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. The warrants were valued at $615,951 of which $527,958
          was
          expensed during the period and the remaining amount will be expensed when
          and if
          the milestones are met.
 
 In
          April
          2005, the Company issued 100,000 warrants to purchase shares of common
          stock at
          $5.85 per share to a consultant. The warrants vest over a 12 month period
          and
          have a five-year life. The warrants were valued at $397,340 of which $134,711
          has been expensed.
 
 Warrants
          granted during the year 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 September
          30,
          2005, all warrants issued to the consultants remain outstanding.
 
 **14.
          RELATED PARTY TRANSACTIONS**
 
 *Tuxis
          Corporation*
 
 On
          July
          22, 2005, Ault Glazer filed a Schedule 13D/A with the SEC relating to its
          holdings in 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 September 30, 2005, the Company
          directly held 109,700 shares and indirectly, by virtue of its relationship
          with
          Ault Glazer, held 207,000 shares of Tuxis common stock, which represented
          approximately 11.15% and 21.23%, respectively, of the total outstanding
          shares.
          At September 30, 2005, Tuxis had reportable net assets of approximately
          $8.9
          million.
 
 *AGB
          Properties*
 
 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 at an exercise price of $4.53 and a 5 year contractual
          life.
 
 *Ipex,
          Inc.*
 
 On
          June
          30, 2005, the Company formalized the terms of a consulting agreement, consented
          to by IPEX, whereby the Company was retained by Wolfgang Grabher, the majority
          shareholder of IPEX, former President, former Chief Executive Officer and
          former
          director of IPEX, to serve as a business consultant to IPEX. Mr. Grabher
          owns
          18,855,900 shares of IPEX's 28,195,566 outstanding shares of common stock
          and
          has granted Mr. Ault, the Company’s Chairman and Chief Executive Officer, an
          irrevocable voting proxy for his shares. At September 30, 2005, the Company
          held
          1.93% of IPEX’s outstanding shares of common stock. On June 30, 2005, the
          Company agreed with IPEX as to the scope of such consulting services and
          the
          consideration for such services. The Company has provided and/or will provide
          if
          reasonably necessary within the next 12 months, the following services
          to IPEX:
          (a) substantial review of IPEX's business and operations in order to facilitate
          an analysis of IPEX's strategic options regarding a turnaround of IPEX's
          business; (b) providing advice in the following areas: (i) identification
          of
          financing sources; (ii) providing capital introductions of financial
          institutions and/or strategic investors; (iii) evaluation and recommendation
          of
          candidates for appointment as officers, directors or employees; (iv) making
          personnel of the Company available to IPEX to provide services to IPEX
          on a
          temporary or permanent basis; (v) evaluation and/or negotiation of merger
          or
          sale opportunities, or such other form of transaction or endeavor which
          IPEX may
          elect to pursue; and (vi) providing any other services as are mutually
          agreed
          upon in writing by the Company and Wolfgang Grabher from time to time;
          and (c)
          assisting IPEX in installing a new management team.
  14
  **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Condensed Consolidated Financial
              Statements (continued)**
 The
          Company has performed a significant amount of the services stipulated under
          the
          terms of the consulting agreement, including but not limited to: (i) a
          review of
          the business and operations; (ii) the execution of two purchase agreements
          for
          the purchase of certain intellectual property assets; (iii) the hiring
          of a
          Chief Executive Officer, Chief Operating Officer and a Vice President of
          Research & Development; and (iv) the appointment of two members to the Board
          of Directors of IPEX. The Company initially valued the amount of the consulting
          services at $1,331,250, which was due on August 15, 2005, and was based
          upon the
          assumption that the Company would most likely receive 500,000 shares of
          IPEX
          common stock as payment for the services. During the three months ended
          September 30, 2005, the fair market value of IPEX common stock has decreased
          by
          approximately 29.6%. Accordingly, since the amount due will be paid to
          the
          Company, most likely, in the form of 500,000 shares of IPEX common stock
          we have
          reduced the receivable and deferred revenue by the amount of the decrease
          in the
          fair market value of IPEX common stock, $393,750. As a result of the decrease
          in
          the fair market value of IPEX common stock, the Company now expects to
          ultimately recognize $937,500 in revenue as a result of this agreement,
          of which
          approximately $606,320 has been recognized and approximately $331,180 has
          been
          deferred. Management expects that substantially all of the revenue will
          be
          recognized during the year ending December 31, 2005.
 
 *Digicorp*
 
 In
          connection with the Company’s investment in Digicorp, the Company was entitled
          to designate two members to the Board of Directors of Digicorp. The Company’s
          first designee, Melanie Glazer, who is also manager of our subsidiary Ault
          Glazer Bodnar Capital Properties, LLC, was appointed on December 29, 2004.
          Milton “Todd” Ault, III, our Chairman and Chief Executive Officer, was appointed
          Chief Executive Officer of Digicorp on April 26, 2005. On July 16, 2005,
          Alice
          M. Campbell, one of our directors, and Mr. Ault were appointed to the Board
          of
          Directors of Digicorp. On July 20, 2005, Lynne Silverstein, our President
          and
          Secretary, was appointed as a director of Digicorp, and William B. Horne,
          our
          Chief Financial Officer, was appointed as a director and as Chief Financial
          Officer of Digicorp. On September 30, 2005, Mr. Ault resigned from all
          positions
          with Digicorp and Mr. Horne was appointed as the interim Chief Executive
          Officer.
 
 On
          September 19, 2005, Digicorp entered into an asset purchase agreement with
          Philip Gatch, who at that time was the Company’s Chief Technology Officer. The
          assets purchased consisted of the iCodemedia suite of websites and internet
          properties and all related intellectual property (the ***“iCodemedia
          Assets”*** ).
          Mr.
          Gatch received 1,000,000 shares of Digicorp’s common stock as consideration for
          the iCodemedia Assets.
 
 **15.
          COMMITMENT AND CONTINGENCIES**
 
 *Operating
          Lease*
 
 During
          August 2005 the Company entered into an operating agreement for office
          space.  The lease requires monthly payments of $4,174 from October 1, 2005
          through September 30, 2006 and $4,341 from October 1, 2006 through September
          30,
          2007.  Future minimum annual rent payments under these leases for the
          twelve months subsequent to September 30, 2005 are as follows:
  **September
                        30,****2006**
                    
                    **2007**
                    
                    **Total**$50,088
                    
                    $52,092
                    
                    $102,180
  15
 **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Condensed Consolidated Financial
              Statements (continued)**
 *Legal
          Proceedings*
 
 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
          alleged that the Company and Sunshine joined the alleged conspiracy. On
          June 1,
          2005, the United States Court of Appeals for the Second Circuit affirmed
          the
          February 25, 2003 judgment of the district court dismissing the claims
          against
          the Company.
 
 On
          July
          28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed
          a new
          lawsuit (the ***“new
          Leve Lawsuit”*** )
          against
          the Company, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
          and
          four other defendants affiliated with Winstar Communications, Inc. ( ***“Winstar”*** ).
          The
          new Leve Lawsuit attempts to collect a federal default judgment of $5,014,000
          entered against only two entities, i.e., Winstar Radio Networks, LLC and
          Winstar
          Global Media, Inc., by attempting to enforce the judgment against a number
          of
          additional entities who are not judgment debtors. Further, the new Leve
          Lawsuit
          attempts to enforce the plaintiffs default judgment against entities who
          were
          dismissed on the merits from the underlying action in which plaintiffs
          obtained
          their default judgment. 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.
 
 **16.
          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 Ault
          Glazer Bodnar 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”.
  16
  Segment
          information for the three and nine months ended September 30, 2005, and
          2004 is
          as follows:
  **Three
                      Months Ended**
                
                
                **Nine
                      Months Ended****September
                      30,**
                
                
                **September
                      30,**
                
                
                **September
                      30,**
                
                
                **September
                      30,****2005**
                
                
                **2004**
                
                
                **2005**
                
                
                **2004****Medical
                    Products**Revenue
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (663,714
                )
                
                —
                
                $
                (1,832,343
                )
                
                —Total
                    Assets
                
                $
                4,603,439
                
                
                —
                
                $
                4,603,439
                
                
                —**Health
                    Care Solutions**Revenue
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (81,430
                )
                
                —
                
                $
                (314,350
                )
                
                —Total
                    Assets
                
                
                —
                
                
                —
                
                
                —
                
                
                —**Financial
                    Services and Real Estate**Revenue
                
                $
                29,693
                
                
                —
                
                $
                616,320
                
                
                —Net
                    income
                
                $
                (158,219
                )
                $
                155
                
                $
                154,845
                
                $
                584,991Total
                    Assets
                
                $
                5,807,207
                
                $
                2,679,513
                
                $
                5,807,207
                
                $
                2,679,513**Corporate**Revenue
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (1,251,951
                )
                $
                (1,296,165
                )
                $
                (3,716,908
                )
                $
                (1,991,803
                )Total
                    Assets
                
                $
                387,477
                
                $
                69,014
                
                $
                387,477
                
                $
                69,014**Total**Revenue
                
                $
                29,693
                
                
                —
                
                $
                616,320
                
                
                —Net
                    loss
                
                $
                (2,155,314
                )
                $
                (1,296,010
                )
                $
                (5,708,756
                )
                $
                (1,406,812
                )Total
                    Assets
                
                $
                10,798,123
                
                $
                2,748,527
                
                $
                10,798,123
                
                $
                2,748,527
 
 **17.
          SUBSEQUENT EVENTS**
 
 On
          October 19, 2005, the Company entered into a subscription agreement with
          an
          accredited investor, pursuant to which the Company sold 16,666 shares of
          common
          stock at a price of $3.00 per share. The Company received gross proceeds
          of
          $50,000 from the sale of the stock.
 
 On
          November 3, 2005, the Company entered into a subscription agreement with
          Herbert
          Langsam, a current director of the Company, pursuant to which the Company
          sold
          28,653 shares of common stock at a price of $3.49 per share. The Company
          received gross proceeds of $100,000 from the sale of the stock.
 17
  **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 the 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.





In
      the
      past we invested in illiquid equity securities acquired directly from issuers
      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 have invested 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 made 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 the companies
      we have invested in may 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,
      likely causing our investments to 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 liquid
      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
      nine months ended September 30, 2005 and 2004.




18




Security
      investments which are publicly traded on a national securities exchange or
      over-the-counter market are stated at the last reported sale 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., a Delaware corporation
      ( ***“we,”
      “us,” or “our”*** ),
      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. In the past
      we
      also focused on the financial services and real estate industries; however,
      in
      October 2005 our board of directors authorized us to evaluate alternative
      strategies for the divesture of our non-healthcare assets in order to focus
      all
      of our efforts on the health care and medical products field. SurgiCount
      Medical, Inc., a provider of patient safety devices, Patient Safety Consulting
      Group, LLC, a healthcare consulting services company, Ault Glazer Bodnar
      Merchant Capital, Inc., a holding company for our non-patient safety related
      assets, and Ault
      Glazer Bodnar 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. Currently, we are evaluating ways
      in which to monetize the assets in Ault Glazer Bodnar Merchant Capital, Inc,
      and
      Ault Glazer Bodnar Capital Properties, LLC. However, the divesture of any assets
      will be dependent on a number of factors including: (1) lack of a liquid market
      to dispose of such assets; (2) potential adverse tax effects from a disposition;
      or (3) our board of directors and management may change their decision to
      dispose of certain assets.





SurgiCount
      is our first acquisition in our plan to become a leader in the dollar patient
      safety market. SurgiCount owns patents issued in the United States and Europe
      related to the Safety-Sponge TM System,
      an innovation which management believes will allow us to capture a significant
      portion of the United States and European surgical sponge sales. Based upon
      assumptions that take into consideration factors such as the approximate number
      of hospitals and operating rooms in the United States and Europe, the
      approximate number of surgeries performed annually, and estimates for the
      average cost of surgical sponges, incorporating the Safety-Sponge TM System,
      per surgery, we believe that the existing market for surgical sponge sales
      in
      the United States and Europe represents a market opportunity equal to or in
      excess of $650 million in annual sales.




In
        May
        2005, to assist us in our marketing efforts of the Safety-Sponge TM System
        we
        entered into an asset purchase agreement whereby we purchased all of the
        assets
        of Cinapse Digital Media, a sole proprietorship, for the issuance of 17,241
        shares of common stock held in treasury and 8,621 warrants to purchase common
        stock at an exercise price of $5.80 and a contractual life of 5 years. The
        assets were valued at $66,895 and consisted primarily of computers and equipment
        utilized in the production of digital video. Simultaneously with the asset
        purchase, we formed Cinapse Digital Media, LLC, a 50% owned Delaware limited
        liability company, and contributed the acquired assets. At the time we entered
        into the asset purchase agreement, we intended to utilize Cinapse Digital
        Media,
        LLC to produce digital videos for training and marketing of our
        Safety-Sponge TM System.
        However, we abandoned this plan after Philip Gatch resigned as our Chief
        Technology Officer. On October 14, 2005 we transferred our 50% ownership
        interest in Cinapse Digital Media, LLC to Mr. Gatch in exchange for the
        cancellation of all securities issued to Mr. Gatch as consideration for the
        Company’s purchase of the Cinapse Digital Media assets.




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.





Together
      with our subsidiaries, we also plan to **** provide
      capital and managerial assistance to early stage companies in the medical
      products and health care solutions industries.





Our
      principal executive offices are located at 100 Wilshire Boulevard, Suite 1750,
      Santa Monica, California 90401. Our telephone number is (310) 752-1442. Our
      website is located at http://www.patientsafetytechnologies.com .





19




**Financial
      Condition**




Our
        cash
        and marketable securities were $1,511,406 at September 30, 2005, versus
        $4,334,123 at December 31, 2004. Total current liabilities were $4,234,090
        at
        September 30, 2005, versus $3,367,974 at December 31, 2004. Included in current
        liabilities at September 30, 2005 and December 31, 2004 is a note payable,
        and
        accrued interest on such note, payable to Winstar Communications, Inc. in
        the
        amount of $950,561 and $1,004,962, respectively. As discussed in Note 9 in
        the notes to the accompanying condensed consolidated financial statements
        filed
        with this Form 10-Q, the due date on the note payable to Winstar was February
        28, 2002. The note payable has a right of offset against certain representations
        and warranties made by Winstar and we believe the amount of the offsets exceed
        the amount of the note payable. Specifically, it is our belief that the presence
        of litigation surrounding the assets that we acquired from the issuance of
        the
        note payable impaired our ability to raise additional capital and forced
        us to
        liquidate our investment in Excelsior earlier than we would otherwise have
        done
        and at a discounted price resulting in the loss of the full value of the
        security. We believe that these circumstances not only harmed us, but that
        the
        extent of the harm was in excess of the amount of the note payable. However,
        since Winstar may not agree with this belief, the only offsets against the
        principal balance of the note reflected in the accompanying financial statements
        relate to legal fees attributed to our defense of the lawsuits filed against
        us.
        As of September 30, 2005, we incurred $184,496 in legal fees attributed to
        our
        defense of lawsuits
        filed by Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. and the
        representations and warranties made by Winstar Radio Networks, Inc. These
        fees
        have been offset against the note with the remaining principal balance of
        $815,504 reflected as a note payable on the accompanying balance sheet. Because
        we believe the amount of the offsets exceeds the amount of the note payable,
        we
        do not intend to pay principal or interest on the note payable. However,
        in the
        event we are required to pay off the note, we anticipate that the funds for
        doing so will be available from liquidating our investments and from revenues
        generated from operations.





At
      September 30, 2005 and December 31, 2004, we had $400,711 and $846,404,
      respectively, in cash and cash equivalents. At September 30, 2005, $237,731
      of
      our total cash balance was restricted. Our Board has authorized our Chairman
      and
      Chief Executive Officer, Milton "Todd" Ault III, to invest our cash balances
      in
      the public equity and debt markets as appropriate to maximize the short-term
      return on such assets. Such investments entail risks including the loss of
      investment and price volatility.





We
      had a
      working capital deficit of approximately $1,477,500 at September 30, 2005 and
      we
      continue to have recurring losses. In the past we have relied upon private
      placements of equity and debt securities and we may rely on private placements
      to fund our capital requirements in the future. In the past we have relied
      upon
      private placements of equity and debt securities and we may rely on private
      placements to fund our capital requirements in the future. The Company has
      received shareholder approval to sell equity and/or debt securities of the
      Company up to $10 million in any calendar year to the Company’s Chairman and
      Chief Executive Officer, Milton “Todd” Ault, III, to the Company’s President and
      Secretary, Lynne Silverstein, to the Chief Health and Science Officer of the
      Company’s subsidiary Patient Safety Consulting Group, LLC, Louis Glazer, and to
      the Manager of the Company’s subsidiary Franklin Capital Properties, LLC and Mr.
      Glazer’s spouse, Melanie Glazer. If the Company proposed to sell more than $10
      million of securities in a calendar year to such persons additional shareholder
      approval would be required. The Company does not currently anticipate selling
      equity or debt securities to these persons and, in the event the Company elected
      to pursue such an investment, the Company cannot guarantee that such persons
      would be willing to further invest in the Company. At this time we plan to
      fund
      future operations primarily by liquidating our portfolio companies.




On
      April 7, 2005, we 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. Steven J. Bodnar is a managing member of Bodnar
      Capital Management, LLC. Mr. Bodnar, through Bodnar Capital Management, LLC,
      is
      one of our principal stockholders. The principal amount of the Note and interest
      at the rate of 6% per annum is due on May 31, 2006. The obligations under the
      Note are secured by all real property owned by us. Management believes that
      existing cash resources, together with proceeds from investments and anticipated
      revenues from operations, should be adequate to fund our operations for the
      twelve months subsequent to September 30, 2005. However, long-term liquidity
      is
      dependent on our ability to attain future profitable operations. Management
      may
      undertake additional debt or equity financings to better enable us to grow
      and
      meet future operating and capital requirements.




In
        August
        2005, we entered into an agreement with the financial institution IXIS
        Derivatives Inc. to borrow against securities to provide an additional source
        of
        capital for general corporate purposes. The agreement, which extends for
        53
        weeks, is subject to a premium of up to 6% of the amount of the borrowings
        which
        is amortized on a straight line basis over the term of the agreement. To
        the
        extent the agreement is terminated early, we do not incur a premium for the
        amount of time that the agreement is terminated. The agreement also provides
        that in addition to the securities held by the financial institution, that
        we
        pledge a total of 25% of the value of the securities in cash. The pledged
        cash
        is reduced daily by the amount of the earned premium and protects the financial
        institution from decreases in the market value of the securities. Any decrease
        in the market value of the pledged securities in excess of 5% over the
        securities notional value would require us to fund additional monies, such
        that
        25% of the initial borrowing, as adjusted by the earned premium, was covered.
        If
        we failed to fund additional monies the financial institution has the right
        to
        liquidate the pledged securities. In the event the proceeds from liquidation
        are
        insufficient to cover the amount of the borrowings, the financial institution’s
        sole recourse is against the pledged cash. During the nine months ended
        September 30, 2005, we received proceeds from such borrowings of $874,500
        and
        consequently recorded a liability at September 30, 2005 of $874,500 which
        is
        included in current liabilities under the heading “Due to broker.” Additionally,
        we have recorded $237,731 as restricted cash related to borrowings under
        this
        agreement.





20


Management
        believes that existing cash resources, together with proceeds from investments
        and anticipated revenues from operations, should be adequate to fund our
        operations for the twelve months subsequent to September 30, 2005. However,
        long-term liquidity is dependent on our ability to attain future profitable
        operations. Management may undertake additional debt or equity financings
        to
        better enable us to grow and meet future operating and capital requirements.
  On
        November 3, 2004, we sold an aggregate of 1,216,875 shares of common stock
        and
        warrants to purchase an aggregate of 608,430 shares of common stock in a
        private
        placement transaction to certain accredited investors. Pursuant to the terms
        of
        the private placement, we held additional closings on November 15, 2004,
        December 2, 2004, and on December 27, 2004, and sold an aggregate of 300,825
        additional shares of common stock and warrants to purchase an aggregate of
        150,411 shares of common stock. We received aggregate net proceeds of $3,924,786
        from all the closings. We used 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. We filed a
        registration statement with the SEC on May 3, 2005 registering the resale
        of the
        shares of 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 filed such registration statement
        with the SEC.




As
      of
      September 30, 2005, other than our office lease, we had no commitments not
      reflected in our condensed consolidated financial statements. As in prior
      acquisitions, we intend to use a combination of common stock and warrants as
      the
      primary means to acquire companies. Accordingly, our need to raise significant
      amounts of cash for acquisitions can be minimized, provided the companies we
      acquire are willing to accept non-cash forms of consideration.





**Investments**





Our
      financial condition is dependent on the success of our investments. In the
      future, we intend to invest a substantial portion of our 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. Short selling
      is a component of the Company’s investment strategy and these trades typically
      range, in any particular month, from 0% to 20% of total trading activity. The
      making of such investments entails significant risk that the price of a security
      may increase resulting in the loss of or negative return on the investment.
      The
      following is a discussion of our most significant investments at September
      30,
      2005.





*Alacra
      Corporation*





At
      September 30, 2005, we had an investment in Alacra Corporation (“Alacra”),
      valued at $1,000,000, which represents 9.3% of our total assets. On April 20,
      2000, we purchased $1,000,000 worth of Alacra Series F Convertible Preferred
      Stock. Alacra has recorded revenue growth in every year since the Company’s
      original investment, further, 2004 revenues of approximately $11.4 million,
      were
      in excess of the prior years revenues by approximately 38%. At December 31,
      2004, Alacra had total assets of approximately $4.4 million with total
      liabilities of approximately $7.2 million. Deferred revenue, which represents
      subscription revenues are amortized over the term of the contract, which is
      generally one year, and represented approximately $3.3 million of the total
      liabilities. 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.





Alacra,
      a
      privately held company 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 business information. Alacra’s customers include more than 750
      leading financial institutions, management consulting, law and accounting firms
      and other corporations throughout the world. Currently, Alacra’s largest
      customer segment is investment and commercial banking, followed closely by
      management consulting, law and multi-national corporations.





Alacra’s
      online service allows users to search via a set of tools designed to locate
      and
      extract business information from the Internet and from Alacra’s library of
      content. Alacra’s team of information professionals selects, categorizes and
      indexes more than 45,000 sites on the Web containing the most reliable and
      comprehensive business information. Simultaneously, users can search more than
      100 premium commercial databases that contain financial information, economic
      data, business news, and investment and market research. Alacra provides
      information in the required format, gleaned from such prestigious content
      partners as Thomson FinancialTM, Barra, The Economist Intelligence Unit, Factiva,
      Mergerstat® and many others.




21




The
      information services industry is intensely competitive and we expect it to
      remain so. Although Alacra has been in operation since 1996 they are
      significantly smaller in terms of revenue than a large number of companies
      offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
      LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
      revenues that range anywhere from $100 million to several billion dollars,
      as
      reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
      range of products and services, greater financial and marketing resources,
      larger customer bases, greater name recognition, greater global reach and more
      established relationships with potential customers than Alacra has. These larger
      and better capitalized competitors may be better able to respond to changes
      in
      the financial services industry, to compete for skilled professionals, to
      finance investment and acquisition opportunities, to fund internal growth and
      to
      compete for market share generally.





*China
      Nurse, LLC*





At
      September 30, 2005, we had an investment in China Nurse LLC ( ***"China
      Nurse"*** ),
      valued
      at $50,000, which represents 0.5% of our total assets. On November 23, 2004,
      we
      entered into a strategic relationship with China Nurse. In connection with
      this
      strategic relationship, we agreed to provide referrals and other assistance
      and
      we made a capital investment in cash of $50,000 in China Nurse. China Nurse
      is a
      developmental stage 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. China Nurse creates an opportunity for hospitals and other health care
      providers to efficiently recruit skilled professionals from China and
      Taiwan. It maintains a customized approach to matching the qualifications
      of the nurses with the specific needs of U.S. clients. The primary purpose
      for
      this strategic investment was in anticipation of leveraging the relationships
      that China Nurse developed during the ordinary course of its business for the
      Company’s other patient safety products. This investment was a seed investment
      in a concept that may ultimately be completely impaired within a one year time
      frame if China Nurse is unable to secure additional interest both in the form
      of
      additional investment and from hospitals and health care facilities in the
      United States.





*Digicorp*




At
        September 30, 2005, we had an investment in Digicorp valued at $492,301,
        which
        represents 4.6% of our total assets. On December 29, 2004, we 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. We purchased 2,229,527 of such shares on December 29, 2004 (2,128,740
        shares at a price of $0.135 per share and 100,787 shares at a price of $0.145
        per share) and we are required to purchase the remaining 1,224,000 shares
        from
        the selling shareholders at a price of $0.145 per share at such time that
        Digicorp registers the resale of the shares with the SEC. We are in discussions
        with an unrelated party, which we believe will be a source of strategic advice
        in the future to Digicorp, to assume the obligation to purchase 1,000,000
        of the
        remaining 1,224,000 shares from the selling shareholders. We believe an
        agreement will be consummated prior to December 29, 2005 and this will reduce
        our obligation to purchase only 224,000 shares of Digicorp common stock for
        approximately $32,500 which will be funded from our working capital. Digicorp’s
        common stock is traded on the OTC Bulletin Board, which reported a closing
        price, at September 30, 2005, of $0.85. In connection with the Agreement,
        we are
        entitled to designate two members to the Board of Directors of Digicorp.
        Our
        first designee, Melanie Glazer, who is also manager of our subsidiary Ault
        Glazer Bodnar Capital Properties, LLC, was appointed on December 29, 2004.
        Milton “Todd” Ault, III, our Chairman and Chief Executive Officer, was appointed
        Chief Executive Officer of Digicorp on April 26, 2005. On July 16, 2005,
        Alice
        M. Campbell, one of our directors, and Mr. Ault was appointed to the Board
        of
        Directors of Digicorp. On July 20, 2005, Lynne Silverstein, our President
        and
        Secretary, was appointed as a director of Digicorp, and William B. Horne,
        our
        Chief Financial Officer, was appointed as a director and as Chief Financial
        Officer of Digicorp. On September 30, 2005, Mr. Ault resigned from all positions
        with Digicorp and Mr. Horne was appointed as the interim Chief Executive
        Officer.





Since
      June 30, 1995, Digicorp has been in the developmental stage and has had no
      operations other than issuing shares of common stock for financing the
      preparation of financial statements and for preparing filings for the SEC.
      On
      May 18, 2005, Digicorp sold Bodnar Capital Management, LLC 2,941,176 shares
      of
      its common stock and warrants to purchase an additional 3,000,000 shares of
      its
      common stock with exercise prices ranging from $0.25 to $1.50 per share.
      Digicorp received gross proceeds of approximately $500,000 from the sale of
      stock and warrants to Bodnar Capital Management, LLC. As described above under
      “Financial Condition,” Bodnar Capital Management, LLC also is one of our
      principal stockholders. On October 27, 2005, Bodnar Capital Management, LLC
      canceled the warrants to purchase 3,000,000 shares of common stock in exchange
      for the issuance of a warrant to purchase 500,000 shares of Digicorp’s common
      stock with an exercise price of $0.01 per share.





On
      September 19, 2005, upon entering into an asset purchase agreement with Philip
      Gatch, who was recently appointed Digicorp’s Chief Technology Officer, Digicorp
      completed the initial transaction to transform itself from that of a development
      stage enterprise to a digital media and content delivery company. Digicorp
      issued Mr. Gatch 1,000,000 shares of its common stock as consideration. The
      assets purchased consisted of the iCodemedia suite of websites and internet
      properties and all related intellectual property (the ***“iCodemedia
      Assets”*** ).
      The
      iCodemedia suite of websites consists of the websites www.icodemedia.com,
      www.iplaylist.com, www.tunecast.com, www.tunebucks.com, www.podpresskit.com
      and
      www.tunespromo.com. Digicorp plans to use these websites and the related
      intellectual property to provide a suite of applications and services to enable
      content creators the ability to publish and deliver content to existing and
      next
      generation digital media devices, such as the Apple iPod and the Sony PSP,
      based
      upon the consumers’ expectation for broader and on-demand access to content and
      services.




22




On
      September 30, 2005, Digicorp entered into a non-binding Letter of Intent
      ( *the* ***"LOI"*** )
      to
      purchase (the ***"Acquisition"*** )
      all of
      the issued and outstanding shares of capital stock of Rebel Crew Films, Inc.,
      a
      California corporation ( ***"Rebel
      Crew"*** ).
      As
      proposed in the LOI, upon closing the Acquisition, Digicorp would issue 20
      million shares of its common stock to the shareholders of Rebel Crew as
      compensation for the issued and outstanding capital stock of Rebel Crew. Rebel
      Crew was founded in 2001 as a film licensing and distribution company of Latino
      home entertainment products. Rebel Crew currently maintains more than 200
      Spanish language films and serves the some of the nation’s largest wholesale,
      retail, catalog, and e-commerce accounts. Rebel Crew’s titles can be found at
      Wal-Mart, Best Buy, Blockbuster, K-Mart, and hundreds of independent video
      outlets across the United States and Canada. Since the Acquisition is subject
      to
      further negotiation of definitive agreements, we cannot assure that the proposed
      transactions will be completed. However, we believe that the proposed
      Acquisition, if consummated, will allow Digicorp to leverage Rebel Crew’s Latino
      content and industry relationships with the iCodemedia Assets to create a
      compelling digital media and content delivery company.





*Excelsior
      Radio Networks, Inc.*





During
      the period from August 12, 2003 through October 22, 2004, we liquidated our
      investment in Excelsior Radio Networks, Inc. ( **“Excelsior”** ).
      We
      sold a total of 1,476,804 shares and warrants to purchase 87,111 shares of
      Excelsior common stock. We have stock appreciation rights on these shares that
      began to expire on August 8, 2005, however, no value has been ascribed to these
      rights.





*IPEX,
      Inc.*


At
        September 30, 2005, we held 545,000 shares of common stock and warrants to
        purchase 225,000 shares of common stock at $1.50 per share and warrants to
        purchase 225,000 shares of common stock at $2.00 per share of IPEX, Inc.
        (“ ***IPEX”)*** ,
        valued
        at $1,106,250, which represents 10.2% of our total assets. IPEX's common
        stock
        is traded on the OTC Bulletin Board, which reported a closing price, at
        September 30, 2005, of $2.50. The warrants are exercisable for a period of
        five
        years and are callable by IPEX in certain instances. IPEX operates a Voice
        over
        Internet Protocol ( ***"VoIP"*** )
        routing
        platform that directs telecommunication traffic. VoIP permits a user to send
        voice, fax and other information over the Internet, rather than through a
        regular telephone network system based on switches. Pursuant to two separate
        asset purchase agreements entered into during June 2005, in consideration
        for
        $6,000,000 of IPEX common stock and $275,000 cash, IPEX purchased certain
        intellectual property assets that may be used to enhance, compact, store,
        encrypt, stream and display digital image content over wireless networks
        and
        over the Internet and for image enhancement, compacting and content protection
        applications. On March 21, 2006 IPEX reported that it is in the process of
        transferring ownership of such assets to its subsidiary RGB Channel, Inc.
        On
        June 23, 2005, Alice M. Campbell, who is one of our directors, was appointed
        to
        the Board of Directors of IPEX. In addition, from May 26, 2005 until July
        20,
        2005, Milton “Todd” Ault, III, our Chairman and Chief Executive Officer, served
        as interim Chief Executive Officer and a director of IPEX.




The
        Company’s initial investment into IPEX occurred On March 2, 2005 in the amount
        of $450,000. This investment was part of the private placement that IPEX
        completed on March 18, 2005. The total amount of IPEX’s private placement was
        for 3,500,000 shares of common stock, 1,750,000 Series A Warrants and 1,750,000
        Series B Warrants for aggregate proceeds of $3,500,000, less issuance costs
        of
        $259,980, resulting in net realized proceeds of $3,240,020. The common stock,
        Series A and Series B Warrants were sold as Units, with each Unit consisting
        of
        two shares of common stock, one series A Warrant and one Series B Warrant.
        Each
        Series A Warrant entitles the holder to purchase one share of common stock
        at
        $1.50 per share, exercisable for a period of five years. Each Series B Warrant
        entitles the holder to purchase one share of common stock at $2.00 per share,
        exercisable for a period of five years. Subsequent to the effectiveness of
        a
        registration statement covering the re-sale of shares underlying the warrants,
        the Series A and Series B Warrants are callable by IPEX, under certain
        circumstances, if IPEX's common stock trades at or above $2.00 and $2.50,
        respectively, for ten consecutive trading days. In such event IPEX must give
        us
        30 days prior written notice of its intention to call the warrants after
        which
        it has the right to repurchase the warrants at a purchase price of $0.01
        per
        share of common stock then purchasable pursuant to the warrants. During such
        30
        day notice period we would have the right to exercise the warrants. As of
        November 14, 2005 IPEX has not filed a registration statement covering the
        re-sale of the shares underlying the warrants and accordingly IPEX does not
        have
        a right to call them. However, in the event the warrants are called by IPEX,
        the
        warrants would be likely be in-the-money and we would likely exercise the
        warrants. To the extent we did not have a sufficient amount of cash available
        to
        exercise the warrants we would most likely liquidate a portion of our existing
        shares in IPEX common stock to satisfy the exercise amount.




23




As
      reflected in IPEX’s June 30, 2005 Form 10-Q, sales for the six months ended June
      30, 2005 rose to $4,816,177 as compared to sales of $1,778,705 from the prior
      year's six months ended June 30, 2004. Due to prior working capital constraints
      IPEX could only maintain selling to Tier 3 customers on a weekly net 5 basis.
      The additional working capital provided by the private placement completed
      in
      March 2005 allowed IPEX to extend credit to Tier 2 carriers under net 15 terms
      therefore increasing the number of overall customers.





*Tuxis
      Corporation*




At
        September 30, 2005, we held 109,700 shares of common stock of Tuxis Corporation
        ( ***“Tuxis”*** )
        valued
        at $932,450, which represents 8.6% of our total assets. We have classified
        our
        investment in Tuxis as a trading security since we expect that we will
        ultimately liquidate the investment in the near-term to fund a portion of
        our
        operating costs. During the three months ended September 30, 2005, based
        upon
        our belief that the market price of Tuxis common stock represented an
        opportunity to maximize short term profits, we purchased an additional 29,900
        shares of Tuxis common stock in the open market for approximately $263,000.
        Tuxis, a Maryland corporation, is a holding company operating in the real
        estate
        and related services business through its subsidiaries. At September 30,
        2005
        Tuxis was registered under the Investment Company Act of 1940 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. Tuxis reported that on October 5, 2005, the SEC issued an order
        declaring that it had ceased to be an investment company effective immediately.
        At June 30, 2005, Tuxis had reportable net assets of approximately $8.8 million,
        which represents a decrease of approximately $200,000 from March 31, 2005
        and is
        primarily attributed to Tuxis’ net loss from operations.


*Ault
      Glazer Bodnar Capital Properties, LLC*





At
      September 30, 2005, we had several real estate investments, valued at $576,065,
      which represents 5.3% of our total assets. We hold our real estate investments
      in Ault Glazer Bodnar Capital Properties, LLC ***(“AGB
      Properties”)*** ,
      a
      Delaware limited liability company and a wholly owned subsidiary. AGB Properties
      is in the process of liquidating its real estate holdings. AGB Properties’
primary focus was on the acquisition and management of income producing real
      estate holdings. AGB Properties real estate holdings consist of two vacant
      single family buildings and one multi-unit building in Baltimore, Maryland,
      approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas, 0.61
      acres of undeveloped land in Springfield, Tennessee, and various loans secured
      by real estate in Heber Springs, Arkansas. We expect that any gain or loss
      recognized on the liquidation of some or all of our real estate holdings would
      be insignificant to the Company primarily due to the short period of time that
      the properties were owned combined with the absence of any significant changes
      in property values in the real estate markets where the Company’s real estate
      holdings are located.







**Results
      of Operations**





We
      account for our operations under accounting principles generally accepted in
      the
      United States. The principal measure of our financial performance is captioned
      “Net loss attributable to common shareholders,” which is comprised of the
      following:





§
            "Revenues,"
                which is the amount we receive from sales of our
                products;





§
            “Operating
                expenses,” which are the related costs and expenses of operating our
                business;





§
            “Interest,
                dividend income and other, net,” which is the amount we receive from
                interest and dividends from our short term investments and money
                market
                accounts, and our proportionate share of income or losses from investments
                accounted for under the equity method of
                accounting;





§
            “Realized
                gains (losses) on investments, net,” which is the difference between the
                proceeds received from dispositions of investments and their stated
                cost;
                and





§
            “Unrealized
                gains (losses) on marketable securities, net,” which is the net change in
                the fair value of our 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
      gains (losses) on investments, net” and “Unrealized gains (losses) 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.




24




We
      generally earn interest income from loans, preferred stock, corporate bonds
      and
      other fixed income securities. The amount of interest income varies based upon
      the average balance of our fixed income portfolio and the average yield on
      this
      portfolio.





**Revenues**





We
      recognized revenues of $29,693 and $616,320 for the three and nine months ended
      September 30, 2005 as opposed to no revenues during the three and nine months
      ended September 30, 2004. Although none of the revenues that we recognized
      related to sales of our Safety-Sponge TM System
      we
      expect to begin recognizing revenues from the Safety-Sponge TM System
      during the three month period ending June 30, 2006 based in part upon the
      results of initial usage of the Safety-Sponge TM System
      in
      hospital operating rooms. We expect these revenues will initially have an
      insignificant impact on our results of operations, however, during the three
      month period ending December 31, 2006 we expect that revenues from our
      Safety-Sponge TM System
      will provide a material source of funds to cover a portion of our operating
      costs.




The
        increase in revenue was the result of a consulting agreement, consented to
        by
        IPEX, whereby Wolfgang Grabher, the majority shareholder of IPEX, former
        President, former Chief Executive Officer and former director of IPEX, retained
        us to serve as a business consultant to IPEX. In consideration for the services,
        Mr. Grabher personally agreed to pay us either 500,000 shares of common stock
        of
        IPEX, or $1,500,000 in cash, as a non-refundable consulting fee. Whether
        the
        consulting fee is paid in the form of IPEX common stock or cash is in the
        sole
        discretion of Mr. Grabher. Although the determination of whether the Company
        will receive IPEX common stock or cash is in the discretion of Mr. Grabher,
        the
        Company has operated under the assumption that the Company will most likely
        receive 500,000 shares of IPEX common stock as payment for the services.
        Mr.
        Grabher owns 18,855,900 shares of IPEX's 28,195,566 outstanding shares of
        common
        stock and in May 2005 granted Mr. Ault, our Chairman and Chief Executive
        Officer, an irrevocable voting proxy for his shares for a period of three
        years
        or earlier if independent counsel hired by IPEX clears Mr. Grabher of any
        wrongdoings in connection with IPEX’s operations, if Mr. Ault releases the proxy
        or if Mr. Grabher sells the subject shares. The irrevocable voting proxy
        was
        granted to Mr. Ault while he served as interim Chief Executive Officer and
        a
        director of IPEX in order to distance Mr. Grabher from control over IPEX
        amid
        allegations of wrongdoing. Former counsel to IPEX has alleged that the offering
        memorandum used in connection with IPEX’s March 18, 2005 private placement
        (described above under “Investments”) and in IPEX’s Form 8-K dated March 16,
        2005 either misstated or omitted certain material information and Mr. Grabher
        is
        alleged to be responsible for the disclosure in those documents. At September
        30, 2005, we held 1.93% of IPEX’s outstanding shares of common stock. On June
        30, 2005, we agreed with IPEX as to the scope of such consulting services
        and
        the consideration for such services. We have provided and/or will provide
        if
        reasonably necessary within the 12 month period ending June 30, 2006, the
        following services to IPEX: (a) substantial review of IPEX's business and
        operations in order to facilitate an analysis of IPEX's strategic options
        regarding a turnaround of IPEX's business; (b) providing advice in the following
        areas: (i) identification of financing sources, (ii) providing capital
        introductions of financial institutions and/or strategic investors, (iii)
        evaluation and recommendation of candidates for appointment as officers,
        directors or employees, (iv) making our personnel available to IPEX to provide
        services to IPEX on a temporary or permanent basis, (v) evaluation and/or
        negotiation of merger or sale opportunities, or such other form of transaction
        or endeavor which IPEX may elect to pursue, and (vi) providing any other
        services as are mutually agreed upon in writing with Mr. Grabher from time
        to
        time; and (c) assisting IPEX in installing a new management team. Our Chairman
        and Chief Executive Officer, Mr. Ault, has been a director of IPEX since
        May 26,
        2005 and Mr. Ault served as interim Chief Executive Officer of IPEX from
        May 26,
        2005 until July 13, 2005. Darrell W. Grimsley, Jr., Chief Executive Officer
        of
        our 50% owned subsidiary Automotive Services Group, LLC, served as a director
        of
        IPEX has served as a member of IPEX’s audit committee since August 30, 2005.
        Alice M. Campbell, a member of our Board of Directors and our audit and
        compensation committees, has served as a director of IPEX since June 23,
        2005.





At
      September 30, 2005, we had performed a significant amount of the services
      stipulated under the terms of the consulting agreement, including but not
      limited to: (i) a review of the business and operations (ii) advice in
      connection with IPEX’s purchase of certain intellectual property assets; (iii)
      the hiring by IPEX of a new Chief Executive Officer, Chief Operating Officer
      and
      a Vice President of Research & Development, none of which would be deemed
      related parties; and (iv) IPEX’s appointment of two new members to its Board of
      Directors. We have deferred approximately $331,180 of revenue relating to this
      consulting agreement which management expects will be substantially recognized
      during the year ending December 31, 2005.





**Expenses**





Operating
      expenses were $6,376,854 and $1,965,025 for the nine months and $2,128,432
      and
      $1,287,315 for the three months ended September 30, 2005 and September 30,
      2004,
      respectively.




25




The
      increase in operating expenses for the nine months ended September 30, 2005
      when
      compared to September 30, 2004, was primarily the result of stock based
      compensation expenses, and to a lesser extent printing, stock exchange and
      transfer agent fees. Until October 22, 2004, the date the Company’s shareholders
      approved certain proposals relating to the Company’s restructuring plan to
      change from a business development company to an operating company, the
      Company’s principal activities involved the management of existing investments.
      As such, compensation expense was primarily the salaries of the Company’s Chief
      Executive Officer and to a lesser extent the Chief Financial Officer. Since
      the
      restructuring plan, management has aggressively focused on expanding into the
      health care and medical products field, particularly the patient safety markets,
      and up until October 2005, the financial services and real estate industries.
      A
      significant component of this strategy has resulted in the acquisition of
      assets. The Company has hired personnel in order to meet the increased needs
      of
      its current business focus which has resulted in increases in almost every
      expense category.





Printing,
      Amex stock exchange, and transfer agent fees for the nine months ended September
      30, 2005 increased by $61,174, $65,783 and $46,138, respectively, over the
      nine
      months ended September 30, 2004. The increase is primarily attributable to
      work
      performed on the Company’s proxy statements, registration statements, annual
      report and related annual meeting of shareholders. All of these reports required
      a significant amount of additional time to prepare due to the Company’s change
      from a business development company to an operating company. Printing fees
      increased as a direct result of the greater number of printed documents,
      including business cards and stationary, as well as revisions to those
      documents. Amex stock exchange fees primarily increased as a result of a
      non-recurring fee associated with the Company’s 3 for 1 stock split.





Printing,
      Amex stock exchange, and transfer agent fees are a component of the $668,335
      increase reflected in general and administrative expenses for the nine months
      ended September 30, 2005. An increase in travel related expenses of $176,553,
      another component of general and administrative expenses, was attributed to
      expenses incurred in identifying and reviewing investment opportunities and
      attendance at trade shows and conventions to promote the Company’s patient
      safety products. The remaining increase in general and administrative expenses
      is a direct result of an overall increase in business activity associated with
      being an operating company with increased personnel. These expenses, which
      are
      not significant individually, include but are not limited to office supplies,
      postage, and marketing.




A
        majority of our operating expenses consist of employee compensation, which
        increased by $2,341,446. Our Compensation Committee, which is comprised of
        three
        independent directors for purposes of AMEX rules, determines and recommends
        to
        our Board the cash and stock based compensation to be paid to our executive
        officers and also reviews the amount of salary and bonus for each of our
        other
        officers and employees. Additionally, on March 30, 2005, our shareholders
        approved annual cash and stock based compensation to four of our officers.
        The
        maximum annual compensation, approved by our shareholders, for the officers
        ranged between; (a) cash of $100,000 to $180,000, (b) stock options to purchase
        45,000 to 90,000 shares of our common stock, and (c) restricted grants of
        our
        common stock of 30,000 to 60,000 shares.




The
        most
        significant component of employee compensation is stock based compensation
        expense. For the nine months ended September 30, 2005, we recorded approximately
        $1,230,551 relating to grants of nonqualified stock options and $1,287,496
        related to restricted stock awards to our employees and non-employee directors,
        all of which were expensed in accordance with SFAS 123(R). During the nine
        months ended September 30, 2004, our total stock based compensation expense,
        which was caused from the issuance of 26,250 options to members of our Board
        of
        Directors, was $5,094. Thus, the increase in expenses related to the issuance
        of
        stock options and restricted stock awards to our employees and non-employee
        directors amounted to $2,512,953. The difference between the amount by which
        stock based compensation increased above the overall increase in employee
        compensation was $171,507 and was caused by the lack of severance payments
        in
        the current period offset by an increase in base salaries caused by an increased
        number of employees. Included in compensation expense for the three months
        ended
        September 30, 2004, was the severance package paid to Stephen L. Brown, our
        former Chairman and Chief Executive Officer, of $483,000. The absence of
        compensation related to the severance package was offset by an increase in
        base
        salaries of $294,643 attributed to the increased number of employees. At
        September 30, 2005, we had 14 full time employees as opposed to 4 full time
        employees at September 30, 2004.




At
        September 30, 2005, three of our executives were covered under employment
        agreements. Our Chief Financial Officer, William B. Horne, is covered under
        a
        two year employment agreement with annual base compensation of $150,000;
        our
        Executive Vice-President of Sales and Marketing of SurgiCount Medical, Inc.,
        Richard Bertran, is covered under a three year employment agreement with
        annual
        base compensation of $200,000 and; our Chief Operating Officer of SurgiCount
        Medical, Inc., James Schafer, is covered under a two year employment agreement
        with annual base compensation of $100,000. None of our other executives our
        currently covered under an employment agreement, therefore, we are under
        no
        financial obligation, other than monthly salaries, for our other executive
        officers. Currently, monthly gross salaries for all of our employees are
        approximately $120,000. We believe, as with all our operating expenses, that
        existing cash resources, together with proceeds from investments and anticipated
        revenues from our operations, should be adequate to fund our salary obligations.
        During the six month period ended December 31, 2005, the Company expects
        that
        salaries will increase significantly from the prior year’s comparable reporting
        period and be paid from existing cash resources, together with proceeds from
        investments and anticipated revenues from the Company’s
        operations




26




The
      second largest component of our operating expenses is professional fees, which
      increased by $1,132,607. As in the case of employee compensation, stock based
      compensation expense is the most significant component of professional fees
      for
      the nine months ended September 30, 2005. We incurred approximately $759,253
      relating to the issuance of warrants and $431,979 related to restricted stock
      awards to our consultants performing services for us.





A
      significant amount of the warrants relate to a consulting agreement that we
      entered into in April 2005 with Health West Marketing Incorporated ( ***“Health
      West”*** )
      where
      we agreed, as an incentive for entering into the agreement, to issue Health
      West
      a callable warrant to purchase 150,000 shares of our common stock at an exercise
      price of $5.95, exercisable for 5 years. We recognized an expense of $527,958
      related to these warrants. In addition to the warrants, we have recognized
      expenses of $156,253 related to the issuance and future issuance of 26,261
      shares of our common stock, as follows: (a) 10,505 shares valued at $62,505
      were
      issued upon signing the agreement; and (b) on August 17, 2005, we entered into
      a
      comprehensive manufacturing agreement with A Plus Manufacturing and became
      obligated to issue 15,756 shares, valued at $93,748, to Health West. In the
      event that Health West helps us develop a regional distribution network to
      integrate the Safety-Sponge TM System
      into the existing acute care supply chain by February 5, 2006, we will then
      issue Health West an additional 15,756 shares and at that time recognize an
      additional expense of $93,748.





In
      addition to the stock based compensation that we recognized as a result of
      our
      agreement with Health West, we have issued additional warrants to purchase
      shares of common stock and granted restricted shares of common stock to various
      consultants performing services for us. These services have primarily related
      to
      investor relations and legal services.





All
      of
      our stock based compensation issued to employees, non-employee directors and
      consultants were expensed in accordance with SFAS 123(R). We valued the
      nonqualified stock options and warrants using the Black-Scholes valuation model
      assuming expected dividend yield, risk-free interest rate, expected life and
      volatility of 0%, 3.75%, three to five years and 83%, respectively. The
      restricted stock awards were valued at the closing price on the date the
      restricted shares were granted. The overall increase in expenses related to
      the
      issuance of stock options, warrants and restricted stock awards amounted to
      $3,704,185.





We
      also
      issued 150,000 warrants, valued at $536,578, to Aegis Securities Corp., a
      nonaffiliated consultant, for providing advisory services in connection with
      the
      acquisition of SurgiCount Medical, Inc. The services provided by Aegis
      Securities Corp. included an evaluation of and oversight over completion of
      the
      transaction. The value of the warrants, along with the purchase price and direct
      costs incurred as a result of the transaction, were capitalized. The entire
      capitalized costs, valued at $4,684,576, have 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. Amortization expense
      related to the patents, for the nine months ended September 30, 2005, was
      approximately $190,000 as opposed to no expense during the nine months ended
      September 30, 2004.




**Interest,
      dividend income and other, net**





We
      had
      investment income of $41,321 and $369 for the nine months ended and $1,234
      and
      $155 for the three months ended September 30, 2005 and September 30, 2004,
      respectively.





The
      increase in investment income for the nine and three months ended September
      30,
      2005 when compared to September 30, 2004, was primarily the result of an
      increased amount of fixed income investments held throughout the period. At
      March 31, 2005, we held in marketable securities approximately $2.5 million
      in
      U.S. Treasuries which were liquidated during the three month period ended June
      30, 2005. At September 30, 2004, our primary contributing asset to investment
      income was its cash balance of $190,303.




27


**Realized
      gains (losses) on investments, net**





During
      the nine months ended September 30, 2005, we realized net gains of $252,848
      from
      trades of marketable securities.





During
      the nine months ended September 30, 2004, we realized net gains of $650,878
      primarily from the disposition of a portion of our equity interest in Excelsior
      and the sale of common shares in Principal Financial Group.





We
      have
      relied and we continue to rely to a large extent upon proceeds from sales of
      investments rather than investment income to defray a significant portion of
      our
      operating expenses. Because such sales cannot be predicted with certainty,
      we
      attempt to maintain adequate working capital to provide for fiscal periods
      when
      there are no such sales.





**Unrealized
      gains (losses) on marketable securities, net**




Unrealized
        losses, as compared to that which was reported at December 31, 2004, increased
        by $80,115 during the nine months ended September 30, 2005, primarily due
        to our
        investment in IPEX which had an unrealized loss of $168,993 for the period
        then
        ended. The unrealized loss represents the difference between our average
        cost
        per share of $3.65 compared to our September 30, 2005 valuation of $1.875
        per
        share. IPEX common stock is traded on the OTC Bulletin Board, which reported
        a
        closing price, at September 30, 2005, of $2.50. We valued our holdings in
        IPEX
        at a 25% discount to the $2.50 closing price, or $1.875 per share, due primarily
        to the limited average number of shares traded on the OTC Bulletin Board.
        Additionally, all marketable securities which had an unrealized loss at December
        31, 2004, in the amount of $58,254, had been disposed **** of.





Unrealized
      losses, as compared to that which was reported at December 31, 2003, increased
      by $66,256 during the nine months ended September 30, 2004 primarily due to
      the
      sale of a portion of our Excelsior common stock holdings, which resulted in
      a
      corresponding increase in realized gains of $508,804, offset by an increase
      in
      the value of the remaining Excelsior holdings of $435,548.





**Accumulated
      other comprehensive income**





Unrealized
      gains (losses) on our investments designated as available-for-sale are recorded
      in accumulated other comprehensive income. At September 30, 2005, we classified
      all of our restricted holdings in IPEX as available-for-sale. At September
      30,
      2005, the unrealized gains on our restricted holdings in IPEX amounted to
      $478,125. We did not hold any investments classified as available-for-sale
      at
      September 30, 2004.





**Taxes**





We
      are
      taxed under Title 26, Chapter 1, Subchapter C of the Internal Revenue Code
      of
      1986, as amended, and therefore subject to federal income tax on the portion
      of
      our taxable income.





At
      December 31, 2004, we had 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 future income taxes
      will
      depend on our ability to generate sufficient taxable income prior to the
      expiration of the net operating loss carryforwards. The carryforward expires
      beginning in 2011.





A
      change
      in the ownership of a majority of the fair market value of our common stock
      can
      delay or limit the utilization of existing net operating loss carryforwards
      pursuant to Internal Revenue Code Section 382. We believe that such a change
      occurred during the year ended December 31, 2004. Based upon an analysis of
      purchase transactions of our equity securities during 2004, we believe that
      our
      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. Each of the following
      risks may materially adversely affect our business, financial condition and
      results of operations. 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 our operations due to
                terrorism;*


·
            *future
                regulatory actions and conditions in our operating areas or target
                industries for investments;
                and*


·
            *other
                risks and uncertainties as may be detailed from time to time in our
                public
                announcements and SEC filings.*




28




**RISKS
      RELATING TO OUR BUSINESS AND STRUCTURE**





**We
      recently restructured our business 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.**





Since
      the
      change of control that occurred in October 2004, we restructured our business
      strategy and objective to focus on the medical products and healthcare solutions
      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 our election to be treated as a BDC may increase the risks to our
      shareholders since we are no longer subject the regulatory restrictions or
      financial reporting benefits of the Investment Company Act of 1940 (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.





The
      nature of our business has changed 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
      and health care solutions industries, with the goal of generating income from
      the operations of those businesses. No assurance can be given that our business
      strategy or 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 resulted 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 or historical cost methods of accounting, depending on the
      classification of the investment and our intent with respect to the period
      of
      time we intend to hold the investment.





The
      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 now have to consolidate our financial statements with subsidiaries,
      thus eliminating the portfolio company reporting benefits available to BDCs.





**We
      may never dispose of our non-core, non-patient safety related assets, which
      could require us to re-register under the 1940 Act.**





In
      the
      past, as a BDC registered under the 1940 Act, we invested in illiquid equity
      securities acquired directly from issuers in private transactions. In March
      2005, we changed our business strategy to become an operating company focused
      on
      the health care and medical products field, particularly the patient safety
      markets. In order to further our new business strategy, our management is
      currently trying to dispose of our non-core, non-patient safety related assets,
      which includes various investments in businesses and real estate that are not
      part of our current business plan. We may never dispose of these non-core,
      non-patient safety related assets due to a number of reasons including: (1)
      lack
      of a liquid market to dispose of such assets; (2) potential adverse tax effects
      from a disposition; or (3) our board of directors and management may change
      their decision to dispose of such assets. If we do not dispose of these assets,
      our management’s focus will be diverted from our present business strategy,
      which could delay implementation of our business plan and which could require
      us
      to re-register under the 1940 Act.




29


**We
      may have to take actions that are disruptive to our business strategy to avoid
      registration under the 1940 Act.**





The
      1940
      Act generally requires public companies that are engaged primarily in the
      business of investing, reinvesting, owning, holding or trading in securities
      to
      register as investment companies. A company may be deemed to be an investment
      company if it owns “investment securities” with a value exceeding 40% of the
      value of its total assets (excluding government securities and cash items)
      on an
      unconsolidated basis, unless an exemption or safe harbor applies. Securities
      issued by companies other than majority-owned subsidiaries are generally counted
      as investment securities for purposes of the 1940 Act.





Presently
      we are near the 40% investment threshold for meeting the definition of an
      investment company under the 1940 Act and thus could be required to register
      as
      investment company under the 1940 Act in the near future.





Registration
      as an investment company would subject us to restrictions that are inconsistent
      with our fundamental business strategy of equity growth through creating,
      building and operating companies
      in the medical products, healthcare services, financial and real estate
      industries. Moreover, registration under the 1940 Act would subject us to
      increased regulatory and compliance costs, and other restrictions on the way
      we
      operate. We
      may
      also have to take actions, including buying, refraining from buying, selling
      or
      refraining from selling securities, when we would otherwise not choose to do
      so
      in order to continue to avoid registration under the 1940 Act.





**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.**





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.





**Should
      the value of our patents be less than their purchase price, we could incur
      significant impairment charges.**





At
      September 30, 2005, patents received in the acquisition of SurgiCount Medical,
      Inc., net of accumulated amortization, represented $4,495,027, or 41.6%, of
      our
      total assets. We
      perform an annual review in the fourth quarter of each year, or more frequently
      if indicators of potential impairment exist to determine if the recorded amount
      of our patents is impaired. This determination requires significant judgment
      and
      changes in our estimates
      and assumptions could materially affect the determination of fair value and/or
      impairment of patents. We may incur charges for the impairment of our patents
      in
      the future if sales of our patient safety products, in particular our
      Safety-SpongeTM System, fail to achieve our assumed revenue growth rates or
      assumed operating margin results.




30




**We
      have in the past invested in non-marketable investment securities which may
      subject us to significant impairment charges.**





We
      have
      in the past invested in illiquid equity securities acquired directly from
      issuers in private transactions. At September 30, 2005, 41.25% of our assets
      were comprised of investment securities, the majority of which are illiquid
      investments. Investments in illiquid, or non-marketable, securities are
      inherently risky and a number of the companies we have invested may fail. 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
      we
      use to identify those events or circumstances includes as relevant, the nature
      and value of any collateral, the company’s ability to make payments and its
      earnings, the markets in which the company does business, comparison to
      valuations of publicly traded companies, comparisons to recent sales of
      comparable companies, the discounted cash flows of the 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 liquid 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 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. Although we did not recognize any impairment for
      the
      nine months ended September 30, 2005, since a significant amount of our assets
      are comprised of non-marketable investment securities, any future impairment
      charges from the write down in value of these securities will adversely affect
      our financial condition. ****





**We
      may not be able to effectively integrate our acquisition targets, which would
      be
      detrimental to our business.**





On
      February 25, 2005, we purchased SurgiCount Medical, Inc., a holding company
      for
      intellectual property rights relating to our Safety-SpongeTM System. We
      anticipate seeking other acquisitions in furtherance of our plan to acquire
      assets and businesses in the medical products and health care solutions
      industries. Acquisitions involve numerous risks, including potential difficulty
      in integrating operations, technologies, systems, and products and services
      of
      acquired companies, diversion of management’s attention and disruption of
      operations, increased expenses and working capital requirements and the
      potential loss of key employees and customers of acquired companies. In
      addition, acquisitions involve financial risks, such as the potential
      liabilities of the acquired businesses, the dilutive effect of the issuance
      of
      additional equity securities, the incurrence of additional debt, the financial
      impact of transaction expenses and the amortization of goodwill and other
      intangible assets involved in any transactions that are accounted for by using
      the purchase method of accounting, and possible adverse tax and accounting
      effects. Any of the foregoing could materially and adversely affect our
      business.





**Failure
      to properly manage our potential growth would be detrimental to our
      business.**





Any
      growth in our operations will place a significant strain on our resources and
      increase demands on our management and on our operational and administrative
      systems, controls and other resources. There can be no assurance that our
      existing personnel, systems, procedures or controls will be adequate to support
      our operations in the future or that we will be able to successfully implement
      appropriate measures consistent with our growth strategy. As part of this
      growth, we may have to implement new operational and financial systems,
      procedures and controls to expand, train and manage our employee base and
      maintain close coordination among our technical, accounting, finance, marketing,
      sales and editorial staffs. We cannot guarantee that we will be able to do
      so,
      or that if we are able to do so, we will be able to effectively integrate them
      into our existing staff and systems. We may fail to adequately manage our
      anticipated future growth. We will also need to continue to attract, retain
      and
      integrate personnel in all aspects of our operations. Failure to manage our
      growth effectively could hurt our business.





**If
      the protection of our intellectual property rights is inadequate, our ability
      to
      compete successfully could be impaired.**





In
      connection with our purchase of SurgiCount Medical, Inc., we acquired one
      registered U.S. patent and one registered international patent of the Safety-SpongeTM
      System. We regard our patents, copyrights, trademarks, trade secrets and similar
      intellectual property as critical to our business. We rely on a combination
      of
      patent, trademark and copyright law and trade secret protection to protect
      our
      proprietary rights. Nevertheless, the steps we take to protect our proprietary
      rights may be inadequate. Detection and elimination of unauthorized use of
      our
      products is difficult. We may not have the means, financial or otherwise, to
      prosecute infringing uses of our intellectual property by third parties.
      Further, effective patent, trademark, service mark, copyright and trade secret
      protection may not be available in every country in which we will sell our
      products and offer our services. If we are unable to protect or preserve the
      value of our patents, trademarks, copyrights, trade secrets or other proprietary
      rights for any reason, our business, operating results and financial condition
      could be harmed.




31




Litigation
      may be necessary in the future to enforce our intellectual property rights,
      to
      protect our trade secrets, to determine the validity and scope of the
      proprietary rights of others, or to defend against claims that our products
      infringe upon the proprietary rights of others or that proprietary rights that
      we claim are invalid. Litigation could result in substantial costs and diversion
      of resources and could harm our business, operating results and financial
      condition regardless of the outcome of the litigation.





Other
      parties may assert infringement or unfair competition claims against us. We
      cannot predict whether third parties will assert claims of infringement against
      us, or whether any future claims will prevent us from operating our business
      as
      planned. If we are forced to defend against third-party infringement claims,
      whether they are with or without merit or are determined in our favor, we could
      face expensive and time-consuming litigation, which could distract technical
      and
      management personnel. If an infringement claim is determined against us, we
      may
      be required to pay monetary damages or ongoing royalties. Further, as a result
      of infringement claims, we may be required, or deem it advisable, to develop
      non-infringing intellectual property or enter into costly royalty or licensing
      agreements. Such royalty or licensing agreements, if required, may be
      unavailable on terms that are acceptable to us, or at all. If a third party
      successfully asserts an infringement claim against us and we are required to
      pay
      monetary damages or royalties or we are unable to develop suitable
      non-infringing alternatives or license the infringed or similar intellectual
      property on reasonable terms on a timely basis, it could significantly harm
      our
      business.





**There
      are significant potential conflicts of interest with our officers, directors
      and
      our affiliated entities which could adversely affect our results from
      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 Bodnar & Company Investment Management LLC. In
      particular, Milton “Todd” Ault, III, our Chairman and Chief Executive Officer,
      Melanie Glazer, Manager of our subsidiary Ault Glazer Bodnar Capital Properties,
      LLC, and Lynne Silverstein, our President and Secretary, are all principals
      of
      Ault Glazer Bodnar & 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 Ault Glazer Bodnar
      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 Bodnar & 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 Bodnar & Company Investment Management LLC,
      other than certain of our officers’ responsibility to provide management and
      administrative services to Ault Glazer Bodnar & Company Investment
      Management LLC. and its clients from time-to-time. However, subject to
      applicable law, we may engage in transactions with Ault Glazer Bodnar &
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.




32




**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 on 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
      October 1, 2005, Milton “Todd” Ault, III, our Chief Executive Officer and
      Chairman, beneficially owned approximately 25.6% 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.





**RISKS
      RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED
      BUSINESS**





**We
      rely on a third party manufacturer and supplier to manufacture our
      Safety-SpongeTM System. The loss of this manufacturer and supplier may interrupt
      our operations.**





On
      August
      17, 2005, our wholly owned subsidiary SurgiCount entered into an agreement
      for A
      Plus International Inc. to be the exclusive manufacturer and provider of the
      Safety-SpongeTM System. During the term of the agreement, A Plus International
      Inc. agreed not to manufacture, distribute or otherwise supply any bar coded
      gauze sponges, bar coded laparotomy sponges, bar coded O.R. towels or bar coded
      specialty sponges manufactured in China for any third party except for
      SurgiCount. However, in the event A Plus International Inc. does not meet the
      requirements of the agreement, SurgiCount may seek additional providers of
      the
      Safety-SpongeTM products. We cannot assure you that SurgiCont will be able to
      maintain its relationship with A Plus International Inc. or secure additional
      suppliers and manufacturers on favorable terms as needed. Although we believe
      the materials used in the manufacture of the Safety-SpongeTM System are readily
      available and can be purchased and/or produced by multiple vendors, the loss
      of
      a major supplier or manufacturer, the deterioration of our relationship with
      a
      major supplier or manufacturer, changes 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.




33




**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.




**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. All of our products, currently comprising
      only
      the Safety-SpongeTM System, must receive 510(k) clearance or PMA approval. The
      Safety-SpongeTM System has already received 501(k) exempt status from the FDA. 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.




34




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.





**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 have general liability insurance
      to
      cover claims up to $1,000,000. This insurance 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 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 success rate of our current 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.




35




**Economic
      recessions or downturns could impair investments and harm our operating results.**





Many
      of
      the companies in which we have made 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 investments is likely to decrease during these periods. These
      conditions could lead to financial losses in our investments and a decrease
      in
      our revenues, net income, and assets. Our investments also may be affected
      by
      current and future market conditions. 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** .





Our
      assets 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. We have invested a substantial portion of
      our
      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. 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.





We
      expect
      that some of our 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. We have in the past relied, and we continue to rely to a large
      extent, upon proceeds from sales of investments rather than investment income
      or
      revenue generated from operating activities to defray a significant portion
      of
      our operating expenses.





**The
      lack of liquidity in our investments may adversely affect our business.**





A
      portion
      of our investments consist of securities acquired directly from the issuer
      in
      private transactions. Some of these investments are subject to restrictions
      on
      resale and/or otherwise are illiquid. There is no established trading market
      for
      most of such securities. Additionally, many of such securities are not eligible
      for sale to the public without registration under the Securities Act of 1933,
      which could prevent or delay any sale by us 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, we may be considered an insider by virtue of our board representation
      and would be restricted in sales of such corporation's securities. 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 our investments, the proceeds of such liquidation
      may
      be significantly less than the value at which we acquired those investments.




36




**We
      may not realize gains from our equity investments.**





Our
      investments are primarily in equity securities of other companies. 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. The types of factors that our Board
      of
      Directors takes into account include, 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 investment
      fails
      to perform as expected.**





We
      have
      acquired controlling equity stakes in certain 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.




37




**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 the amount of cash
      we
      eventually receive on the liquidation of our real estate holdings.**





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. If adverse changes in any of these factors were
      to
      occur, we generally would expect to receive less cash upon liquidation of our
      real estate holdings.





**Our
      current real estate holdings are concentrated in Baltimore, Maryland and Heber
      Springs, Arkansas. Adverse circumstances affecting these areas generally could
      adversely affect the value of such real estate holdings.**




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.





**RISKS
      RELATED TO OUR FINANCING**





**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
      November 7, 2005, we had 5,626,708 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 registration statement filed with the
      SEC
      on May 3, 2005. After the Form S-3 is declared effective by the SEC, 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 will cause immediate
      and substantial dilution to our existing stockholders.**





The
      issuance of shares upon exercise of our outstanding warrants will result in
      substantial dilution to the interests of other stockholders. This may include
      dilution in the market price of our common stock since the exercising warrant
      holders may exercise and sell the full amount issuable on exercise.




38




**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 $0.167 to $7.333. 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 3,973 shares. The last reported sale price for our common stock
      on
      October 3, 2005, was $3.55 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.





**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 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. On June 24, 2004, we received a
      letter from AMEX inquiring as to our ability to remain listed on AMEX.
      Specifically, AMEX indicated that our common stock was subject to delisting
      under sections 1003(a)(i) and 1003(a)(ii) of AMEX’s Company Guide because our
      stockholders’ equity was below the level required by AMEX’s continued listing
      standards. Our stockholders’ equity fell below the required standard due to
      years of continued losses. On September 15, 2004, AMEX notified us that it
      had
      accepted our proposed plan to comply with AMEX’s continued listing standards.
      Significant events which increased our stockholders’ equity in excess
      of
      AMEX’s continued listing standards were the completion of an approximately $4
      million equity financing combined with the acquisition of Surgicount Medical,
      Inc. which was done primarily through the issuance of common stock. AMEX will
      normally consider suspending dealings in, or removing from the listing of,
      securities of a company under Section 1003(a)(i) for a company that has
      stockholders' equity of less than $2,000,000 if such company has sustained
      losses from continuing operations and/or net losses in two of its three most
      recent fiscal years; or under Section 1003(a)(ii) for a company that has
      stockholders' equity of less than $4,000,000 if such company has sustained
      losses from continuing operations and/or net losses in three of its four most
      recent fiscal years. At June 30, 2005, we reported our second consecutive
      quarter in which our stockholders’ equity was in excess of $4,000,000, and we
      believe we have re-gained compliance with AMEX’s continued listing requirements.
      As reflected in this September 30, 2005 Form 10-Q, our stockholders’ equity was
      still in excess of that required
      under Section 1003(a)(ii) of AMEX’s Company Guide. If we were to again become
      noncompliant with AMEX’s continued listing requirements, our common stock may be
      delisted which would have a material adverse affect on the price and liquidity
      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 receive 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.




39




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.





**Item
      3. Quantitative and Qualitative Disclosures About Market Risk.**





Our
      business activities contain elements of market risk. We consider 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 our Board of Directors.





We
      have
      invested a substantial portion of our 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. We expect that some of our 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 no public market for the equity interests of some of the small
      companies in which we have invested, the valuation of such the equity interests
      is subject to the estimate of our 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 our equity
      investments may differ significantly from the values that would be placed on
      them if a liquid market for the equity interests existed. Any changes in
      valuation are recorded in our consolidated statements of operations as either
      "Unrealized losses on marketable securities, net” or “Other comprehensive
      income."





**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 all information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is: (1) accumulated and communicated to our management, including our chief executive
      officer and chief financial officer, as appropriate to allow timely decisions
      regarding required disclosure ;
      and (2)
      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.





40




**PART
      II - OTHER INFORMATION**





**Item
      1.**  **Legal
      Proceedings.**




On
      July
      28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a
      lawsuit against us, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
      and
      four other defendants affiliated with Winstar Communications, Inc. The
      plaintiffs are attempting to collect a federal default judgment of $5,014,000
      entered against two entities, i.e., Winstar Radio Networks, LLC and Winstar
      Global Media, Inc., by attempting to enforce the judgment against us and the
      other defendants, none of whom are judgment debtors. Further, the plaintiffs
      are
      attempting to enforce their default judgment against us when their initial
      lawsuit against us was dismissed on the merits. An unfavorable outcome in the
      lawsuit may have a material adverse effect on our business, financial condition
      and results of operations. We believe the lawsuit is without merit and we intend
      to vigorously defend against the lawsuit.





**Item
      2.****Unregistered
      Sales of Equity Securities and Use of Proceeds.**




**Unregistered
        Sales of Equity Securities**
 
 On
        July
        19, 2005, we sold 38,000 shares of common stock to an unaffiliated accredited
        investor in exchange for 12,000 shares of common stock of Tuxis Corporation
        valued at approximately $102,000. These securities were sold pursuant to
        Section
        4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated
        thereunder.


On
      October 25, 2005, we sold 16,666 shares of common stock to an unaffiliated
      accredited investor at a price of $3.00 per share, resulting in gross proceeds
      of $50,000. These securities were sold pursuant to Rule 506 promulgated under
      the Securities Act of 1933, as amended.





On
      November 3, 2005, we sold Herbert Langsam, one of our current directors, 28,653
      shares of common stock at a price of $3.49 per share, resulting in gross
      proceeds of $100,000. These securities were sold pursuant to Rule 506
      promulgated under the Securities Act of 1933, as amended.





For
      each
      of the above sales, no advertising or general solicitation was employed in
      offering the securities. The offerings and sales were made to a limited number
      of persons, all of whom were accredited investors, business associates of ours
      or our executive officers, and transfer was restricted by us in accordance
      with
      the requirements of the Securities Act. Each of the above security holders
      represented that they are accredited and sophisticated investors, that they
      are
      capable of analyzing the merits and risks of their investment, and that they
      understand the speculative nature of their investment. Furthermore, all of
      the
      above-referenced persons had access to our Securities and Exchange Commission
      filings.




**Purchases
        of Equity Securities by the Issuer**
 
 The
        following table provides information with respect to purchases of our common
        stock by us during the fiscal quarter ended September 30, 2005. No such
        purchases were made by any “affiliated purchaser,” as defined in Rule
        10b-18(a)(3) of the Exchange Act.
 
 **Issuer
        Purchases of Equity Securities**
 **Period**
                
                **(a)
                    Total Number of Shares (or Units) Purchased (1)**
                
                **(b)
                    Average**
                  **Price
                    Paid per Share (or Unit)**
                
                **(c)
                    Total Number of Shares (or Units) Purchased as Part of Publicly
                    Announced
                    Plans or Programs**
                
                **(d)
                    Maximum Number (or approximate Dollar Value) of Shares (or Units)
                    that May
                    Yet Be Purchased Under the Plans or Programs (2)**Month
                    # 1
                  (Beginning
                    7/01/2006;
                  Ending
                    7/31/2006)
                
                
                3,689
                
                $
                3.64
                
                
                0
                
                
                260,461Month
                    # 2
                  (Beginning
                    8/01/2006;
                  Ending
                    8/31/2006)
                
                
                3,960
                
                $
                3.30
                
                
                0
                
                
                256,501Month
                    # 3
                  (Beginning
                    9/01/2006;
                  Ending
                    9/30/2006)
                
                
                2,962
                
                $
                3.54
                
                
                0
                
                
                253,539**Total**
                
                
                **10,611**
                
                **$**
                **3.48
                    (3**
                **)**
                
                **0**
                
                
                **253,539**
 
 (1)
        None
        of the reported issuer purchases were made pursuant to a publicly announced
        plan
        or program. All of such purchases were made in open-market
        transactions.
 (2) At
        December 31, 2004, the Board of Directors authorized a stock repurchase program
        under which up to 1,725,000 shares of common stock could be repurchased from
        time to time with available funds. At December 31, 2004, we had repurchased
        1,610,850 shares of our common stock and i n
        May
        2005, the Board of Directors authorized us
        to repurchase an
        additional 150,000
        shares of common stock. The Board of Directors has not established an expiration
        date for the stock repurchase program.
 (3)
        Represents the average price paid per share for 10,611 shares purchased during
        the fiscal quarter ended September 30, 2005.




**Item
      3.**  **Defaults
      Upon Senior Securities.**





None.





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




None.




**Item
      5.**  **Other
      Information.**





None.





41




**Item
                6.**
            **Exhibits.**





**Exhibit
                Number**
            
            **Description**10.1
            
            Consulting
                Agreement among Wolfgang Grabher and Patient Safety Technologies,
                Inc.
                (Incorporated by reference to the Company’s Form 8-K filed with the
                Securities and Exchange Commission on July 7, 2005)10.2
            
            Agreement
                between Patient Safety Technologies, Inc. and IPEX, Inc. dated July
                7,
                2005 (Incorporated by reference to the Company’s Form 8-K filed with the
                Securities and Exchange Commission on July 7, 2005)10.3
            
            Supply
                Agreement entered into August 17, 2005 with A Plus International,
                Inc.
                (Incorporated by reference to the Company’s Form 8-K filed with the
                Securities and Exchange Commission on August 23, 2005)10.4
            
            Real
                Estate Note dated July 27, 2005 in the principal amount of $480,000
                issued
                by Automotive Services Group, LLC to Ault Glazer Bodnar Acquisition
                Fund,
                LLC (Incorporated by reference to the Company’s Form 8-K filed with the
                Securities and Exchange Commission on September 29,
                2005)10.5
            
            Future
                Advance Mortgage Assignment of Rents and Leases and Security Agreement
                dated July 27, 2005 between Automotive Services Group, LLC to Ault
                Glazer
                Bodnar Acquisition Fund, LLC (Incorporated by reference to the Company’s
                Form 8-K filed with the Securities and Exchange Commission on September
                29, 2005)10.6
            
            Addendum
                I dated August 10, 2005 to Real Estate Note issued by Automotive
                Services
                Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated
                by
                reference to the Company’s Form 8-K filed with the Securities and Exchange
                Commission on September 29, 2005)10.7
            
            Addendum
                II to Real Estate Note issued by Automotive Services Group, LLC to
                Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s Form 8-K filed with the Securities and Exchange Commission on
                September 29, 2005)10.8
            
            Employment
                Agreement dated October 31, 2005 between SurgiCount Medical, Inc.,
                Patient
                Safety Technologies, Inc. and Richard Bertran (Incorporated by reference
                to the Company’s Form 8-K filed with the Securities and Exchange
                Commission on November 2, 2005)10.9
            
            Employment
                Agreement dated November 2, 2005 by and between SurgiCount Medical,
                Inc.,
                Patient Safety Technologies, Inc. and James Schafer (Incorporated
                by
                reference to the Company’s Form 8-K filed with the Securities and Exchange
                Commission on November 7, 2005)31.1
            
            Certification
                by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act31.2
            
            Certification
                by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a)
                of the Exchange Act32.1
            
            Certification
                by Chief Executive 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 Code32.2
            
            Certification
                by 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





42


**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: June
                8,
                2006
              By:
              /s/ Louis Glazer, M.D.Louis
                Glazer, M.D., Ph.GChief
                  Executive Officer
                andChairman
                  of the
                  Board


Date: June
              8,
              2006
            By:
            /s/ William B. HorneWilliam
              B. HorneChief
                Financial Officer
              and Principal Accounting
                Officer






43