**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**










**FORM
      10-Q**





(Mark
      One)





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





FOR
      THE
      QUARTERLY PERIOD ENDED JUNE 30, 2008




**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   001-09727





**PATIENT
      SAFETY TECHNOLOGIES, INC.**


**(Exact
      name of registrant as specified in its charter)**





**Delaware**
            
            **13-3419202****(State or other jurisdiction of incorporation or organization)**
            
            **(I.R.S. Employer Identification Number)****43460
                Ridge Park Drive, Suite 140, Temecula, CA
                92590****(Address
                of principal executive offices) (Zip
                Code)**





**Registrant’s
      telephone number, including area** **code:
      (951) 587-6201**





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      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 a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      definitions of “accelerated filer,” “large accelerated filer,” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ̈
            
            Accelerated filer ̈
            
            Non-accelerated filer ̈
              (Do not check if a smaller reporting
              company)
            
            Smaller reporting companyx





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





There
      were 16,266,706 shares of the registrant's common stock outstanding as of August
      15, 2008.





**PATIENT
      SAFETY TECHNOLOGIES, INC.**





**FORM
      10-Q FOR THE QUARTER**


**ENDED
      JUNE 30, 2008**





**TABLE
      OF CONTENTS**





**Page****PART
                I – FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements
            1Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            15Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            24Item
                4T.
            Controls
                and Procedures
            24**PART
                II – OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            25Item
                1A.
            Risk
                Factors
            25Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            25Item
                3.
            Defaults
                Upon Senior Securities
            26Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            26Item
                5.
            Other
                Information
            26Item
                6.
            Exhibits
            26**SIGNATURES**
            28





**"SAFE
      HARBOR" STATEMENT UNDER**


**THE
      PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**





We
      believe that it is important to communicate our plans and expectations about
      the
      future to our stockholders and to the public. Some of the statements in this
      report are forward-looking statements about our plans and expectations of what
      may happen in the future, including in particular the statements about our
      plans
      and expectations in Part I of this report under the heading “Item 2.
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations.” Statements that are not historical facts are forward-looking
      statements. These forward-looking statements are made pursuant to the
“safe-harbor” provisions of the Private Securities Litigation Reform Act of
      1995. You can sometimes identify forward-looking statements by our use of
      forward-looking words like “may,” “should,” “expects,” “intends,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue”
or the negative of these terms and other similar expressions.





Although
      we believe that the plans and expectations reflected in or suggested by our
      forward-looking statements are reasonable, those statements are based only
      on
      the current beliefs and assumptions of our management and on information
      currently available to us and, therefore, they involve uncertainties and risks
      as to what may happen in the future. Accordingly, we cannot guarantee you that
      our plans and expectations will be achieved. Our actual results and stockholder
      values could be very different from and worse than those expressed in or implied
      by any forward-looking statement in this report as a result of many known and
      unknown factors, many of which are beyond our ability to predict or control.
      These factors include, but are not limited to, those contained in Part II of
      this report under “Item 1A. Risk Factors.” All written and oral forward-looking
      statements attributable to us are expressly qualified in their entirety by
      these
      cautionary statements.





Our
      forward-looking statements speak only as of the date they are made and should
      not be relied upon as representing our plans and expectations as of any
      subsequent date. Although we may elect to update or revise forward-looking
      statements at some time in the future, we specifically disclaim any obligation
      to do so, even if our plans and expectations change.





**PART
      I – FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**




**PATIENT
        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY**
 
 **Consolidated
        Balance Sheets (Unaudited)**
 
 **June 30,**
              
              **December 31,****2008**
              
              **2007****ASSETS****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              446,530
              
              $
              405,413Accounts
                  receivable
              
              
              187,450
              
              
              71,840Inventories
              
              
              27,544
              
              
              —Prepaid
                  expenses
              
              
              571,597
              
              
              104,723**TOTAL
                  CURRENT ASSETS**
              
              
              1,233,121
              
              
              581,976Restricted
                  certificate of deposit
              
              
              87,500
              
              
              87,500Notes
                  receivable
              
              
              153,545
              
              
              153,545Property
                  and equipment, net
              
              
              764,419
              
              
              663,391Assets
                  held for sale, net
              
              
              90,000
              
              
              405,986Goodwill
              
              
              1,832,027
              
              
              1,832,027Patents,
                  net
              
              
              3,601,437
              
              
              3,763,908Long-term
                  investment
              
              
              666,667
              
              
              666,667Other
                  assets
              
              
              19,174
              
              
              19,174**TOTAL
                  ASSETS**
              
              $
              8,447,890
              
              $
              8,174,174**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Notes
                  payable, current portion
              
              $
              1,171,082
              
              $
              1,172,380Accounts
                  payable
              
              
              1,025,675
              
              
              708,593Accrued
                  liabilities
              
              
              1,939,466
              
              
              520,749**TOTAL
                  CURRENT LIABILITIES**
              
              
              4,136,223
              
              
              2,401,722Notes
                  payable, less current portion
              
              
              2,530,558
              
              
              2,530,558Deferred
                  tax liabilities
              
              
              1,434,610
              
              
              1,499,329**COMMITMENTS
                  AND CONTINGENCIES (Note 14)****STOCKHOLDERS'
                  EQUITY**Convertible
                  preferred stock, $1.00 par value, cumulative 7% dividend:1,000,000
                  shares authorized; 10,950 issued and outstandingat
                  June 30, 2008 and December 31, 2007(Liquidation
                  preference of $1,229,138 at June 30, 2008 and December 31,
                  2007
              
              
              10,950
              
              
              10,950Common
                  stock, $0.33 par value: 25,000,000 shares authorized;14,253,566
                  shares issued and outstanding at June 30, 2008; 12,054,602shares
                  issued and outstanding at December 31, 2007
              
              
              4,703,677
              
              
              3,978,019Additional
                  paid-in capital
              
              
              36,205,032
              
              
              34,320,134Accumulated
                  deficit
              
              
              (40,573,160
              )
              
              (36,566,538
              )**TOTAL
                  STOCKHOLDERS' EQUITY**
              
              
              346,499
              
              
              1,742,565**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              8,447,890
              
              $
              8,174,174
 The
          accompanying notes are an integral part of these consolidated interim financial
          statements.
  1
 
 **PATIENT
        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY**
 
 **Consolidated
        Statements of Operations (Unaudited)**
 
 **For The Three Months Ended June 30,**
              
              **For The Six Months Ended June 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****REVENUES**
              
              $
              556,591
              
              $
              313,461
              
              $
              1,056,750
              
              $
              620,619**COST
                  OF SALES**
              
              
              325,892
              
              
              187,460
              
              
              719,183
              
              
              401,670**Gross
                  margin**
              
              
              230,699
              
              
              126,001
              
              
              337,567
              
              
              218,949**OPERATING
                  EXPENSES**Salaries
                  and employee benefits
              
              
              1,317,553
              
              
              827,310
              
              
              1,966,569
              
              
              1,351,649Professional
                  fees
              
              
              430,575
              
              
              180,282
              
              
              763,811
              
              
              492,922Rent
              
              
              38,636
              
              
              7,788
              
              
              57,899
              
              
              46,370Insurance
              
              
              18,175
              
              
              23,233
              
              
              39,639
              
              
              39,946Taxes
                  other than income taxes
              
              
              32,519
              
              
              37,743
              
              
              66,639
              
              
              64,901Amortization
                  of patents
              
              
              81,235
              
              
              81,236
              
              
              162,471
              
              
              162,471General
                  and administrative
              
              
              488,333
              
              
              377,688
              
              
              880,575
              
              
              572,203**Total
                  operating expenses**
              
              
              2,407,026
              
              
              1,535,280
              
              
              3,937,603
              
              
              2,730,462**Operating
                  loss**
              
              
              (2,176,327
              )
              
              (1,409,279
              )
              
              (3,600,036
              )
              
              (2,511,513
              )**OTHER
                  INCOME (EXPENSES)**Interest,
                  dividend income and other
              
              
              —
              
              
              —
              
              
              —
              
              
              4,287Realized
                  gain (loss) assets held for sale, net
              
              
              —
              
              
              22,394
              
              
              (24,578
              )
              
              22,394Interest
                  expense
              
              
              (87,847
              )
              
              (340,355
              )
              
              (174,932
              )
              
              (607,939
              )Change
                  in fair value of warrant liability
              
              
              (168,010
              )
              
              —
              
              
              (168,010
              )
              
              —Unrealized
                  loss on assets held for sale, net
              
              
              —
              
              
              —
              
              
              (65,460
              )
              
              —**Loss
                  from continuing operations before income taxes**
              
              
              (2,432,184
              )
              
              (1,727,240
              )
              
              (4,033,016
              )
              
              (3,092,771
              )**Income
                  tax benefit**
              
              
              32,359
              
              
              29,245
              
              
              64,719
              
              
              58,490**Loss
                  from continuing operations**
              
              
              (2,399,825
              )
              
              (1,697,995
              )
              
              (3,968,297
              )
              
              (3,034,281
              )**Loss
                  from discontinued operations**
              
              
              —
              
              
              (58,162
              )
              
              —
              
              
              (146,929
              )**Net
                  loss**
              
              
              (2,399,825
              )
              
              (1,756,157
              )
              
              (3,968,297
              )
              
              (3,181,210
              )**Preferred
                  dividends**
              
              
              (19,162
              )
              
              (19,162
              )
              
              (38,325
              )
              
              (38,325
              )**Loss
                  applicable to common shareholders**
              
              $
              (2,418,987
              )
              $
              (1,775,319
              )
              $
              (4,006,622
              )
              $
              (3,219,535
              )**Basic
                  and diluted net loss per common share****Continuing
                  operations**
              
              $
              (0.19
              )
              $
              (0.17
              )
              $
              (0.32
              )
              $
              (0.34
              )**Discontinued
                  operations**
              
              $
              —
              
              $
              (0.01
              )
              $
              —
              
              $
              (0.02
              )**Net
                  loss**
              
              $
              (0.19
              )
              $
              (0.18
              )
              $
              (0.32
              )
              $
              (0.36
              )**Weighted
                  average common shares outstanding - basic and
                  diluted**
              
              
              13,054,109
              
              
              10,057,303
              
              
              12,566,855
              
              
              8,929,707
 
 
  The
        accompanying notes are an integral part of these consolidated interim financial
        statements.
 2
  **PATIENT
        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY**
 
 **Consolidated
        Statements of Cash Flows (Unaudited)**
 
 **For The Six Months Ended June 30,****2008**
              
              **2007**Cash flows
                  from operating activities:Net
                  loss
              
              $
              (3,968,297
              )
              $
              (3,181,210
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              162,731
              
              
              74,069Amortization
                  of patents
              
              
              162,471
              
              
              162,471Non-cash
                  interest
              
              
              —
              
              
              407,920Realized
                  loss on assets held for sale, net
              
              
              24,578
              
              
              —Realized
                  loss (gain) on sale of property and equipment
              
              
              526
              
              
              (51,483
              )Unrealized
                  loss on assets held for sale, net
              
              
              65,460
              
              
              —Stock-based
                  compensation to employees and directors
              
              
              1,000,998
              
              
              635,849Stock-based
                  compensation to consultants
              
              
              8,222
              
              
              57,249Income
                  tax benefit
              
              
              (64,719
              )
              
              (58,490
              )Change
                  in fair value of warrant derivative liability
              
              
              168,010
              
              
              —Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (115,610
              )
              
              (150,926
              )Inventories
              
              
              (27,544
              )
              
              13,870Prepaid
                  expenses
              
              
              (466,874
              )
              
              307,766Other
                  current assets
              
              
              —
              
              
              (295
              )Assets
                  held for sale, net
              
              
              —
              
              
              21,818Accounts
                  payable
              
              
              317,082
              
              
              (532,006
              )Accrued
                  liabilities
              
              
              250,043
              
              
              116,855Net
                  cash used in operating activities
              
              
              (2,482,923
              )
              
              (2,176,543
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (264,285
              )
              
              (223,955
              )Proceeds
                  from sale of property and equipment
              
              
              —
              
              
              42,600Proceeds
                  from sale of assets held for sale, net
              
              
              225,948
              
              
              1,500,000Net
                  cash (used in) provided by investing activities
              
              
              (38,337
              )
              
              1,318,645Cash
                  flows from financing activities:Proceeds
                  from issuance of common stock and warrants
              
              
              2,202,000
              
              
              3,051,100Proceeds
                  from notes payable
              
              
              500,000
              
              
              10,000Payments
                  and decrease on notes payable
              
              
              (101,298
              )
              
              (1,805,693
              )Restricted
                  cash
              
              
              —
              
              
              (228,059
              )Payments
                  of preferred dividends
              
              
              (38,325
              )
              
              —Net
                  cash provided by financing activities
              
              
              2,562,377
              
              
              1,027,348Net
                  increase in cash and cash equivalents
              
              
              41,117
              
              
              169,450Cash
                  and cash equivalents at beginning of period
              
              
              405,413
              
              
              3,775Cash
                  and cash equivalents at end of period
              
              $
              446,530
              
              $
              173,225Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for interest
              
              $
              23,078
              
              $
              189,127Non
                  cash investing and financing activities:Issuance
                  of common stock in payment of accrued liabilities
              
              $
              134,750
              
              $
              —Dividends
                  accrued
              
              $
              —
              
              $
              38,325Issuance
                  of common stock in connection with contingent payment with Surgicount
                  acquisition
              
              $
              —
              
              $
              75,000Issuance
                  of common stock in payment of notes payable and accrued
                  interest
              
              $
              426,170
              
              $
              579,801Payment
                  of accrued liability with long-term investments
              
              $
              —
              
              $
              10,969Reclassification
                  of accrued interest to notes payable, less current portion -
                  net
              
              $
              —
              
              $
              348,614Reclassification
                  of warrant derivative liability to accrued liabilities
              
              $
              1,161,584
              
              $
              —
 The
          accompanying notes are an integral part of these consolidated interim financial
          statements.


3
  **Patient
        Safety Technologies, Inc. and Subsidiary**
 **Notes
        to Consolidated Interim Financial Statements – Unaudited**
 **June
        30, 2008**
 
 **1.
        DESCRIPTION OF BUSINESS**
 
 Patient
        Safety Technologies, Inc. ( ***"PST"*** or the ***"Company"*** )
        is a
        Delaware corporation. The Company’s operations are conducted at its wholly-owned
        operating subsidiary, SurgiCount Medical, Inc. ( ***“SurgiCount”*** ),
        a
        California corporation.
 
 The
        Company’s primary focus is development, manufacturing and distribution of
        products and services focused primarily in the health care and medical products
        field, particularly the patient safety markets. SurgiCount is a developer
        and
        manufacturer of patient safety products and services. The SurgiCount
        Safety-Sponge  System
        is
        a patented turn-key array of modified surgical sponges, line-of-sight scanning
        SurgiCounters, and printPAD printers integrated together to form a comprehensive
        counting and documentation system.
 
 Until
        June 29, 2007, the Company also operated a car wash through Automotive Services
        Group, Inc. ( ***“Automotive
        Services Group”*** ),
        which
        held the Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
        its
        wholly-owned subsidiary. As discussed in Note 4, during 2007 the Company
        completed the sale of the assets held in ASG. In addition, the Company holds
        other unrelated investments including an investment in real estate and in
        a
        financial services company, which it is in the process of liquidating as
        part of
        a strategic plan adopted during 2006 to dispose of all of the Company’s non
        patient safety related assets.
 
 **2.
        LIQUIDITY AND GOING CONCERN**
 
 The
        accompanying unaudited consolidated interim financial statements have been
        prepared assuming that the Company will continue as a going concern. At June
        30,
        2008, the Company has an accumulated deficit of approximately $40.6 million
        and
        a working capital deficit of approximately $2.9 million. For the six months
        ended June 30, 2008, the Company incurred a loss of approximately $4.0 million
        and has used approximately $2.5 million in cash in its operations. Further,
        the
        Company has just begun to generate a material amount of revenues from sales
        of
        the Company’s patient safety products. These conditions raise substantial doubt
        about the Company’s ability to continue as a going concern. The Company has
        relied on liquidating investments and short-term debt financings to fund
        a large
        portion of its operations. In order to ensure the continued viability of
        the
        Company, equity financing must be obtained and profitable operations must
        be
        achieved in order to repay the existing short-term debt and to provide a
        sufficient source of operating capital. In August 2008, the Company completed
        an
        equity financing in which it raised $2.3 million (see Note 14). No assurances
        can be made that the Company will be successful obtaining additional equity
        financing needed to continue to fund its operations, or that the Company
        will
        achieve profitable operations and positive cash flow from its patient safety
        products. The consolidated interim financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.
 
 **3.
        BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**
 
 **Basis
        of Presentation**
 
 The
        accompanying unaudited consolidated interim financial statements have been
        prepared in accordance with the instructions to Form 10-Q and Article 8-03
        of
        Regulation S-X and do not include all the information and disclosures required
        by accounting principles generally accepted in the United States of America.
        The
        consolidated interim 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 consolidated
        interim
        balance sheet as of December 31, 2007 was derived from the Company’s audited
        financial statements. The consolidated interim financial statements should
        be
        read in conjunction with the consolidated financial statements in the Company’s
        Annual Report on Form 10-K for the year ended December 31, 2007. Results
        of the
        three and six months ended June 30, 2008 are not necessarily indicative of
        the
        results to be expected for the full year ending December 31, 2008. All
        intercompany transactions have been eliminated in consolidation.
 
 4
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements – Unaudited
          (continued)**
  **Revenue
        Recognition**
  The
        Company complies with SEC Staff Accounting Bulletin ( ***“SAB”*** )
        101, *Revenue
        Recognition in Financial Statements* ,
        amended
        by SAB 104, *Revenue
        Recognition* .
        Revenues from sales of the Safety-Sponge TM System
        are recorded upon shipment.
 
 **Goodwill
        and Intangible Assets**
 
 In
        accordance with SFAS No. 142, *Goodwill
        and Intangible Assets* ,
        goodwill is tested for impairment at the reporting unit level (operating
        segment
        or one level below an operating segment) on an annual basis in the Company’s
        fourth fiscal quarter or more frequently if indicators of impairment
        exist.  The performance of the test involves a two-step process.  The
        first step of the impairment test involves comparing the fair value of the
        Company’s reporting units with each respective reporting unit’s carrying amount,
        including goodwill.  The fair value of reporting units is generally
        determined using the income approach.  If the carrying amount of a
        reporting unit exceeds the reporting unit’s fair value, the second step of the goodwill impairmenttest is
        performed to determine the amount of any impairment loss.  The second step
        of the goodwill impairmenttest
        involves comparing the implied fair value of the reporting unit’s goodwill with
        the carrying amount of that goodwill.
 
 **Long-Lived
        Assets**
 
 The
        Company evaluates long-lived assets for impairment in accordance with SFAS
        No. 144, *Accounting
        for the Impairment or Disposal of Long-Lived Assets,* which
        requires impairment evaluation on long-lived assets used in operations when
        indicators of impairment are present.  Reviews are performed to determine
        whether the carrying value of an asset is impaired, based on a comparison
        to
        undiscounted expected future cash flows.  If this comparison indicates that
        there is impairment, the impaired asset is written down to fair value, which
        is
        typically calculated using discounted expected future cash flows and a discount
        rate based upon the Company’s weighted average cost of capital adjusted for
        risks associated with the related operations.  Impairment is based on the
        excess of the carrying amount over the fair value of those assets.
 
 **Stock-Based
        Compensation** ******
 
 The
        Company adopted SFAS No. 123(R), *Share-Based
        Payment* ,
        as of
        January 1, 2005 using the modified retrospective application method as provided
        by SFAS 123(R). During the three and six months ended June 30, 2008, the
        Company
        had stock-based compensation expense of $277,000 and $477,000, respectively,
        related to issuances to the Company’s employees and directors, included in
        reported net loss. The total amount of stock-based compensation for the six
        months ended June 30, 2008 of $477,000 included expenses related to restricted
        stock grants valued at $2,000 and stock options valued at $475,000. During
        the
        three and six months ended June 30, 2007, the Company had stock-based
        compensation expense, from issuances to the Company’s employees and directors,
        included in reported net loss of $250,000 and $636,000, respectively. The
        total
        amount of stock-based compensation for the six months ended June 30, 2007,
        of
        $636,000, included restricted stock grants valued at $359,000 and stock options
        valued at $277,000.
 
 During
        the three and six months ended June 30, 2008, the Company had stock-based
        compensation expense from issuances of warrants to employees, directors and
        consultants of the Company included in reported net loss of nil and $532,000,
        respectively. During the three and six months ended June 30, 2007, the Company
        had stock-based compensation expense from issuances of restricted stock and
        warrants to consultants of the Company of $45,000 and $57,000,
        respectively.
  5
  **Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements – Unaudited
        (continued)**
  A
        summary
        of stock option activity for the six months ended June 30, 2008 is presented
        below:
 
 **Outstanding Options****Shares**
                **Available for**
                **Grant**
              
              **Number of**
                **Shares**
              
              **Weighted**
                **Average**
                **Exercise Price**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Life (years)**
              
              **Aggregate**
                **Intrinsic**
                **Value****December
                  31, 2007**
              
              
              **990**
              
              
              **1,650,000**
              
              **$**
              **3.49**
              
              
              **8.43**Grants
              
              
              (550,000
              )
              
              550,000
              
              $
              1.25
              
              
              9.95Cancellations
              
              
              793,000
              
              
              (793,000
              )
              $
              4.07
              
              
              7.60**June
                  30, 2008**
              
              
              **243,990**
              
              
              **1,407,000**
              
              **$**
              **2.28**
              
              
              **8.96**
              
              **$**
              **—**Options
                  exercisable at:December
                  31, 2007
              
              
              
              
              
              782,500
              
              $
              4.40
              
              
              7.83
              
              $
              —June
                  30, 2008
              
              
              
              
              
              952,417
              
              $
              2.65
              
              
              8.74
              
              $
              —
 
 The
        aggregate intrinsic value in the table above represents the total pretax
        intrinsic value (i.e., the difference between our closing stock price on
        June
        30, 2008 and the exercise price, times the number of shares) that would have
        been received by the option holders had all option holders exercised their
        options on June 30, 2008. There have not been any options exercised during
        the
        six months ended June 30, 2008 or year ended December 31, 2007.
 
 All
        options that the Company granted during the six months ended June 30, 2008
        and
        2007 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:
 
 **Six Months ended June 30,****2008**
              
              **2007**Weighted
                  average risk free interest rate
              
              
              3.50
              %
              
              4.50
              %Weighted
                  average life (in years)
              
              
              5.00
              
              
              5.00Volatility
              
              
              106
              %
              
              98
                  - 100
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %Weighted
                  average grant-date fair value per share of options granted
              
              $
              0.93
              
              $
              1.22
 
 A
        summary
        of the changes in the Company’s nonvested options during the six months ended
        June 30, 2008 is as follows:
 
 **Nonvested
                  Shares**
              
              **Shares**
              
              **Weighted**
                **Average**
                **Grant Date**
                **Fair Value**Nonvested
                  at December 31, 2007
              
              
              867,500
              
              $
              1.75Granted
              
              
              550,000
              
              $
              1.40Vested
              
              
              (556,250
              )
              $
              1.56Cancelled
                  and forfeited
              
              
              (406,667
              )
              $
              2.23Nonvested
                  at June 30, 2008
              
              
              454,583
              
              $
              1.13
 
 6
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements – Unaudited
          (continued)**
 During
        the six months ended June 30, 2008, the Company recorded compensation costs
        related to stock options of $475,000. As of June 30, 2008, total unrecognized
        compensation cost related to unvested stock options was $379,000. The cost
        is
        expected to be recognized over a weighted average period of 1.43 years.
 
 **Beneficial
        Conversion Feature of Convertible Notes Payable**
 
 The
        convertible feature of certain notes payable provides for a rate of conversion
        that is below market value. Such feature is normally characterized as a
        Beneficial Conversion Feature ( ***“BCF”*** ).
        Pursuant to EITF Issue No. 98-5, *Accounting
        for Convertible Securities with Beneficial Conversion Features or Contingently
        Adjustable Conversion Ratio,* EITF No.
        00-27, *Application
        of EITF Issue No. 98-5 To Certain Convertible Instruments* and APB
        14, *Accounting
        for Convertible Debt and Debt Issued with Stock Purchase
        Warrants* ,
        the
        estimated fair value of the BCF is recorded in the consolidated financial
        statements as a discount from the face amount of the notes. Such discounts
        are
        amortized to interest expense over the term of the notes (or conversion of
        the
        notes, if sooner).
 
 **Warrant
        Derivative Liability**
 
 The
        Company accounts for warrants issued in connection with financing arrangements
        in accordance with EITF Issue No. 00-19, *Accounting
        for Derivative Financial Instruments Indexed to, and Potentially Settled
        in, a
        Company’s Own Stock* ( **“** ***EITF
        00-19”*** ).
        Pursuant to EITF 00-19, an evaluation of specifically identified conditions
        is
        made to determine whether warrants issued are required to be classified as
        either equity or a liability. If the classification required under EITF 00-19
        changes as a result of events during a reporting period, the instrument is
        reclassified as of the date of the event that caused the reclassification. 
In the event that this evaluation results in a partial reclassification,
        our
        policy is to first reclassify warrants with the latest date of issuance.
        The
        estimated fair value of warrants classified as derivative liabilities is
        determined using the Black-Scholes option pricing model. The fair value of
        warrants classified as derivative liabilities is adjusted for changes in
        fair
        value at each reporting period, and the corresponding non-cash gain or loss
        is
        recorded in current period earnings. There is no limit on the number of
        times a contract may be reclassified.
 
 **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 consolidated statements of operations. Basic loss per common share
        excludes dilution and is computed by dividing loss available to common
        stockholders by the weighted-average common shares outstanding for the period.
        Diluted loss per common share reflects the potential dilution that could
        occur
        if convertible preferred stock or debentures, options and warrants were to
        be
        exercised or converted or otherwise resulted in the issuance of common stock
        that then shared in the earnings of the entity.
 
 Since
        the
        effects of outstanding options, warrants and the conversion of convertible
        preferred stock and convertible debt are anti-dilutive in all periods presented,
        shares of common stock underlying these instruments have been excluded from
        the
        computation of loss per common share.
 
 The
        following sets forth the number of shares of common stock underlying outstanding
        options, warrants, convertible preferred stock and convertible debt as of
        June
        30, 2008 and 2007:
 
 **June 30, 2008**
              
              **June 30, 2007**Warrants
              
              
              9,363,542
              
              
              4,758,441Stock
                  options
              
              
              1,407,000
              
              
              1,490,000Convertible
                  promissory notes
              
              
              1,069,091
              
              
              2,667,287Convertible
                  preferred stock
              
              
              246,375
              
              
              246,37512,086,008
              
              
              9,162,103
  7
  **Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements – Unaudited
        (continued)**
  **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the amounts reported in the financial
        statements and accompanying notes. The actual results may differ from
        management’s estimates.
 
 **Reclassifications**
 
 Certain
        prior year amounts have been reclassified to conform to the 2008
        presentation.  These reclassifications had no effect on previously reported
        results of operations or accumulated deficit.
 
 **Recent
        Accounting Pronouncements**
 
 In
        September 2006, the Financial Accounting Standards Board ( ***“FASB”*** )
        issued
        Statement of Financial Accounting Standards No. 157, *Fair
        Value Measurements* ( ***“SFAS
        157”*** ).
        SFAS
        157 does not require new fair value measurements but rather defines fair
        value,
        establishes a framework for measuring fair value and expands disclosure of
        fair
        value measurements. SFAS 157 is effective for fiscal years beginning after
        November 15, 2007 and interim periods within those fiscal years. In
        February 2008, the FASB issued FSP FAS 157-2, to defer the effective date
        of
        SFAS 157 for all nonfinancial assets and liabilities, except those items
        recognized or disclosed at fair value on an annual or more frequently recurring
        basis, until years beginning after November 15, 2008. We adopted SFAS 157
        for
        our financial assets and liabilities effective January 1, 2008 (see Note
        12 -
        Fair Value Measurements for more information related to the adoption of SFAS
        157
        for financial assets and liabilities). We are currently reviewing the adoption
        requirements related to our nonfinancial assets and liabilities and have
        not yet
        determined the impact, if any, on our financial position or results of
        operations.
  In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159, *The
        Fair Value Option for Financial Assets and Financial Liabilities - Including
        an
        amendment to FASB Statement No. 115* ( ***“SFAS
        159”*** ).
        This
        statement permits companies to choose to measure many financial instruments
        and
        other items at fair value. The objective is to improve financial reporting
        by
        providing entities with the opportunity to mitigate volatility in reported
        earnings caused by measuring related assets and liabilities differently without
        having to apply complex hedge accounting provisions. This statement is expected
        to expand the use of fair value measurement of accounting for financial
        instruments. The fair value option established by this statement permits
        all
        entities to measure eligible items at fair value at specified election dates
        with the resulting unrealized gains and losses, if any, reported in earnings.
        The Company adopted SFAS 159 on January 1, 2008 and in connection with its
        adoption, there was no impact on the Company’s consolidated financial
        statements.
 
 Staff
        Accounting Bulletin 110 ( ***“SAB
        110”*** )
        issued
        by the U.S. Securities and Exchange Commission ( ***“SEC”*** )
        was
        effective for the Company beginning in the first quarter of 2008. SAB 110
        amends
        the SEC’s views discussed in Staff Accounting Bulletin 107 ( ***“SAB
        107”*** )
        regarding the use of the simplified method in developing estimates of the
        expected lives of share options in accordance with SFAS No. 123(R), *Share-Based
        Payment* .
        The
        Company will continue to use the simplified method until we have the historical
        data necessary to provide reasonable estimates of expected lives in accordance
        with SAB 107, as amended by SAB 110.
 
 In
        December 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        141(R), *Business
        Combinations* ( ***“SFAS
        141(R)”*** ).
        This
        statement requires the acquiring entity in a business combination to record
        all
        assets acquired and liabilities assumed at their respective acquisition-date
        fair values, changes the recognition of assets acquired and liabilities assumed
        arising from contingencies, changes the recognition and measurement of
        contingent consideration, and requires the expensing of acquisition-related
        costs as incurred. SFAS 141(R) also requires additional disclosure of
        information surrounding a business combination, such that users of the entity's
        financial statements can fully understand the nature and financial impact
        of the
        business combination. The Company will implement SFAS No. 141(R) on January
        1,
        2009 and will apply prospectively to business combinations completed on or
        after
        that date.
 
 In
        December 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        160, *Noncontrolling
        Interests in Consolidated Financial Statements an amendment of ARB
        51* ( ***“SFAS
        160”*** ).
        SFAS
        160 establishes accounting and reporting standards for ownership interests
        in
        subsidiaries held by parties other than the parent, the amount of consolidated
        net income attributable to the parent and to the noncontrolling interest,
        changes in a parent's ownership interest and the valuation of retained
        noncontrolling equity investments when a subsidiary is deconsolidated. SFAS
        160
        also established reporting requirements that provide sufficient disclosures
        that
        clearly identify and distinguish between the interests of the parent and
        the
        interests of the noncontrolling owner. The Company will implement SFAS No.
        160
        on January 1, 2009. As of May 20, 2009, the Company did not have any minority
        interests. Therefore, the Company does not expect the adoption of this standard
        to have a material impact on our income statement, financial position or
        cash
        flows.
 
 8
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements – Unaudited
          (continued)**
 In
        March 2008, the FASB issued Statement of Financial Accounting Standards
        No. 161, *Disclosures
        about Derivative Instruments and Hedging Activities—an amendment of FASB
        Statement No. 133* ( ***“SFAS
        No. 161”*** ).
        The
        standard requires additional quantitative disclosures (provided in tabular
        form)
        and qualitative disclosures for derivative instruments. The required disclosures
        include how derivative instruments and related hedged items affect an entity’s
        financial position, financial performance, and cash flows; relative volume
        of
        derivative activity; the objectives and strategies for using derivative
        instruments; the accounting treatment for those derivative instruments formally
        designated as the hedging instrument in a hedge relationship; and the existence
        and nature of credit-related contingent features for derivatives. SFAS
        No. 161 does not change the accounting treatment for derivative
        instruments. SFAS No. 161 is effective for the Company in the first quarter
        of fiscal year 2009.
 
 In
        May 2008, the FASB issued FASB Staff Position ( ***“FSP”*** )
        APB
        14-1, *Accounting
        for*  *Convertible
        Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
        Cash Settlement)* ( ***“FSP
        APB 14-1”*** ).
        FSP
        APB 14-1 requires recognition of both the liability and equity components
        of
        convertible debt instruments with cash settlement features. The debt component
        is required to be recognized at the fair value of a similar instrument that
        does
        not have an associated equity component. The equity component is recognized
        as
        the difference between the proceeds from the issuance of the note and the
        fair
        value of the liability. FSP APB 14-1 also requires an accretion of the resulting
        debt discount over the expected life of the debt. Retrospective application
        to
        all periods presented is required and a cumulative-effect adjustment is
        recognized as of the beginning of the first period presented. This standard
        is
        effective for the Company in the first quarter of fiscal year 2009. The Company
        is currently evaluating the impact of FSP APB 14-1.
 
 In
        April
        2008, the FASB issued FSP FAS 142-3, *Determination
        of Useful Life of Intangible Assets* ( ***“FSP
        FAS 142-3”*** ).
        FSP
        FAS 142-3 amends the factors that should be considered in developing the
        renewal
        or extension assumptions used to determine the useful life of a recognized
        intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS
        142-3 also requires expanded disclosure related to the determination of
        intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years
        beginning after December 15, 2008. Earlier adoption is not permitted. The
        Company does not expect FSP FAS 142-3 to have a material impact on its financial
        statements.
 
 In
        May
        2008, the FASB issued Statement of Financial Accounting Standards No. 162, *The
        Hierarchy of Generally Accepted Accounting Policies* ( ***“SFAS
        162”*** ),
        which
        reorganizes the GAAP hierarchy. The purpose of the new standard is to improve
        financial reporting by providing a consistent framework for determining what
        accounting principles should be used when preparing the U.S. GAAP financial
        statements. The standard is effective 60 days after the SEC’s approval of the
        PCAOB’s amendments to AU Section 411. The adoption of SFAS 162 will not have an
        impact on the Company’s financial position or results of
        operations.
 
 In
        June
        2008, the FASB issued FSP No. EITF 03-6-1, *Determining
        Whether Instruments Granted in Share-Based Payment Transactions Are
        Participating Securities* ( ***“FSP
        EITF 03-6-1”*** ),
        which
        requires entities to apply the two-class method of computing basic and diluted
        earnings per share for participating securities that include awards that
        accrue
        cash dividends (whether paid or unpaid) any time common shareholders receive
        dividends and those dividends do not need to be returned to the entity if
        the
        employee forfeits the award. FSP EITF 03-6-1 will be effective for the Company
        on January 1, 2009 and will require retroactive disclosure. The Company is
        currently evaluating the impact of adopting FSP EITF 03-6-1 on its consolidated
        financial position, cash flows, and results of operations.
  9
  **Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements – Unaudited
        (continued)**
  **4.
        DISCONTINUED OPERATIONS**
 
 As
        part
        of a strategic plan to dispose of all the Company’s non-patient safety related
        assets, during the fourth quarter of 2006 the Company began marketing for
        sale the assets of ASG, located in Alabama. The Company completed the sale
        of
        one operating car wash on June 29, 2007 and the remaining two parcels of
        undeveloped land during the six months ended September 30, 2007. The assets
        of
        ASG met the “held for sale” and “discontinued operations” criteria in accordance
        with SFAS 144.
  The
        following sets forth the discontinued operations for the six months ended
        June
        30, 2008 and 2007 related to the held for sale assets of Automotive Services
        Group:
 
 **Six Months Ended June 30,****2008**
              
              **2007**Operating
                  revenues
              
              $
              —
              
              $
              309,455Operating
                  expenses
              
              
              —
              
              
              262,323Depreciation
                  and amortization
              
              
              —
              
              
              21,819Interest
                  expense
              
              
              —
              
              
              201,331Gain
                  on sale of assets
              
              
              —
              
              
              29,089Loss
                  from discontinued operations
              
              $
              —
              
              $
              (146,929
              )
 
 **5.
        PATENTS**
 
 Patents,
        net, as of June 30, 2008 and December 31, 2007 are:
 
 **June
                  30, 2008**
              
              **December
                  31, 2007**Patents
              
              $
              4,684,576
              
              $
              4,684,576Accumulated
                  amortization
              
              
              (1,083,139
              )
              
              (920,668
              )$
              3,601,437
              
              $
              3,763,908
 
 **6.
        LONG-TERM INVESTMENTS**
 
 Long-term
        investments at June 30, 2008 and December 31, 2007 are comprised of the
        Company’s investment in Alacra Corporation ( ***“Alacra”*** ).
        The
        investment represents 221,484 shares of Series F convertible preferred stock
        of
        Alacra Corporation, recorded at its cost of $666,667, and classified as an
        available-for-sale investment. The Company has the right, to the extent that
        Alacra has sufficient available capital, to have the Series F convertible
        preferred stock redeemed by Alacra for face value plus accrued dividends
        beginning on December 31, 2006. During the year ended December 31, 2007,
        Alacra
        redeemed one-third of the Series F convertible preferred stock. Alacra, based
        in
        New York, is a global provider of business and financial
        information.
 
 **7.
        OTHER ASSETS**
 
 At
        June
        30, 2008 and December 31, 2007, the Company had other assets of approximately
        $19,000 consisting primarily of security deposits.
  10
  **Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements – Unaudited
        (continued)**
  **8.
        NOTES PAYABLE**
 
 Notes
        payable at June 30, 2008 and December 31, 2007 are comprised of the
        following:
 
 **June 30, 2008**
              
              **December 31, 2007**Notes
                  payable to Ault Glazer Capital Partners, LLC (a)
              
              $
              2,530,558
              
              $
              2,530,558Notes
                  payable to Herb Langsam (b)
              
              
              600,000
              
              
              600,000Note
                  payable to Charles Kalina III (c)
              
              
              —
              
              
              400,000Note
                  payable to Catalysis Offshore, Ltd (d)
              
              
              250,000
              
              
              —Note
                  payable to Catalysis Partners, LLC (d)
              
              
              250,000
              
              
              —Other
                  notes payable (e)
              
              
              71,082
              
              
              172,380Total
                  notes payable
              
              
              3,701,640
              
              
              3,702,938Less:
                  current portion
              
              
              (1,171,082
              )
              
              (1,172,380
              )Notes
                  payable - long-term portion
              
              $
              2,530,558
              
              $
              2,530,558
 
 Aggregate
        future required principal payments on these notes during the twelve month
        period
        subsequent to June 30, 2008 are as follows:
 
 2008
              
              $
              1,171,0822009
              
              
              —2010
              
              
              2,530,558$
              3,701,640
 
 (a)
        Effective June 1, 2007, the entire unpaid principal and interest due under
        note
        payable agreements previously entered into with Ault Glazer Capital Partners,
        LLC (formerly AGB Acquisition Fund) (the ***“Fund”*** )
        a
        related party, were restructured into a new Convertible Secured Promissory
        Note
        (the ***"AG
        Partners Convertible Note"*** )
        in the
        principal amount of $2,530,558. The Fund is controlled by Milton “Todd” Ault
        III, a former director of the Company and its former Chairman and Chief
        Executive Officer and Louis Glazer, a director of the Company, both of whom
        currently have a significant beneficial ownership interest in the Company’s
        common and preferred stock. The AG Partners Convertible Note bears interest
        at
        the rate of 7% per annum and is due on the earlier of December 31, 2010,
        or the
        occurrence of an event of default. In the event that the average closing
        price
        of the Company’s common stock is in excess of $5.00 per share for thirty (30)
        consecutive trading days, the Company will have the right to redeem the
        promissory note in shares or in cash. In the event of redemption in shares,
        the
        principal is convertible into shares of the Company’s common stock at a
        conversion price of $2.50. The promissory note is secured by all of the
        Company’s assets. Should the Company raise up to $2,000,000 in a new credit
        facility, including any replacement credit facilities, the Fund is required
        to
        subordinate its security interest in favor of the new credit facility. During
        the three and six months ended June 30, 2008, the Company incurred interest
        expense of $44,000 and $88,000, respectively, on the AG Partners Convertible
        Note. During the three and six months ended June 30, 2007, the Company incurred
        interest expense of nil and $14,000, respectively, on the AG Partners
        Convertible Note.
 
 (b)
        On
        May 1, 2006, Herbert Langsam, a Class II Director of the Company, loaned
        the
        Company $500,000. The loan is documented by a $500,000 Secured Promissory
        Note
        (the ***“Langsam
        Note”*** )
        payable
        to the Herbert Langsam Irrevocable Trust. The Langsam Note accrues interest
        at
        the rate of 12% per annum and had a maturity date of November 1, 2006. This
        note
        was not repaid by the scheduled maturity and to date has not been extended,
        therefore the Langsam Note is recorded in current liabilities. Accordingly,
        the
        note is currently in default and therefore accruing interest at the rate
        of 16%
        per annum. Pursuant to the terms of a Security Agreement dated May 1, 2006,
        the
        Company granted the Herbert Langsam Revocable Trust a security interest in
        all
        of the Company’s assets as collateral for the satisfaction and performance of
        the Company’s obligations pursuant to the Langsam Note.
 
 11
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements – Unaudited
          (continued)**
 On
        November 13, 2006, Mr. Langsam, loaned the Company an additional $100,000.
        The
        loan is documented by a $100,000 Secured Promissory Note (the ***“Second
        Langsam Note”*** )
        payable
        to the Herbert Langsam Irrevocable Trust. The Second Langsam Note accrues
        interest at the rate of 12% per annum and had a maturity date of May 13,
        2007.
        The Company is in the process of restructuring the debt that is owed to Mr.
        Herbert Langsam. Mr. Langsam received warrants to purchase 50,000 shares
        of the
        Company’s common stock at an exercise price of $1.25 per share as additional
        consideration for entering into the loan agreement. The Company recorded
        debt
        discount in the amount of $17,000 as the estimated value of the warrants.
        The
        debt discount was amortized as non-cash interest expense over the term of
        the
        debt using the effective interest method. During the six months ended June
        30,
        2008 and 2007, interest expense of nil and $12,000, respectively, was recorded
        from the debt discount amortization. Pursuant to the terms of a Security
        Agreement dated November 13, 2006, the Company granted the Herbert Langsam
        Revocable Trust a security interest in all of the Company’s assets as collateral
        for the satisfaction and performance of the Company’s obligations pursuant to
        the Second Langsam Note.
 
 During
        the three and six months ended June 30, 2008, the Company incurred interest
        expense, excluding amortization of debt discount, of $24,000 and $48,000,
        respectively, on the Langsam Notes. During the three and six months ended
        June
        30, 2007, the Company incurred interest expense, excluding amortization of
        debt
        discount, of $8,000 and $40,000, respectively. At June 30, 2008 and December
        31,
        2007 accrued interest on the Langsam Notes totaled $186,000 and $138,000,
        respectively.
 
 (c)
        On
        July 12, 2006 the Company, executed a Convertible Promissory Note in the
        principal amount of $250,000 in favor of Charles J. Kalina, III, an existing
        shareholder of the Company. On November 3, 2006 the balance due under the
        $250,000 Convertible Promissory Note was added to a new Convertible Promissory
        Note in the principal amount of $400,000 (the ***“Kalina
        Note”*** ),
        pursuant to which the Company received proceeds of approximately $150,000.
        The
        Kalina Note accrued interest at the rate of 12% per annum and was due on
        January
        31, 2008. On May 20, 2008, the principal and accrued interest on the Kalina
        Note, in the aggregate amount of $426,000, was exchanged for equity in the
        Company. Mr. Kalina received 340,936 shares of the Company’s common stock and a
        warrant to purchase 204,561 shares of the Company’s common stock at $1.40 per
        share. During the three and six months ended June 30, 2008, the Company incurred
        interest expense, excluding amortization of debt discount of $12,000 and
        $19,000, respectively, on the Kalina Note. At December 31, 2007 accrued interest
        on the Kalina Note totaled $8,000.
 
 (d) Between
        February 28, 2008 and March 20, 2008, Catalysis Offshore, Ltd. and Catalysis
        Partners, LLC (collectively***“Catalysis”***),
        related parties, each loaned $250,000 to the Company. As consideration for
        the
        loans, the Company issued Catalysis promissory notes in the aggregate principal
        amount of $500,000 (the***“Catalysis
        Notes”***).
        The
        Catalysis Notes accrue interest at the rate of 8% per annum and had maturity
        dates of May 31, 2008. The managing partner of Catalysis is Francis Capital
        Management, LLC (***“Francis
        Capital”***),
        an
        investment management firm. John Francis, a director of the Company and
        President of Francis Capital, has voting and investment control over the
        securities held by Catalysis. Francis Capital, including shares directly
        held by
        Catalysis, beneficially owns 1,272,000 shares of the Company’s common stock and
        warrants for purchase of 763,200 shares of the Company’s common
        stock.During
        the three and six months ended June 30, 2008, the Company incurred interest
        expense of $3,000 and $13,000, respectively, on the Catalysis Notes. At June
        30,
        2008 accrued interest on the Catalysis Notes totaled $13,000
 
 (e)
        On
        November 1, 2006 we entered into a Convertible Promissory Note with Michael
        G.
        Sedlak in the principal amount of $71,000 (the ***“Sedlak
        Note”*** ).
        The
        Sedlak Note, which was not paid by its scheduled maturity date, January 31,
        2008, accrues interest at the rate of 12% per annum.
  12
 **Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements – Unaudited
        (continued)**
  **9.
        ACCRUED LIABILITIES**
 
 Accrued
        liabilities at June 30, 2008 and December 31, 2007 are comprised of the
        following:
 **June
                  30, 2008**
              
              **December
                  31, 2007**Accrued
                  interest
              
              $
              294,133
              
              $
              168,449Accrued
                  dividends on preferred stock
              
              
              134,138
              
              
              134,138Accrued
                  salaries and director fees
              
              
              181,415
              
              
              212,000Warrant
                  derivative liability
              
              
              1,329,594Other
              
              
              186
              
              
              6,162$
              1,939,466
              
              $
              520,749
 
 **10.
        EQUITY TRANSACTIONS**
 
 Between
        May 20, 2008 and June 19, 2008, the Company sold, in a private placement
        exempt
        from the registration requirements of the Securities Act, 2,102,536 shares
        of
        the Company’s common stock at $1.25 price per share and issued five-year
        warrants to purchase 1,261,521 shares of common stock at an exercise price
        of
        $1.40 per share, pursuant to a Securities Purchase Agreement entered into
        with
        several accredited investors. The investors paid $2,202,000 in cash and agreed
        to extinguish $426,170 in existing debt and accrued interest owed to it by
        the
        Company.
 
 **11.
        WARRANTS AND WARRANT DERIVATIVE LIABILITY**
 
 During
        the three and six months ended June 30, 2008, a total of 3,249,021 warrants,
        at
        an average exercise price of $1.39 per share were issued primarily in connection
        with the various subscription agreements entered into by the Company as well
        as
        payment for services and accrued interest. The warrants were valued using
        the
        Black-Scholes valuation model assuming expected dividend yield, risk-free
        interest rate, expected life and volatility of 0%, 3.50%, five years and
        103% -
        106%, respectively. Warrants granted during the year ended December 31, 2007
        were valued using an expected dividend yield, risk-free interest rate, expected
        life and volatility of 0%, 4.50%, five years and 63% - 101%, respectively.
        As of
        June 30, 2008, a total of 9,363,542 warrants, at exercise prices ranging
        from
        $1.25 to $6.05 remain outstanding. Of the 9,363,542 warrants outstanding,
        1,349,998 warrants are unvested.
  As
          discussed in Note 2, EITF 00-19 requires analysis of criteria which must
          be met
          in order to classify warrants issues in a Company’s own stock as either equity
          or liabilites. Evaluation of these criteria as of June 30, 2008 resulted
          in the
          determination that certain outstanding warrants should be reclassified
          from
          equity to a derivative liability.
 
 Based
          on
          this analysis, during the quarter ended June 30, 2008 the Company recorded
          a
          partial reclassification of 1,339,394 warrants with an estimated fair value
          of
          $1,161,583 as a reclassification from stockholder’s equity to warrant derivative
          liability, which is included as a component of accrued liabilities. As
          of June
          30, 2008, the total fair value of the warrant derivative liability is
          $1,329,594. Based on the change in fair value of the warrant derivative
          liability, the Company recorded a non-cash charge of $168,010 during the
          quarter
          ended June 30, 2008.
 
 **12.
          FAIR VALUE MEASUREMENTS**
 
 We
          adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities
          measured on a recurring basis. SFAS 157 defines fair value, establishes
          a
          framework for measuring fair value and generally accepted accounting principles
          and expands disclosures about fair value measurements. This standard applies
          in
          situations where other accounting pronouncements either permit or require
          fair
          value measurements. SFAS 157 does not require any new fair value
          measurements.
 
 Fair
          value is defined in SFAS 157 as the price that would be received to sell
          an
          asset or paid to transfer a liability in an orderly transaction between
          market
          participants at the measurement date. Fair value measurements are to be
          considered from the perspective of a market participant that holds the
          assets or
          owes the liability. SFAS 157 also establishes a fair value hierarchy which
          requires an entity to maximize the use of observable inputs and minimize
          the use
          of unobservable inputs when measuring fair value.
 
 The
          standard describes three levels of inputs that may be used to measure fair
          value:
 
 Level
          1:
          Quoted prices in active markets for identical or similar assets and
          liabilities.
 
 Level
          2:
          Quoted prices for identical or similar assets and liabilities in markets
          that
          are not active or observable inputs other than quoted prices in active
          markets
          for identical or similar assets and liabilities.
 
 Level
          3:
          Unobservable inputs that are supported by little or no market activity
          and that
          are significant to the fair value of the assets or liabilities.
 
 At
          June
          30, 2008, we had outstanding warrants to purchase common shares of our
          stock
          that are classified as warrant derivative liabilities with a fair value
          of
          $1,329,549. The warrants are valued using Level 3 inputs because there
          are
          significant unobservable inputs associated with them.
 **13.
        RELATED PARTY TRANSACTIONS**
 
 *Rent*
 
 During
        the six months ended June 30, 2007 the Company paid approximately $26,000
        of the
        base rent on the corporate offices and The Ault Glazer Group, Inc. ( ***"Ault
        Glazer"*** )
        paid
        the remaining base rent based upon their respective usage of the facilities.
        Together, Milton “Todd” Ault III, our former Chairman and Chief Executive
        Officer of the Company, and Louis Glazer, a Class I Director of the Company,
        and
        Melanie Glazer, the former Manager of our real estate segment, (together,
        the ***“Glazers”*** )
        own a
        controlling interest in the outstanding capital stock of Ault Glazer. As
        of June
        30, 2008 and December 31, 2007, Ault Glazer, Mr. Ault and the Glazers had
        a
        significant beneficial ownership interest in the outstanding common and
        preferred stock of the Company.
 13
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements – Unaudited
          (continued)**
 *Notes
          Payable*
 
 As
          of
          June 30, 2008 and December 31, 2007, the Company has notes payable agreements
          issued to related parties with aggregate outstanding principal balances
          of
          $3,630,558 and $3,130,558, respectively (See Note 8).
 
 *ASG*
 
 During
          the period from June 29, 2007 to August 13, 2007, Automotive Services Group
          sold
          its express car wash and underlying real estate and a parcel of undeveloped
          land
          located in Birmingham, Alabama to Charles H. Dellaccio and Darrell Grimsley.
          Mr.
          Grimsley was the Chairman of the Board and Chief Executive Officer of Automotive
          Services Group.
 *A
          Plus International, Inc.*
 
 During
        the six months ended June 30, 2008 and 2007, the Company recognized cost
        of
        goods sold of $593,000 and $252,000, respectively, in connection with surgical
        sponges provided by A Plus. Wenchen Lin, a director and significant beneficial
        owner of the Company is a founder and significant owner of A Plus.
 
 **14.
        COMMITMENTS AND CONTINGENCIES**
 
 *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 consolidated interim financial
        statements do not include any adjustments for the possible outcome of this
        uncertainty.
 
 **15.
        SUBSEQUENT EVENTS**
 
 Between
        August 1, 2008 to August 14, 2008, the Company sold, in a private placement
        exempt from the registration requirements of the Securities Act, 1,860,000
        shares of the Company’s common stock at $1.25 price per share and issued
        five-year warrants to purchase 1,162,500 shares of common stock at an exercise
        price of $1.40 per share, pursuant to a Securities Purchase Agreement entered
        into with several accredited investors. The investors paid $2,325,000 in
        cash.
  14


**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.**





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our financial statements and
      the
      related notes thereto contained elsewhere in this Form 10-Q. This
      discussion contains forward-looking statements that involve risks and
      uncertainties. All statements regarding future events, our future financial
      performance and operating results, our business strategy and our financing
      plans
      are forward-looking statements. In many cases, you can identify forward-looking
      statements by terminology, such as “may,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or
“continue” or the negative of such terms and other comparable terminology. These
      statements are only predictions. Known and unknown risks, uncertainties and
      other factors could cause our actual results to differ materially from those
      projected in any forward-looking statements. In evaluating these statements,
      you
      should specifically consider various factors, including, but not limited to,
      those set forth in Part II of this report under “Item 1A. Risk Factors” and
      elsewhere in this report on Form 10-Q.*





*The
      following “Overview” section is a brief summary of the significant issues
      addressed in Management’s Discussion and Analysis of Financial Condition and
      Results of Operations (* ***“MD&A”*** *).
      Investors should read the relevant sections of the MD&A for a complete
      discussion of the issues summarized below. The entire MD&A should be read in
      conjunction with Item 1 of Part I of this report, “Financial
      Statements.”*





**Overview**





Patient
      Safety Technologies, Inc. (referred to in this report as the ***“Company,”***  ***“we,”
      “us,”*** and ***“our”*** )
      was
      incorporated on March 31, 1987, under the laws of the state of Delaware.
      Currently we conduct our operations through a single wholly-owned operating
      subsidiary: SurgiCount Medical, Inc. ( ***“SurgiCount”*** ),
      a
      California corporation. Beginning in July 2005 through August 2007, the
      Company’s wholly-owned subsidiary, Automotive Services Group, Inc., a Delaware
      corporation, held the Company’s investment in Automotive Services Group, LLC
      ( ***“ASG”*** ),
      its
      wholly-owned express car wash subsidiary. During the period from June 29, 2007
      to August 13, 2007, Automotive Services Group sold all the assets held by
      ASG.





The
      Company, including SurgiCount, is engaged in the acquisition of controlling
      interests in companies and research and development of products and services
      focused primarily in the health care and medical products field, particularly
      the patient safety markets. SurgiCount is a developer and manufacturer of
      patient safety products and services. In the past we also focused on the
      financial services and real estate industries. On October 2005 our Board of
      Directors authorized us to evaluate alternative strategies for the divesture
      of
      our non-healthcare assets. As a result of our prior focus on the financial
      services and real estate industries, we continue to hold various other unrelated
      investments. We are in the process of liquidating these few remaining
      non-patient safety related assets (the “ *non-core
      assets* ”).
      The
      non-core assets are recorded on the Company’s balance sheet in “long-term
      investments” and “assets held for sale, net”.





**SurgiCount**





SurgiCount,
      developer of the Safety-SpongeTM System, was acquired to enhance our ability to
      focus our efforts in the health care and medical products field, particularly
      the patient safety markets. SurgiCount’s Safety-Sponge System helps reduce the
      number of retained sponges and towels in patients during surgical procedures
      and
      allows for faster and more accurate counting of surgical sponges. The SurgiCount
      Safety-Sponge  System
      is
      a patented turn-key array of modified surgical sponges, line-of-sight scanning
      SurgiCounters, and printPAD printers integrated together to form a comprehensive
      counting and documentation system. The Safety-Sponge System works much like
      a
      grocery store checkout process: Every surgical sponge and towel is affixed
      with
      a unique inseparable two-dimensional data matrix bar code and used with a
      SurgiCounter to scan and record the sponges during the initial and final counts.
      Because each sponge is identified with a unique code, a SurgiCounter will not
      allow the same sponge to be counted more than one time. When counts have been
      completed at the end of a procedure, the system will produce a printed report,
      or can be modified to work with a hospital's paperless system. By scanning
      the
      surgical dressings in at the beginning of a surgical procedure and then scanning
      them out at the end of the procedure, the sponges can be counted faster and
      more
      accurately than traditional methods which require two medical personnel manually
      counting the used and un-used sponges. The Safety-Sponge System is the only
      FDA
      510k approved computer assisted sponge counting system. SurgiCount is the
      first acquisition in our plan to become a leader in the patient safety
      market.


15





Our
      principal executive offices are located at 43460 Ridge Park Drive, Suite 140,
      Temecula, CA 92590. Our telephone number is (951) 587-6201. Our website is
      located at http://www.patientsafetytechnologies.com .





**Critical
      accounting policies and estimates**





The
      below
      discussion and analysis of our financial condition and results of operations
      is
      based upon the accompanying 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, often as a result of the need
      to
      make estimates of matters that are inherently uncertain. Our most critical
      accounting policy relates to the valuation of our intangible assets and stock
      based compensation.





**Valuation
      of Intangible Assets**





We
      assess
      the impairment of intangible assets when events or changes in circumstances
      indicate that the carrying value of the assets or the asset grouping may not
      be
      recoverable. Factors that we consider in deciding when to perform an impairment
      review include significant under-performance of a product line in relation
      to
      expectations, significant negative industry or economic trends, and significant
      changes or planned changes in our use of the assets. Recoverability of
      intangible assets that will continue to be used in our operations is measured
      by
      comparing the carrying amount of the asset grouping to our estimate of the
      related total future net cash flows. If an asset grouping’s carrying value is
      not recoverable through the related cash flows, the asset grouping is considered
      to be impaired. The impairment is measured by the difference between the asset
      grouping’s carrying amount and its fair value, based on the best information
      available, including market prices or discounted cash flow analysis. Impairments
      of intangible assets are determined for groups of assets related to the lowest
      level of identifiable independent cash flows. Due to our limited operating
      history and the early stage of development of some of our intangible assets,
      we
      must make subjective judgments in determining the independent cash flows that
      can be related to specific asset groupings. To date we have not recognized
      impairments on any of our intangible assets related to the Safety SpongeTM
System.





**Stock-Based
      Compensation**





We
      have
      adopted the provisions of SFAS No. 123(R), *Share-Based
      Payment* .
      The
      fair value of each option grant, nonvested stock award and shares issued under
      the employee stock purchase plan were estimated on the date of grant using
      the
      Black-Scholes option pricing model and various inputs to the model. Expected
      volatilities were based on historical volatility of our stock. The expected
      term
      represents the period of time that grants and awards are expected to be
      outstanding. The risk-free interest rate approximates the U.S. treasury
      rate corresponding to the expected term of the option, and dividends were
      assumed to be zero. These inputs are based on our assumptions, which include
      complex and subjective variables. Other reasonable assumptions could result
      in
      different fair values for our stock-based awards.





Stock-based
      compensation expense, as determined using the Black-Scholes option pricing
      model, is recognized on a straight line basis over the service period, net
      of
      estimated forfeitures. Forfeiture estimates are based
      on
      historical data. To the extent actual results or revised estimates differ from
      the estimates used, such amounts will be recorded as a cumulative adjustment
      in
      the period that estimates are revised.


16


**New
      Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board ( ***“FASB”*** ) issued
      Statement of Financial Accounting Standards No. 157, *Fair
      Value Measurements* ( ***“SFAS
      157”*** ).
      SFAS
      157 does not require new fair value measurements but rather defines fair value,
      establishes a framework for measuring fair value and expands disclosure of
      fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. We adopted
      SFAS 157 on January 1, 2008 and i n
      connection with its adoption, there was no impact on our consolidated financial
      statements, and the resulting fair values calculated under SFAS No. 157
      after adoption were not significantly different than the fair values that would
      have been calculated under previous guidance.




In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment to FASB Statement No. 115* ( ***“SFAS
      159”*** ).
      This
      statement permits companies to choose to measure many financial instruments
      and
      other items at fair value. The objective is to improve financial reporting
      by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. This statement is expected
      to expand the use of fair value measurement of accounting for financial
      instruments. The fair value option established by this statement permits all
      entities to measure eligible items at fair value at specified election dates
      with the resulting unrealized gains and losses, if any, reported in earnings.
      We adopted
      SFAS 159 on January 1, 2008 and i n
      connection with its adoption, there was no impact on our consolidated financial
      statements.





Staff
      Accounting Bulletin 110 ( ***“SAB
      110”*** )
      issued
      by the SEC was effective for us beginning in the first quarter of 2008. SAB
      110
      amends the SEC’s views discussed in Staff Accounting Bulletin 107 ( ***“SAB
      107”*** )
      regarding the use of the simplified method in developing estimates of the
      expected lives of share options in accordance with SFAS No. 123(R), *Share-Based
      Payment* .
      We will
      continue to use the simplified method until we have the historical data
      necessary to provide reasonable estimates of expected lives in accordance with
      SAB 107, as amended by SAB 110.





In
      December 2007, the FASB issued Statement
      of Financial Accounting Standards No.
      141(R), *Business
      Combinations*  ( ***“SFAS
      141(R)”*** ).
      This
      statement requires
      the acquiring entity in a business combination to record all assets acquired
      and
      liabilities assumed at their respective acquisition-date fair values, changes
      the recognition of assets acquired and liabilities assumed arising from
      contingencies, changes the recognition and measurement of contingent
      consideration, and requires the expensing of acquisition-related costs as
      incurred. SFAS 141(R) also requires additional disclosure of information
      surrounding a business combination, such that users of the entity's financial
      statements can fully understand the nature and financial impact of the business
      combination. We will implement SFAS No. 141(R) on January 1, 2009 and
      will
      apply prospectively to business combinations completed on or after that
      date .





In
      December 2007, the FASB issued Statement
      of Financial Accounting Standards No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements* *an
      amendment of ARB 51*  ( ***“SFAS
      160”*** ).
      SFAS
      160 establishes
      accounting and reporting standards for ownership interests in subsidiaries
      held
      by parties other than the parent, the amount of consolidated net income
      attributable to the parent and to the noncontrolling interest, changes in a
      parent's ownership interest and the valuation of retained noncontrolling equity
      investments when a subsidiary is deconsolidated. SFAS 160 also established
      reporting requirements that provide sufficient disclosures that clearly identify
      and distinguish between the interests of the parent and the interests of the
      noncontrolling owner. We will implement SFAS No. 160 on January 1, 2009. As
      of
      May 20, 2009, we did not have any minority interests. Therefore, we do not
      expect the adoption of this standard to have a material impact on our income
      statement, financial position or cash flows.





In
      March 2008, the FASB issued Statement of Financial Accounting Standards
      No. 161, *Disclosures
      about Derivative Instruments and Hedging Activities—an amendment of FASB
      Statement No. 133* ( ***“SFAS
      No. 161”*** ).
      The
      standard requires additional quantitative disclosures (provided in tabular
      form)
      and qualitative disclosures for derivative instruments. The required disclosures
      include how derivative instruments and related hedged items affect an entity’s
      financial position, financial performance, and cash flows; relative volume
      of
      derivative activity; the objectives and strategies for using derivative
      instruments; the accounting treatment for those derivative instruments formally
      designated as the hedging instrument in a hedge relationship; and the existence
      and nature of credit-related contingent features for derivatives. SFAS
      No. 161 does not change the accounting treatment for derivative
      instruments. SFAS No. 161 is effective for us in the first quarter of
      fiscal year 2009.


17





In
      May 2008, the FASB issued FASB Staff Position ( ***“FSP”*** )
      APB
      14-1, *Accounting
      for*  *Convertible
      Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
      Cash Settlement)* ( ***“FSP
      APB 14-1”*** ).
      FSP
      APB 14-1 requires recognition of both the liability and equity components of
      convertible debt instruments with cash settlement features. The debt component
      is required to be recognized at the fair value of a similar instrument that
      does
      not have an associated equity component. The equity component is recognized
      as
      the difference between the proceeds from the issuance of the note and the fair
      value of the liability. FSP APB 14-1 also requires an accretion of the resulting
      debt discount over the expected life of the debt. Retrospective application
      to
      all periods presented is required and a cumulative-effect adjustment is
      recognized as of the beginning of the first period presented. This standard
      is
      effective for us in the first quarter of fiscal year 2009. We are currently
      evaluating the impact of FSP APB 14-1.





In
      April
      2008, the FASB issued FSP FAS 142-3, *Determination
      of Useful Life of Intangible Assets* ( ***“FSP
      FAS 142-3”*** ).
      FSP
      FAS 142-3 amends the factors that should be considered in developing the renewal
      or extension assumptions used to determine the useful life of a recognized
      intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS
      142-3 also requires expanded disclosure related to the determination of
      intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years
      beginning after December 15, 2008. Earlier adoption is not permitted. We do
      not
      expect FSP FAS 142-3 to have a material impact on our financial
      statements.





In
      May
      2008, the FASB issued Statement of Financial Accounting Standards No. 162, *The
      Hierarchy of Generally Accepted Accounting Policies* ( ***“SFAS
      162”*** ),
      which
      reorganizes the GAAP hierarchy. The purpose of the new standard is to improve
      financial reporting by providing a consistent framework for determining what
      accounting principles should be used when preparing the U.S. GAAP financial
      statements. The standard is effective 60 days after the SEC’s approval of the
      PCAOB’s amendments to AU Section 411. The adoption of SFAS 162 will not have an
      impact on our financial position or results of operations.





In
      June
      2008, the FASB issued FSP No. EITF 03-6-1, *Determining
      Whether Instruments Granted in Share-Based Payment Transactions Are
      Participating Securities* ( ***“FSP
      EITF 03-6-1”*** ),
      which
      requires entities to apply the two-class method of computing basic and diluted
      earnings per share for participating securities that include awards that accrue
      cash dividends (whether paid or unpaid) any time common shareholders receive
      dividends and those dividends do not need to be returned to the entity if the
      employee forfeits the award. FSP EITF 03-6-1 will be effective for the Company
      on January 1, 2009 and will require retroactive disclosure. We are currently
      evaluating the impact of adopting FSP EITF 03-6-1 on our consolidated financial
      position, cash flows, and results of operations.





**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      and cash equivalents balance was $447,000 at June 30, 2008, versus $405,000
      at
      December 31, 2007. Total current liabilities were $4,136,000 at June 30, 2008,
      versus $2,402,000 at December 31, 2007. As of June 30, 2008 we had a working
      capital deficit of approximately $2,903,000. Since we continue to have recurring
      losses, we have relied upon private placements of equity and debt securities.
      Our existing cash and cash equivalents balance, combined with the proceeds
      received from out August 2008 equity financing, are expected to be sufficient
      to
      meet our anticipated funding requirements during 2008.


18


**2008
      private placements**





During
      the period May 20, 2008 to August 14, 2008, we sold to accredited investors
      in
      our private placements, as reflected below, $5,053,000 in equity
      securities.





Between
      May 20, 2008 and June 19, 2008, the Company entered into a securities purchase
      agreement with several accredited investors (the ***“Investors”*** ),
      in a
      private placement exempt from the registration requirements of the Securities
      Act. The Company issued and sold to the Investors an aggregate of 2,102,536
      shares of its common stock and warrants to purchase an additional 1,261,521
      shares of its common stock.





Between
      August 4, 2008 and August 14, 2008, the Company entered into a securities
      purchase agreement with several accredited investors (the ***“New
      Investors”*** ),
      in a
      private placement exempt from the registration requirements of the Securities
      Act. The Company issued and sold to the New Investors an aggregate of 1,860,000
      shares of its common stock and warrants to purchase an additional 1,162,500
      shares of its common stock.





We
      intend
      to use the net proceeds from these private placement transactions primarily
      for
      general corporate purposes and repayment of existing liabilities.





**2007
      private placements**





During
      2007 we sold to accredited investors in our private placements, as reflected
      below, $5,280,000 in equity securities.




Between
      January 29, 2007 and June 8, 2007, we entered into various subscription
      agreements with accredited investors in private placements exempt from the
      registration requirements of the Securities Act. We issued and sold to these
      accredited investors an aggregate of 2,952,000 shares of our common stock and
      warrants to purchase an additional 1,376,000 shares of our common stock.





On
      October 17, 2007, we entered into a securities purchase agreement with Francis
      Capital Management, LLC ( ***“Francis
      Capital”*** ),
      an
      accredited investor, in a private placement exempt from the registration
      requirements of the Securities Act. We issued and sold to Francis Capital an
      aggregate of 1,270,000 shares of our common stock and warrants to purchase
      an
      additional 763,000 shares of our common stock.





**Promissory
      notes**





In
      addition to our private placements, we have also received a significant amount
      of funding from Ault Glazer Capital Partners, LLC (the ***“Fund”*** ).
      AG
      Management is the managing member of the Fund. The managing member of AG
      Management is The Ault Glazer Group, Inc. ( ***“The
      AG Group”*** ).
      The
      Company’s former Chairman and former Chief Executive Officer, Milton “Todd”
Ault, III, is Chairman, Chief Executive Officer and President of The AG Group.
      At June 30, 2008 the outstanding principal balance of the loan that we entered
      into with the Fund was $2,531,000.





At
      June
      30, 2008 we also had outstanding promissory notes in the aggregate principal
      amount of $1,171,000. Between February 28, 2008 and March 20, 2008, Catalysis
      Offshore, Ltd. and Catalysis Partners, LLC (collectively ***“Catalysis”*** ),
      related parties, loaned us an aggregate of $500,000. As consideration for the
      loans, we issued Catalysis promissory notes in the aggregate principal amount
      of
      $500,000 (the ***“Catalysis
      Notes”*** ).
      The
      Catalysis Notes accrue interest at the rate of 8% per annum and had maturity
      dates of May 31, 2008. The other outstanding promissory notes were entered
      into
      during 2006.


19


During
      the period from June 29, 2007 to August 13, 2007, Automotive Services Group
      sold
      all the assets held by ASG thereby completing the liquidation of Automotive
      Services Group. We received net proceeds, after expenses of the sales, of
      $3,178,000 which resulted in a gain of $10,000. The majority of the proceeds
      from the sales were used to repay existing debt. By selling these assets the
      Company has positioned itself to aggressively pursue the market for surgical
      sponges in the United States and Europe, which we believe represents a market
      opportunity equal to or in excess of $650 million in annual sales.





As
      of
      June 30, 2008, other than our office lease and employment agreements with key
      executive officers, we had no commitments as liabilities not reflected in our
      consolidated financial statements.





Cash
      increased by $41,000 to $447,000 during the six months ended June 30, 2008,
      compared to an increase of $169,000 during the six months ended June 30, 2007.




Operating
      activities used $2,483,000 of cash during the six months ended June 30, 2008,
      compared to $2,177,000 during the six months ended June 30, 2007.




Operating
      activities for the six months ended June 30, 2008, exclusive of changes in
      operating assets and liabilities, used $2,440,000 of cash, as the Company's
      net
      cash used in operating activities of $2,438,000 included non-cash charges for
      depreciation and amortization of $325,000 and stock based compensation of
      $1,009,000. For the six months ended June 30, 2007, operating activities,
      exclusive of changes in operating assets and liabilities, used $1,954,000 of
      cash, as the Company's net cash used in operating activities of $2,177,000
      included non-cash charges for depreciation and amortization of $237,000, debt
      discount of $408,000 and stock based compensation of $693,000.





Changes
      in operating assets and liabilities used cash of $43,000 during the six months
      ended June 30, 2008, principally due to increases in prepaid expenses and
      accounts receivable which was partially offset by increases in the level of
      accounts payable and accrued liabilities. Changes in operating assets and
      liabilities used cash of $223,000 during the six months ended June 30, 2007,
      principally due to decreases in the level of accounts payable and an increase
      in
      accounts receivable which were partially offset by an increase in accrued
      liabilities and a decrease in prepaid expenses.





The
      principal factor in the $38,000 of cash used in investing activities during
      the
      six months ended June 30, 2008 was the
      sale
      of our undeveloped land in Alabama for $226,000. This was
      offset by capitalized costs of $264,000, of which $251,000 related to the
      ongoing development of purchased software related to our
      Safety-Sponge  System.
      The principal factor in the $1,319,000 of cash used in investing activities
      during the six months ended June 30, 2007 was due to the
      sale
      of the express car wash and underlying real estate in Birmingham, Alabama for
      $1.5 million. This was
      partially offset by capitalized costs of $160,000 related to the ongoing
      development of purchased software related to our Safety-Sponge  System.





Cash
      provided by financing activities during the six months ended June 30, 2008
      of
      $2,562,000 resulted from the net proceeds from the issuance of common stock
      and
      warrants of $2,202,000 and short-term debt financings of $500,000. The net
      proceeds from the issuance of securities was offset by the repayment of a
      promissory note of $101,000 and the payment of preferred dividends of $38,000.
      Cash provided by financing activities during the six months ended June 30,
      2007
      of $1,027,000 resulted primarily from net proceeds from the issuance of common
      stock and warrants of $3,051,000 offset by the repayment of the Winstar Note
      in
      the amount of $450,000 and other notes in the amount of $1,356,000.





**Investments**





Our
      financial condition is partially dependent on the success of our existing
      investments. On March 29, 2006 our Board of Directors directed us to liquidate
      all of our investments and other assets that do not relate to the patient safety
      medical products business. Some of our investments are subject to restrictions
      on resale under federal securities laws and otherwise are illiquid, which will
      make it difficult to dispose of the securities quickly. Since we will be forced
      to liquidate some or all of the investments on an accelerated timeline, the
      proceeds of such liquidation may be significantly less than the value at which
      we acquired the investments. The following is a discussion of our most
      significant investments at June 30, 2008.


20





Our
      long-term investment, also referred to as our non-core assets, is valued at
      $667,000. At June 30, 2008, our long-term investment included our investment
      in
      Alacra Corporation, our only significant investment security. Our non-core
      assets also consist of certain real property located in Tennessee. The real
      property meets the “held for sale” criteria and is classified as
      such.





*Alacra
      Corporation*





At
      June
      30, 2008, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued
      at $667,000, which represents 7.9% of our total assets. On April 20, 2000,
      we
      purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
      We
      have the right, subject to Alacra having the available cash, to have the
      preferred stock redeemed by Alacra over a period of three years for face value
      plus accrued dividends beginning on December 31, 2006. Pursuant to this right,
      in December 2006 we informed management of Alacra that we were exercising our
      right to put back one-third of our preferred stock. Alacra had a sufficient
      amount of cash to redeem our preferred stock and in December 2007 completed
      the
      initial redemption of one-third of our preferred stock. We received proceeds
      of
      $333,000 which accounted for the entire amount of the decrease in value of
      our
      Alacra investment. We continue to maintain our right to put back our remaining
      preferred stock to Alacra and expect an additional redemption of one-third
      of
      our preferred stock in December 2008.




*Real
      Estate Investments*





At
      June
      30, 2008, we had one real estate investment, valued at $90,000. The real estate
      investment, consisting of 0.61 acres of undeveloped land in Springfield,
      Tennessee, is currently being marketed for sale. In March 2008, we completed
      the
      sale of approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas
      for net proceeds of $226,000, which resulted in a realized loss of $25,000.
      In
      March 2008 we wrote down the value of our one remaining parcel in Springfield,
      Tennessee to $90,000. We recognized an unrealized loss of $90,000 as a result
      of
      this write-down. We anticipate consummating the sale of the undeveloped land
      in
      Tennessee during the quarter ended December 31, 2008.





**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
      “Loss applicable 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;





§
            “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.


21


**Revenues**





We
      recognized revenues of $557,000 and $313,000 during the three months and
      $1,057,000 and $621,000 during the six months ended June 30, 2008 and 2007,
      respectively. Revenues during the three and six months ended June 30, 2008
      consisted of sales from the Safety-Sponge of $538,000 and $951,000,
      respectively, and sales from hardware and supplies of $19,000 and $106,000,
      respectively. Revenues during the three and six months ended June 30, 2007
      consisted of sales from the Safety-Sponge of $313,000 and $514,000,
      respectively, and sales from hardware and supplies of $106,000. Although
      hardware sales are not considered a recurring item, we expect that once an
      institution adopts our system, they will be committed to its use and therefore
      provide a recurring source of revenues for sales of the safety sponge.





We
      attribute a significant amount of the increase in sales generated by our
      Safety-Sponge  System
      to
      increased product awareness and demand. The Safety-Sponge  System
      is
      currently being evaluated by a large number of medical institutions, the
      adoption by any one of which would have a material impact on our revenues.
      We
      expect that small medical institutions which adopt the Safety-Sponge System
      will
      represent approximately $100,000 in annual revenue whereas the larger
      institutions could represent annual recurring revenues of $600,000 or more.
      We
      expect that current demand will begin to accelerate.





On
      November 14, 2006, SurgiCount entered into a Supply Agreement with Cardinal
      Health 200, Inc., a Delaware corporation ( ***"Cardinal"*** ).
      Pursuant to the agreement, Cardinal shall act as the exclusive distributor
      of
      SurgiCount's products in the United States, with the exception that SurgiCount
      may sell its products to one other hospital supply company, named in the
      agreement, solely for the sale and distribution to its hospital customers.
      The
      term of the agreement is 36 months, unless earlier terminated as set forth
      therein. Otherwise, the agreement automatically renews for successive 12 month
      periods. Although we cannot reasonably predict or estimate the financial impact
      of the agreement with Cardinal we believe it has and will continue to have
      a
      material impact on our results of operations due to the coordination of our
      sales efforts with Cardinal and their significant presence in the major medical
      institutions.





**Cost
      of Sales**





The
      increase in cost of sales of $318,000 during the six months ended June 30,
      2008
      as compared to June 30, 2007, reflects an increase in sales of our
      Safety-Sponge TM System.
      During the six months ended June 30, 2008, our gross margin percentage slightly
      decreased as compared to the six months ended June 30, 2007 primarily as a
      result of discounts provided in connection with hardware sales.





**Expenses**





Operating
      expenses were $2,407,000 and $1,535,000 for the three months and $3,938,000
      and
      $2,730,000 for the six months ended June 30, 2008 and 2007, respectively.





The
      increase in operating expenses of $1,207,000, for the six months ended June
      30,
      2008 when compared to the six months ended June 30, 2007, was primarily the
      result of salaries and employee benefits, which increased by $615,000, and
      professional fees, which increased by $271,000. Our Compensation Committee,
      currently comprised of two independent directors, 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.





For
      the
      six months ended June 30, 2008, we recorded $475,000 related to grants of
      nonqualified stock options, $2,000 related to restricted stock awards and
      $524,000 related to grants of warrants to our employees and non-employee
      directors. During the six months ended June 30, 2007, we recorded $277,000
      related to grants of nonqualified stock options, $269,000 related to restricted
      stock awards to our employees and $90,000 related to restricted stock awards
      to
      our non-employee directors. The issuance of stock options, restricted stock
      awards and warrants to our employees and non-employee directors resulted in
      a
      increase in stock based compensation expense of $365,000 for the six months
      ended June 30, 2008 compared to the six months ended June 30, 2007. Further,
      since fees to our non-employee directors are included in general and
      administrative expenses, excluding the $90,000 in expense related to restricted
      stock awards to our non-employee directors, stock based compensation accounted
      for $455,000 of the increase in salaries and benefits. Therefore, excluding
      stock based compensation, salaries and employee benefits increased by $160,000.


22





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%, 3.00% to 4.50%, three to five years and 63% to 102%,
      respectively. The restricted stock awards were valued at the closing price
      on
      the date the restricted shares were granted.





At
      June
      30, 2008, three of our executives were covered under employment agreements.;
      our
      Chief Executive Officer, Bill Adams, was covered under a three year employment
      agreement with annual base compensation of $300,000; Our Chief Financial
      Officer, William B. Horne, was covered under a two year employment agreement
      with annual base compensation of $250,000 and; our President of Sales and
      Marketing of SurgiCount Medical, Inc., Richard Bertran, was covered under a
      three year employment agreement with annual base compensation of $250,000.
      None
      of our other executives are 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 $174,000. During the six months ended June 30, 2007 we
      significantly increased our sales and administrative staff thereby increasing
      the amount of our monthly gross salaries throughout the period to $150,000
      at
      June 30, 2007. We believe, as with all our operating expenses, that our existing
      cash resources, together with proceeds from investments, anticipated financings
      and expected revenues from our operations, should be adequate to fund our salary
      obligations.





Professional
      fees, a large component of our operating expenses, increased by $271,000 during
      the six months ended June 30, 2008 compared to the amount reported during the
      six months ended June 30, 2007. This increase is primarily a result of ongoing
      litigation relating to the lawsuit filed by Jeffrey A. Leve and Jeffrey Leve
      Family Partnership, L.P. (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. The cost of defending this litigation increased by
      $227,000, to $281,000, during the six months ended June 30, 2008.





General
      and administrative expenses experienced an increase of $308,000 during the
      six
      months ended June 30, 2008 over the six months ended June 30, 2007. During
      the
      six months ended June 30, 2008, we invested a significant amount of capital
      in
      our advertising and marketing activities, which resulted in an increase of
      $190,000. The only other significant increase in general and administrative
      expenses is depreciation expense which reflected an increase of $89,000 and
      is
      due to the larger amount of fixed assets being depreciated. The remaining
      increase in general and administrative expenses are comprised of a combination
      of several types of expenses, none of which are significant
      individually.





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





During
      the six months ended June 30, 2008 we realized a net loss of $25,000 compared
      to
      a net gain of $22,000 during the six months ended June 30, 2007. Realized loss
      during the six months ended June 30, 2008 reflects the sale of approximately
      8.5
      acres of undeveloped land in Heber Springs, Arkansas. Realized gain of $51,000
      during the six months ended June 30, 2007 reflects the sale of our operating
      car
      wash for a gain of $29,000, which is reported in our consolidated statements
      of
      operations in loss from discontinued operations, combined with the sale of
      certain non-operating assets for a gain of $22,000.


23





**Interest
      expense**





We
      had
      interest expense of $175,000 and $608,000 for the six months ended June 30,
      2008
      and 2007, respectively.





The
      decrease in interest expense for the six months ended June 30, 2008 when
      compared to June 30, 2007 is primarily attributable to the non-cash interest
      charges incurred as a result of the debt discount amortization associated with
      our short-term debt financings. During the six months ended June 30, 2008 and
      2007, we recorded nil and $408,000, respectively, in non-cash interest charges.
      These charges resulted from the issuance of debt that either had conversion
      prices on the date of issuance that were below the fair market value of the
      underlying common stock or required the issuance of warrants to purchase shares
      of our common stock, which required us to record an expense based on the
      estimated fair value of the warrant.





**Change
      in fair value of warrant liability**





We
      incurred an expense of $168,000 during the three and six months ended June
      30,
      2008 related to the change in fair value of a portion of our outstanding
      warrants. At June 30, 2008, we were required to determine the fair value of
      1,339,394 warrants and reflect those warrants as a derivative liability as
      opposed to equity. The estimated fair value of warrants classified as derivative
      liabilities is determined using the Black-Scholes option pricing model. The
      fair
      value of warrants classified as derivative liabilities is adjusted for changes
      in fair value at each reporting period, and the corresponding non-cash gain
      or
      loss is recorded in current period earnings. If
      the
      classification changes as a result of events during a reporting period, the
      instrument is reclassified as of the date of the event that caused the
      reclassification. There is no limit on the number of times a contract may be
      reclassified.





**Loss
      from discontinued car wash segment**





During
      the three and six months ended June 30, 2007, we recorded losses from our
      discontinued car wash segment of $58,000 and $147,000, respectively. Consistent
      with our decision to focus our business exclusively on the patient safety
      medical products field, we completed the divestiture of ASG in August 2007.




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





As
      a
      Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and
      in
      item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting
      obligations and therefore are not required to provide the information requested
      by this Item.





**Item
      4T. Controls and Procedures.**





**Limitations
      on the Effectiveness of Controls**





We
      seek
      to improve and strengthen our control processes to ensure that all of our
      controls and procedures are adequate and effective. We believe that a control
      system, no matter how well designed and operated, can only provide reasonable,
      not absolute, assurance that the objectives of the controls system are met.
      In
      reaching a reasonable level of assurance, management necessarily was required
      to
      apply its judgment in evaluating the cost-benefit relationship of possible
      controls and procedures. In addition, the design of any system of controls
      also
      is based in part upon certain assumptions about the likelihood of future events,
      and there can be no assurance that any design will succeed in achieving its
      stated goals under all potential future conditions. Over time, a control may
      become inadequate because of changes in conditions, or the degree of compliance
      with policies or procedures may deteriorate. No evaluation of controls can
      provide absolute assurance that all control issues and instances of fraud,
      if
      any, within a company will be detected.  As set forth below, our Chief
      Executive Officer and our Chief Financial Officer have concluded, based on
      their
      evaluation as of the end of the period covered by this report, that our
      disclosure controls and procedures were sufficiently effective to provide
      reasonable assurance that the objectives of our disclosure control system were
      met.


24


**Evaluation
      of Effectiveness of Disclosure Controls and Procedures**





As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our principal executive officer
      and chief financial officer, of the effectiveness of the design and operation
      of
      our disclosure controls and procedures pursuant to Rule 13a-15(b) of the
      Exchange Act.  Based upon that evaluation, our chief executive officer
      and chief financial officer concluded that, as of the end of the period covered
      by this report, our disclosure controls and procedures were effective at
      the reasonable assurance level discussed above.





**Changes
      in Internal Control over Financial Reporting**





There
      were no changes in our internal controls over financial reporting identified
      in
      connection with the evaluation required by paragraph (d) of Exchange Act Rules
      13a-15 or 15d-15 that occurred during the last quarter that have materially
      affected, or are reasonably likely to materially affect our internal control
      over financial reporting.





**PART
      II – OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





As
      of the
      date this report was filed, there have been no material developments in the
      legal proceedings previously reported in our annual report on Form 10-K for
      the
      fiscal year ended December 31, 2007, which was filed with the Securities and
      Exchange Commission on April 15, 2008.





**Item
      1A. Risk Factors.**





There
      have been no material changes from risk factors previously disclosed in
      Item 1A included in our Annual Report on Form 10-K for the fiscal year
      ended December 31, 2007, which was filed with the SEC on April 15, 2008.





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





Between
      May 20, 2008 and June 19, 2008, the Company entered into a securities purchase
      agreement with several accredited investors (the ***“Investors”*** ),
      in a
      private placement exempt from the registration requirements of the Securities
      Act. The Company issued and sold to the Investors an aggregate of 2,102,536
      shares of its common stock and warrants to purchase an additional 1,261,521
      shares of its common stock. The warrants are exercisable for a period of five
      years at an exercise price equal to $1.40 per share. These issuances resulted
      in
      aggregate gross proceeds to the Company of $2,202,000 in cash and the
      extinguishment of $426,170 in existing debt and accrued interest owed to one
      accredited investor by the Company. We are required to file a registration
      statement within 180 calendar days from June 19, 2008 (the ***“Filing
      Date”*** )
      and to
      use our best efforts to cause the registration statement to become effective
      within 120 calendar days from the Filing Date or, in the event of a full review
      by the Securities and Exchange Commission, within 150 calendar days from the
      Filing Date (collectively the ***“Effectiveness
      Date”*** ).
      We
      intend to use the net proceeds from this private placement transaction primarily
      for general corporate purposes and repayment of existing liabilities. These
      securities were sold in reliance upon the exemption provided by Section 4(2)
      of
      the Securities Act and the safe harbor of Rule 506 under Regulation D
      promulgated under the Securities Act. No advertising or general solicitation
      was
      employed in offering the securities, the sales were made to a limited number
      of
      persons, all of whom represented to the Company that they are accredited
      investors, and transfer of the securities is restricted in accordance with
      the
      requirements of the Securities Act.


25


Between
      August 1, 2008 and August 14, 2008, the Company entered into a securities
      purchase agreement with several accredited investors (the ***“Investors”*** ),
      in a
      private placement exempt from the registration requirements of the Securities
      Act. The Company issued and sold to the Investors an aggregate of 1,860,000
      shares of its common stock and warrants to purchase an additional 1,162,500
      shares of its common stock. The warrants are exercisable for a period of five
      years at an exercise price equal to $1.40 per share. These issuances resulted
      in
      aggregate gross proceeds to the Company of $2,325,000 in cash. We are required
      to file a registration statement within 180 calendar days from August 1, 2008
      (the ***“Filing
      Date”*** )
      and to
      use our best efforts to cause the registration statement to become effective
      within 120 calendar days from the Filing Date or, in the event of a full review
      by the Securities and Exchange Commission, within 150 calendar days from the
      Filing Date (collectively the ***“Effectiveness
      Date”*** ).
      We
      intend to use the net proceeds from this private placement transaction primarily
      for general corporate purposes and repayment of existing liabilities. These
      securities were sold in reliance upon the exemption provided by Section 4(2)
      of
      the Securities Act and the safe harbor of Rule 506 under Regulation D
      promulgated under the Securities Act. No advertising or general solicitation
      was
      employed in offering the securities, the sales were made to a limited number
      of
      persons, all of whom represented to the Company that they are accredited
      investors, and transfer of the securities is restricted in accordance with
      the
      requirements of the Securities Act.





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





On
      May 1,
      2006, the Company entered into a secured promissory note with Herbert Langsam,
      a
      Class II Director of the Company, in the principal amount of $500,000 (the ***“Langsam
      Note”*** ).
      The
      Langsam Note was due to be repaid on November 1, 2006.





On
      November 13, 2006, the Company entered into a secured promissory note with
      Mr.
      Langsam in the principal amount of $100,000 (the ***“Second
      Langsam Note”*** ).
      The
      Second Langsam Note was due to be repaid on May 13, 2007. The Company is in
      the
      process of restructuring the debt that is owed to Mr. Herbert
      Langsam.





On
      November 1, 2006 the Company entered into a convertible promissory note with
      Michael G. Sedlak in the principal amount of $71,000 (the ***“Sedlak
      Note”*** ).
      The
      Sedlak Note was due to be repaid on January 31, 2008.





Between
      February 28, 2008 and March 20, 2008, the Company entered into secured
      promissory notes with Catalysis Offshore, Ltd. and Catalysis Partners, LLC
      (collectively ***“Catalysis”*** ),
      in the
      aggregate principal amount of $500,000 (the ***“Catalysis
      Notes”*** ).
      The
      Catalysis Notes were due to be repaid on May 31, 2008. The Company is in the
      process of restructuring the debt that is owed to Catalysis.





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





None.





**Item
      5. Other Information.**





During
      the quarter ended June 30, 2008, Bill Adams received the title of Chief
      Executive Officer, in addition to President.





**Item
      6. Exhibits.**





**Exhibit**
              **Number**
            
            **Description**10.01
            
            Form
                of Securities Purchase Agreement entered into May 20, 2008 between
                Patient
                Safety Technologies, Inc. and several accredited investors (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on June 2, 2008)10.02
            
            Form
                of Registration Rights Agreement entered into May 20, 2008 between
                Patient
                Safety Technologies, Inc. and several accredited investors (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on June 2, 2008)10.03
            
            Form
                of Warrant Agreement entered into May 20, 2008 between Patient Safety
                Technologies, Inc. and several accredited investors (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on June 2,
                2008)


26





**Exhibit**
              **Number**
            
            **Description**10.04
            
            Form
                of Securities Purchase Agreement entered into August 1, 2008 between
                Patient Safety Technologies, Inc. and several accredited investors
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 14,
                2008)10.05
            
            Form
                of Registration Rights Agreement entered into August 1, 2008 between
                Patient Safety Technologies, Inc. and several accredited investors
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 14,
                2008)10.06
            
            Form
                of Warrant Agreement entered into August 1, 2008 between Patient
                Safety
                Technologies, Inc. and several accredited investors (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on August 14, 2008)31.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(a) or Rule
                15d-14(a)31.2*
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(a) or Rule
                15d-14(a)32.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
                and Section 1350 of Chapter 63 of Title 18 of the United States
                Code32.2*
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b)
                and Section 1350 of Chapter 63 of Title 18 of the United States
                Code





*
      Filed
      herewith.


27


**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:
                August 19, 2008
            By:
            /s/
                William AdamsWilliam
                AdamsChief
                Executive OfficerDate:
                August 19, 2008
            By:
            /s/
                William B. HorneWilliam
                B. HorneChief
                Financial Officer and
              Principal
                Accounting Officer


28