**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-Q/A**
 **Amendment
        No. 1**
  x
              
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 FOR
        THE
        QUARTERLY PERIOD ENDED JUNE 30, 2005
  **OR**
   ̈
              
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 OR
        THE
        TRANSITION PERIOD
        FROM                TO
  COMMISSION
        FILE NUMBER:
  **PATIENT
        SAFETY TECHNOLOGIES, INC.**
 **(Exact
        name of registrant as specified in its charter)**
  **Delaware**
              
              **13-3419202****(State
                  of Incorporation)**
              
              **(I.R.S.
                  Employer Identification Number)****100
                  Wilshire Boulevard, Suite 1500**
                **Santa
                  Monica, California 90401****(Address
                  of principal executive offices)**
  **Registrant’s
        telephone number, including area code:** **(310)
        752-1442**
  **With
        Copies To:**
 Marc
        J.
        Ross, Esq.
 Sichenzia
        Ross Friedman Ference LLP
 1065
        Avenue of the Americas
 New
        York,
        New York 10018
 (212)
        930-9700
 
 Indicate
        by check mark whether the registrant (1) filed all reports required to be
        filed
        by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        past 12
        months (or for such shorter period that the registrant was required to file
        such
        reports), and (2) has been subject to such filing requirements for the past
        90
        days. Yes x No  ̈ .
 
 Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act). Yes  ̈ No x
  **APPLICABLE
        ONLY TO CORPORATE ISSUERS**
 
 Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        equity, as of the latest practicable date: On
        July
        27, 2005, there were 5,466,592 shares outstanding of the Registrant’s common
        stock, $0.33 par value.
 
 
 
 **PATIENT
        SAFETY TECHNOLOGIES, INC.**
  **FORM
        10-Q FOR THE SIX MONTHS**
 **ENDED
        JUNE 30, 2005**
  **TABLE
        OF CONTENTS**
  **Page****PART
                  I - FINANCIAL INFORMATION**Item
                  1. Condensed Consolidated Financial Statements
              1Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              16Item
                  3. Quantitative and Qualitative Disclosures About Market
                  Risk
              38Item
                  4. Controls and Procedures
              38**PART
                  II - OTHER INFORMATION**Item
                  1. Legal Proceedings
              39Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              39Item
                  3. Defaults Upon Senior Securities
              40Item
                  4. Submission of Matters to a Vote of Security Holders
              40Item
                  5. Other Information
              40Item
                  6. Exhibits
              41**SIGNATURES**
              42
 
 
  **PART
        I - FINANCIAL INFORMATION**
 
 **Item
        1.**  **Financial
        Statements.**
 **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Condensed
            Consolidated Balance Sheets (Unaudited)**
 **June
                      30,**
                    **2005**
                
                **December
                    31,**
                  **2004
                    *****ASSETS****CURRENT
                    ASSETS**Cash
                    and cash equivalents
                
                $
                91,252
                
                $
                846,404Accounts
                    receivable
                
                
                1,331,250Marketable
                    securities
                
                
                1,402,222
                
                
                3,487,719Other
                    current assets
                
                
                380,708
                
                
                255,510**TOTAL
                    CURRENT ASSETS**
                
                
                3,205,432
                
                
                4,589,633Property
                    and equipment, net
                
                
                145,401
                
                
                23,657Patents,
                    net
                
                
                4,576,262Long-term
                    investments
                
                
                3,861,012
                
                
                2,320,953**TOTAL
                    ASSETS**
                
                $
                11,788,107
                
                $
                6,934,243**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY****CURRENT
                    LIABILITIES**Notes
                    payable
                
                $
                1,838,880
                
                $
                892,530Accounts
                    payable and accrued liabilities
                
                
                1,831,446
                
                
                939,568Marketable
                    securities, sold short
                
                
                
                
                
                1,075,100Due
                    to broker
                
                
                8,376
                
                
                460,776**TOTAL
                    CURRENT LIABILITIES**
                
                
                3,678,702
                
                
                3,367,974**STOCKHOLDERS’
                    EQUITY**Convertible
                    preferred stock, $1 par value, cumulative 7% dividend:
                  1,000,000
                    shares authorized; 10,950 issued and outstanding at June 30,
                    2005 and
                    December 31, 2004 (Liquidation preference $1,095,000)
                
                
                10,950
                
                
                10,950Common
                    stock, $0.33 par value: 25,000,000 shares authorized;
                  6,886,634
                    shares issued and 5,455,339 shares outstanding as of June 30,
                    2005;
                    6,128,067 shares issued and 4,670,703 shares outstanding at December
                    31,
                    2004
                
                
                2,272,589
                
                
                2,022,262Paid-in
                    capital
                
                
                20,629,446
                
                
                13,950,775Other
                    comprehensive income
                
                
                1,158,750Accumulated
                    deficit
                
                
                (13,392,306
                )
                
                (9,800,885
                )10,679,429
                
                
                6,183,102Deduct:
                    1,431,295 and 1,457,364 shares of common stock held in treasury,
                    at cost,
                    at June 30, 2005 and December 31, 2004, respectively
                
                
                (2,570,024
                )
                
                (2,616,833
                )**TOTAL
                    STOCKHOLDERS’ EQUITY**
                
                
                8,109,405
                
                
                3,566,269**TOTAL
                    LIABILITIES AND STOCKHOLDERS’ EQUITY**
                
                $
                11,788,107
                
                $
                6,934,243
 
 *
          Restated to include the impact of share-based compensation expense
 
 The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
 
 1
  **PATIENT
            SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Condensed
          Consolidated Statements of Operations and Comprehensive Income (Loss)
          (Unaudited)**
  **Three
                    Months Ended**
                
                
                **Six
                    Months Ended****June 30,**
                  **2005**
                
                
                **June 30,**
                  **2004
                    ***
                
                
                **June 30,**
                  **2005**
                
                
                **June 30,**
                  **2004
                    *****REVENUES**
                
                $
                586,627
                
                $
                —
                
                $
                586,627
                
                $
                —**EXPENSES**Salaries
                    and employee benefits
                
                
                900,385
                
                
                133,030
                
                
                2,110,096
                
                
                261,931Professional
                    fees
                
                
                897,974
                
                
                184,122
                
                
                1,454,945
                
                
                241,122Rent
                
                
                24,478
                
                
                18,879
                
                
                24,478
                
                
                36,954Insurance
                
                
                22,788
                
                
                17,037
                
                
                43,578
                
                
                34,075Taxes
                    other than income taxes
                
                
                23,947
                
                
                6,037
                
                
                45,982
                
                
                18,801Amortization
                    of patents
                
                
                81,235
                
                
                
                
                
                108,314General
                    and administrative
                
                
                204,463
                
                
                34,684
                
                
                461,634
                
                
                84,828**Operating
                    expenses**
                
                
                2,155,270
                
                
                393,789
                
                
                4,249,027
                
                
                677,711**Operating
                    loss**
                
                
                (1,568,643
                )
                
                (393,789
                )
                
                (3,662,400
                )
                
                (677,711
                )Interest,
                    dividend income and other, net
                
                
                11,485
                
                
                50
                
                
                40,088
                
                
                215Equity
                    in income (loss) of investee
                
                
                (17,020
                )
                
                
                
                
                (17,020
                )Realized
                    gains on investments, net
                
                
                138,372
                
                
                451,400
                
                
                103,644
                
                
                500,878Interest
                    expense
                
                
                (34,243
                )
                
                (9,002
                )
                
                (61,561
                )
                
                (17,928
                )Unrealized
                    gains (losses) on marketable securities, net
                
                
                (300,384
                )
                
                (19,015
                )
                
                43,203
                
                
                83,744**Net
                    income (loss)**
                
                
                (1,770,433
                )
                
                29,644
                
                
                (3,554,046
                )
                
                (110,802
                )**Preferred
                    dividends**
                
                
                (24,637
                )
                
                (19,161
                )
                
                (37,375
                )
                
                (38,325
                )**Net
                    income (loss) attributable to common shareholders**
                
                $
                (1,795,070
                )
                $
                10,483
                
                $
                (3,591,421
                )
                $
                (149,127
                )**Basic
                    and diluted net income (loss) per common share**
                
                $
                (0.33
                )
                $
                0.00
                
                $
                (0.69
                )
                $
                (0.05
                )**Weighted
                    average common shares outstanding**
                
                
                5,430,528
                
                
                3,083,664
                
                
                5,172,181
                
                
                3,072,048**Comprehensive
                    income (loss):****Net
                    income (loss)**
                
                $
                (1,770,433
                )
                $
                29,644
                
                $
                (3,554,046
                )
                $
                (110,802
                )**Other
                    comprehensive income**
                
                
                1,158,750
                
                
                
                
                
                1,158,750**Comprehensive
                    income (loss)**
                
                $
                (611,683
                )
                $
                29,644
                
                $
                (2,395,296
                )
                $
                (110,802
                )
 
 *
          Restated to include the impact of share-based compensation expense
 
 The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
 
 2
  **PATIENT
            SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Condensed
            Consolidated Statements of Cash Flows (Unaudited)**
  **Six
                    Months Ended****June 30,**
                  **2005**
                
                **June 30,**
                  **2004
                    ***Cash
                    flows from operating activities:Net
                    loss
                
                $
                (3,554,046
                )
                $
                (110,802
                )Adjustments
                    to reconcile net loss to net cash (used in) provided by operating
                    activities:Depreciation
                
                
                5,131Amortization
                    of patents
                
                
                108,314Realized
                    gains on investments, net
                
                
                (103,644
                )
                
                (500,878
                )Unrealized
                    gain on marketable securities
                
                
                (43,203
                )
                
                (83,744
                )Stock
                    based compensation
                
                
                2,464,863
                
                
                5,094Stock
                    received for services
                
                
                (10,000
                )Loss
                    on investee
                
                
                17,019Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (1,331,250
                )Purchases
                    of marketable investment securities, net
                
                
                717,245
                
                
                774,332Other
                    current assets
                
                
                (145,198
                )
                
                25,926Accounts
                    payable and accrued liabilities
                
                
                873,666
                
                
                (52,135
                )Due
                    to broker
                
                
                (452,400
                )Net
                    cash provided by (used in) operating activities
                
                
                (1,453,503
                )
                
                57,793Cash
                    flows from investing activities:Purchase
                    of property and equipment
                
                
                (59,981
                )Purchase
                    of SurgiCount
                
                
                (432,398
                )Proceeds
                    from sale of long-term investments
                
                
                300,466Purchases
                    of long-term investments
                
                
                (163,173
                )Net
                    cash used in investing activities
                
                
                (355,086
                )Cash
                    flows from financing activities:Proceeds
                    from issuance of common stock and warrants
                
                
                100,000Proceeds
                    from exercise of stock options
                
                
                26,250
                
                
                39,375Cash
                    proceeds related to 16B filing
                
                
                
                
                
                2,470Payments
                    of preferred dividends
                
                
                (19,163
                )
                
                (38,325
                )Proceeds
                    from notes payable
                
                
                1,000,000Payments
                    and decrease in notes
                
                
                (53,650
                )
                
                (11,040
                )Net
                    cash provided by (used in) financing activities
                
                
                1,053,437
                
                
                (7,520
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                (755,152
                )
                
                50,273Cash
                    and cash equivalents at beginning of period
                
                
                846,404
                
                
                224,225Cash
                    and cash equivalents at end of period
                
                $
                91,252
                
                $
                274,498Supplemental
                    disclosures of cash flow information:Cash
                    paid during the period for interest
                
                $
                32,552
                
                $
                228Issuance
                    of common stock and warrants in connection with SurgiCount acquisition
                
                $
                4,232,178
                
                $
                —Issuance
                    of common stock in connection with asset purchase agreement
                
                $
                66,895
                
                $
                —Issuance
                    of common stock in connection with land acquisition
                
                $
                85,619
                
                $
                —Dividends
                    accrued
                
                $
                37,375
                
                $
                19,163
  *
            Restated to include the impact of share-based compensation expense
 
 The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
 
 3
 
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Condensed Consolidated Financial Statements - Unaudited**
 **June
          30, 2005**
 **1.
          DESCRIPTION OF BUSINESS**
 
 Until
          March 31, 2005, Patient Safety Technologies, Inc. ( ***"PST"*** ,
          or the ***"Company"*** )
          (formerly known as Franklin Capital Corporation) was a Delaware corporation
          that
          elected to be a Business Development Company ( ***“BDC”*** )
          under
          the Investment Company Act of 1940, as amended. On March 30, 2005, stockholder
          approval was obtained to withdraw the Company’s election to be treated as a BDC
          and on March 31, 2005, the Company filed an election to withdraw its election
          with the Securities and Exchange Commission. Through its operating subsidiaries,
          the Company is currently involved in providing capital and managerial assistance
          to early stage companies in the medical products, health care solutions,
          financial services and real estate industries.
 
 Currently,
          the Company has four wholly-owned operating subsidiaries: (1) SurgiCount
          Medical, Inc., a California corporation; (2) Patient Safety Consulting
          Group,
          LLC, a Delaware Limited Liability Company; (3) Franklin Capital Properties,
          LLC,
          a Delaware Limited Liability Company; and (4) Ault Glazer Bodnar Merchant
          Capital, Inc., a Delaware corporation.
 
 The
          Company, including its operating subsidiaries, is engaged in the acquisition
          of
          controlling interests in companies and research and development of products
          and
          services focused on the health care and medical products field, particularly
          the
          patient safety markets, as well as the financial services and real estate
          industries. SurgiCount Medical, Inc., a provider of patient safety devices
          and
          Patient Safety Consulting Group, LLC, a healthcare consulting services
          company,
          focus on the Company’s primary target industries, the health care and medical
          products field. Ault Glazer Bodnar Merchant Capital, Inc. ( ***“AGB
          Merchant Capital”*** )
          was
          formed on June 27, 2005, to hold the Company’s non-patient safety related
          assets, such as Franklin Capital Properties, LLC, a real estate development
          and
          management company, and to focus on the financial services and real estate
          industries.
 
 **2.
          BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**
 
 **Basis
          of Presentation**
 
 The
          accompanying condensed consolidated financial statements have been prepared
          in
          accordance with the instructions to Form 10-Q and do not include all the
          information and disclosures required by accounting principles generally
          accepted
          in the United States of America. The preparation of financial statements
          in
          conformity with accounting principles generally accepted in the U.S. requires
          management to make estimates and assumptions that affect the amounts reported
          in
          the financial statements and accompanying notes. The accounting estimates
          that
          require management’s most difficult and subjective judgments are the valuation
          of the non-marketable equity securities. The actual results may differ
          from
          management’s estimates.
  The
          interim condensed consolidated financial information is unaudited, but
          reflects
          all normal adjustments that are, in the opinion of management, necessary
          to
          provide a fair statement of results for the interim periods presented.
          The
          condensed consolidated interim financial statements should be read in connection
          with the consolidated financial statements in the Company’s Annual Report on
          Form 10-K for the year ended December 31, 2004. Certain amounts reported
          in the
          previous period have been reclassified to conform to the current presentation
          reflecting the Company’s withdrawal of its election to be treated as a
          BDC.
 
 **Reclassifications**
  Certain
          amounts reported in the condensed consolidated financial statements, as
          of June
          30, 2004, have been reclassified to conform with the presentation adopted
          to
          report June 30, 2005 results.
  4
 **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
  **Revenue
          Recognition**
  Consulting
          service contract revenue is recognized when the service is performed.
          Consequently, the recognition of such revenue is deferred until each phase
          of
          the contract is complete. This method is predominately used by the Financial
          Services and Real Estate segment. Service activities may include the following:
          financial advice on mergers, acquisitions, restructurings and similar corporate
          finance matters.
  **Liquidity**
  The
          Company has a working capital deficiency of approximately $473,000 at June
          30,
          2005. The Company continues to have recurring losses and has relied upon
          liquidating its investments to fund operations. Management believes that
          existing cash resources together with proceeds from its investments and
          anticipated revenues from its operations, should be adequate to fund its
          operations for the 12 months subsequent to June 30, 2005. However, long
          term
          liquidity is dependent on the Company’s ability to attain future profitable
          operations.
 
 **Investments**
 
 *Marketable
          Securities.* The
          Company’s investment in marketable securities that are bought and held
          principally for the purpose of selling them in the near-term are classified
          as
          trading securities. Trading securities are recorded at fair value on the
          balance
          sheet in current assets, with the change in fair value during the period
          included in earnings.
 
 *Available-for-Sale
          Investments.* Investments
          designated as available-for-sale include both marketable equity and debt
          (including redeemable preferred stock) securities. Investments that are
          designated as available-for-sale are reported at fair value, with unrealized
          gains and losses, net of tax, recorded in stockholders’ equity. Realized gains
          and losses on the sale or exchange of equity securities and declines in
          value
          judged to be other than temporary are recorded in realized gains (losses)
          on
          investments, net.
 
 *Equity
          Method.* Included
          in long-term investments are investments in companies in which the Company
          has a
          20% to 49% interest. These investments are carried at cost, adjusted for
          the
          Company’s proportionate share of their undistributed earnings or losses. The
          Company’s proportionate share of income or losses are recorded in equity in
          income (loss) of investee.
 
 **Stock-Based
          Compensation** ******
 
 Prior
          to
          January 1, 2005, the Company accounted for stock-based compensation in
          accordance with Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
          for Stock Issued to Employees* ,
          and
          related interpretations, as permitted by Statement of Financial Accounting
          Standards ( ***“SFAS”*** )
          No. 123, *Accounting
          for Stock-Based Compensation* .
          In
          December 2004, SFAS No. 123(R), “ *Share-Based
          Payment* ,”
which
          addresses the accounting for employee stock options, was issued. SFAS 123(R)
          revises the disclosure provisions of SFAS 123 and supercedes APB Opinion
          No. 25.
          SFAS 123(R) requires that the cost of all employee stock options, as well
          as
          other equity-based compensation arrangements, be reflected in the financial
          statements over the vesting period based on the estimated fair value of
          the
          awards. This statement is effective for the Company as of the beginning
          of the
          first interim or annual reporting period that begins after January 1, 2006.
          The
          Company elected to adopt SFAS 123(R) as of January 1, 2005 using the modified
          retrospective application method as provided by SFAS 123(R) and accordingly,
          financial statement amounts for the prior periods in which the Company
          granted
          employee stock options have been restated to reflect the fair value method
          of
          expensing prescribed by SFAS 123(R). During the year ended December 31,
          2004,
          the entire amount of equity compensation expense required to be recognized
          under
          the modified retrospective application method was $5,094 relating to stock
          option grants that occurred in the second quarter of 2004. During the six
          months
          and three months ended June 30, 2005, the Company had stock-based compensation
          expense included in reported net loss of $890,448 and $337,906, respectively. All
          options that we granted in 2005 and 2004 were granted at the per share
          fair
          market value on the grant date. Vesting of options differs based on the
          terms of
          each option. The Company utilized the Black-Scholes option pricing model
          and the
          assumptions used for each period are as follows:
  5
 **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
  **Three
                    and six months ended June 30,****2005**
                
                **2004**Weighted
                    average risk free interest rates
                
                
                3.75
                %
                
                3.00
                %Weighted
                    average life (in years)
                
                
                3.0
                
                
                0.1Volatility
                
                
                83
                %
                
                102
                %Expected
                    dividend yield
                
                
                0
                %
                
                0
                %Weighted
                    average grant-date fair value per share of options granted
                
                $
                2.92
 
 **Comprehensive
          Income**
 
 The
          Company applies SFAS No. 130, *“Reporting
          Comprehensive Income.”* Comprehensive
          income (loss) consists of the after tax net change in unrealized gains
          and
          losses on securities classified as available for sale by the Company during
          the
          three and six months ended June 30, 2005 and 2004 that have been excluded
          from
          net loss and reflected instead in equity. At June 30, 2005, the only investment
          designated as available for sale was the Company’s restricted holdings in
          IPEX.
 
 **3.
          LOSS PER COMMON SHARE**
 
 Loss
          per
          common share is based on the weighted average number of common shares
          outstanding. The Company complies with SFAS No. 128, *“Earnings
          Per Share,”* which
          requires dual presentation of basic and diluted earnings per share on the
          face
          of the statements of operations. Basic loss per share excludes dilution
          and is
          computed by dividing income (loss) available to common stockholders by
          the
          weighted-average common shares outstanding for the period. Diluted loss
          per
          share reflects the potential dilution that could occur if convertible preferred
          stock or debentures, options and warrants were to be exercised or converted
          or
          otherwise resulted in the issuance of common stock that then shared in
          the
          earnings of the entity.
 
 Options
          and warrants outstanding as of June 30, 2005 to purchase 609,000 and 1,149,683
          shares of common stock, respectively, and 246,375 shares issuable upon
          conversion of outstanding convertible preferred stock were not included
          in the
          computation of diluted net loss per common share for the three and six
          months
          ended June 30, 2005, as their inclusion would have been antidilutive.
 
 Options
          outstanding as of June 30, 2004 to purchase 61,875 shares of common stock,
          and
          246,375 shares issuable upon conversion of outstanding convertible preferred
          stock were not included in the computation of diluted net loss per common
          share
          for the three and six months ended June 30, 2004, as their inclusion would
          have
          been antidilutive.
 
 **4.
          EQUITY TRANSACTIONS**
 
 On
          March
          30, 2005, stockholders’ approval was obtained to (i) decrease the authorized
          number of shares of Common Stock from 50,000,000 shares to 25,000,000 shares,
          (ii) decrease the authorized number of shares of Preferred Stock from 10,000,000
          shares to 1,000,000 shares and (iii) to reduce the par value of the Common
          Stock
          from $1.00 per share to $0.33 per share and effect a three-for-one split
          of the
          Common Stock.
 
 Stockholders’
          equity has been restated to give retroactive recognition to the stock split
          for
          all periods presented. In addition, all per share and weighted average
          share
          amounts have been restated to reflect this stock split.
  6
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
 During
          the six months ended June 30, 2005, the Company issued 5,625 shares of
          common
          stock held in treasury upon exercise of options under the Company’s 1997 Stock
          Incentive Plan and 20,444 shares of common stock held in treasury to purchase
          0.61 acres of vacant land in Springfield, Tennessee.
 
 On
          April
          5, 2005, the Company entered into a consulting agreement with Health West
          Marketing Incorporated, a California corporation ("Health West"). Under
          the
          agreement, Health West agreed to help the Company establish a comprehensive
          manufacturing and distribution strategy for the Company's
          Safety-Sponge TM System  worldwide.
          The initial term of the agreement is for a period of two years. After the
          initial two-year term, the agreement will terminate unless extended by
          the
          parties for one or more additional one-year periods.
 
 In
          consideration for Health West's services, the Company agreed to issue Health
          West 42,017 shares of the Company's common stock, to be issued as follows:
          (a)
          10,505 shares valued at $62,505 were issued upon signing the agreement;
          (b) if
          Health West helps the Company structure a comprehensive manufacturing agreement
          with A Plus Manufacturing by July 5, 2005, then the Company will issue
          Health
          West an additional 15,756 shares; and (c) if Health West helps the Company
          develop a regional distribution network to integrate the
          Safety-Sponge TM System  into
          the
          existing acute care supply chain by February 5, 2006, then the Company
          will
          issue Health West the remaining 15,756 shares. At July 5, 2005, the primary
          terms of a comprehensive manufacturing agreement with A Plus Manufacturing
          had
          been agreed upon and the July 5, 2005 deadline was extended. As an additional
          incentive the Company granted Health West warrants to purchase a total
          of
          175,000 shares of the Company’s common stock as discussed in Note 11. In the
          event of the death of Bill Adams, who is Health West's Chief Executive
          Officer,
          the agreement will automatically terminate. The Company may terminate the
          agreement at any time upon delivery to Health West of notice of a good
          faith
          determination by the Company's Board of Directors that the agreement should
          be
          terminated for cause or as a result of disability of Mr. Adams. Health
          West may
          voluntarily terminate the agreement only after expiration of the initial
          two-year term upon providing 30 days prior written notice to the
          Company.
 
 On
          April
          22, 2005, the Company entered into a subscription agreement pursuant to
          which
          the Company sold to an investor 20,000 shares of the Company's common stock
          and
          warrants to purchase an additional 20,000 shares of the Company's common
          stock.
          The warrants are exercisable for a period of five years, have an exercise
          price
          equal to $6.05, and 50% of the warrants are callable. In the event the
          closing
          sale price of the Company's common stock equals or exceeds $7.50 for at
          least
          five consecutive trading days, the Company, upon 30 days prior written
          notice,
          may call the callable warrants at a redemption price equal to $0.01 per
          share of
          common stock then purchasable pursuant to such warrants. Notwithstanding,
          such
          notice, the warrant holder may exercise the callable warrant prior to the
          end of
          the 30-day notice period. The Company received gross proceeds of $100,000
          from
          the sale of stock and warrants. The sale was made in a private placement
          exempt
          from registration requirements pursuant to Section 4(2) of the Securities
          Act of
          1933, as amended, and Rule 506 promulgated thereunder.
 
 On
          May
          12, 2005, the Company entered into an asset purchase agreement whereby
          the
          Company purchased all of the assets of Cinapse Digital Media, a sole
          proprietorship, for the issuance of 17,241 shares of common stock and 8,621
          warrants to purchase common stock at an exercise price of $5.80 and a
          contractual life of 5 years. The assets were valued at $66,895 and consisted
          primarily of computers and equipment utilized in the production of digital
          video. Simultaneously with the asset purchase, the Company formed Cinapse
          Digital Media, LLC, a 50% owned Delaware limited liability company, and
          contributed the acquired assets. Cinapse Digital Media, LLC produces digital
          video for corporate clients and will also produce digital training videos
          for
          the Company’s patient safety devices.
 
 **5.
          ACQUISITION**
 
 In
          February 2005, the Company invested $4,035,600, excluding acquisition costs,
          to
          acquire 100% of the common stock of SurgiCount Medical, Inc. ( ***“SurgiCount”*** ).
          The
          Company acquired SurgiCount for its patents related to the
          Safety-Sponge TM System,
          an innovation which the Company believes will allow it to capture a significant
          portion of the United States and European surgical sponge sales. SurgiCount’s
          operating results from the closing date of the acquisition, February 25,
          2005,
          through June 30, 2005, are included in the condensed consolidated financial
          statements.
  7
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
 At
          closing, the purchase price, including acquisition costs was determined
          to be
          $4,684,576, comprised of $340,000 in cash payments and 600,000 shares of
          the
          Company’s common stock valued at $3,695,600 issued to SurgiCount’s equity
          holders. Additionally, the Company incurred approximately $112,398 in direct
          costs and issued 150,000 warrants, valued at $536,578, to purchase the
          common
          stock of the Company to consultants providing advisory services for the
          Merger.
          The value assigned to the stock portion of the purchase price is $6.16
          per share
          based on the average closing price of the Company’s common stock for the five
          days beginning two days prior to and ending two days after February 4,
          2005, the
          date of the Agreement and Plan of Merger and Reorganization (the “Merger”). In
          addition, in the event that prior to the fifth anniversary of the closing
          of the
          Merger the cumulative gross revenues of SurgiCount exceed $500,000 the
          Company
          is obligated to issue an additional 50,001 shares of the Company’s common stock
          to certain SurgiCount shareholders. Should the cumulative gross revenues
          exceed
          $1,000,000 during the five-year period the additional shares would be increased
          by 50,001, for a total of 100,002 additional shares. Such amount is not
          included
          in the aggregate purchase price and will be recorded when and if issued.
  The
          entire purchase price, including acquisition costs, has been allocated
          to
          SurgiCount’s patents, with an approximate useful life of 14.4 years, on a
          preliminary basis and may change as additional information becomes available.
 
 The
          following pro forma data summarizes the results of operations for the periods
          indicated as if the SurgiCount acquisition had been completed as of the
          beginning of each period presented. The pro forma data gives effect to
          actual
          operating results prior to the acquisition, adjusted to include the pro
          forma
          effect of amortization of intangibles. These pro forma amounts do not purport
          to
          be indicative of the results that would have actually been obtained if
          the
          acquisition occurred as of the beginning of each period presented or that
          may be
          obtained in future periods:
  **Three
                    months ended June 30,**
                
                **Six
                    months ended June 30,****2005**
                
                **2004**
                
                **2005**
                
                **2004**Revenue
                
                —
                
                —
                
                —
                
                —Net
                    loss
                
                $
                (1,789,000
                )
                $
                (65,000
                )
                $
                (3,633,000
                )
                $
                (299,000
                )Basic
                    and diluted net loss per common share
                
                $
                (0.33
                )
                $
                (0.02
                )
                $
                (0.70
                )
                $
                (0.10
                )
 
 **6.
          ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**
 
 Accounts
          payable and accrued liabilities at June 30, 2005 and December 31, 2004
          are
          comprised of the following:
 
 **June
                    30,**
                
                **December
                    31,****2005**
                
                **2004**Professional
                    fees - legal
                
                $
                467,607
                
                $
                351,867Accrued
                    purchase price on investment
                
                
                165,240
                
                
                165,240Officer's
                    severance
                
                
                31,405
                
                
                160,142Accrued
                    interest
                
                
                141,441
                
                
                112,432Professional
                    fees - other
                
                
                84,500
                
                
                52,950Deferred
                    revenue
                
                
                754,623Accrued
                    - other
                
                
                186,630
                
                
                96,937$
                1,831,446
                
                $
                939,568
  8
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
 **7.
          MARKETABLE SECURITIES**
 
 Marketable
          securities at June 30, 2005 and December 31, 2004 are comprised of the
          following:
 
 **June
                    30,**
                
                **December
                    31,****2005**
                
                **2004**U.S.
                    Treasuries
                
                $
                —
                
                $
                2,016,406IPEX,
                    Inc.
                
                
                471,599Other
                    Equities
                
                
                930,623
                
                
                1,471,313$
                1,402,222
                
                $
                3,487,719
 
 *IPEX,
          Inc.*
 
 At
          June
          30, 2005, the Company held 607,425 shares of common stock and warrants
          to
          purchase 225,000 shares of common stock at $1.50 per share and warrants
          to
          purchase 225,000 shares of common stock at $2.00 per share of IPEX, Inc.
          ( ***“IPEX”*** ),
          formerly Administration for International Credit & Investments, Inc. The
          Company acquired approximately 450,000 shares of the common stock and all
          of the
          warrants directly from IPEX in March 2005 and, until such time as the sale
          of
          the securities is either registered with the SEC or the securities are
          eligible
          to be sold without restriction pursuant to Rule 144(k) promulgated pursuant
          to
          the Securities Exchange Act of 1934, the Company is restricted from publicly
          selling the securities except in accordance with Rule 144. The remaining
          157,425
          shares of common stock are valued at $471,599 and included in marketable
          securities. IPEX's common stock is traded on the OTC Bulletin Board, which
          reported a closing price, at June 30, 2005, of $3.55. The Company has valued
          its
          holdings in IPEX at a 25% discount to the $3.55 closing price, or $2.66
          per
          share, due to the limited average number of shares traded on the OTC Bulletin
          Board as well as other trading restrictions on the Company’s unregistered
          holdings in IPEX. The warrants are exercisable for a period of five years
          and
          are callable by IPEX in certain instances. IPEX operates an electronic
          market
          for collecting, detecting, converting, enhancing and routing telecommunication
          traffic and digital content. Members of the exchange anonymously exchange
          information based on route quality and price through a centralized, web
          accessible database and then route traffic. IPEX’s fully-automatic, highly
          scalable Voice over Internet Protocol routing platform updates routes based
          on
          availability, quality and price and executes the capacity request of the
          orders
          using proprietary software and delivers them through IPEX’s system. IPEX
          invoices and processes payments for its members’ transactions and offsets credit
          risk through its credit management programs with third parties.
 
 **8.
          LONG-TERM INVESTMENTS**
 
 Long-term
          investments at June 30, 2005 and December 31, 2004 are comprised of the
          following:
 
 **June
                    30,**
                
                **December
                    31,****2005**
                
                **2004**Alacra
                    Corporation
                
                $
                1,000,000
                
                $
                1,000,000DigiCorp
                
                
                549,942
                
                
                532,435IPEX,
                    Inc.
                
                
                1,608,750Real
                    Estate
                
                
                652,320
                
                
                738,518China
                    Nurse
                
                
                50,000
                
                
                50,000$
                3,861,012
                
                $
                2,320,953
  9
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
 *Alacra
          Corporation*
 
 At
          June
          30, 2005, the Company had an investment in shares of Series F convertible
          preferred stock of Alacra Corporation, valued at $1,000,000, and classified
          as
          an available-for-sale investment. The Company has the right to have the
          Series F
          convertible preferred stock redeemed by Alacra for face value plus accrued
          dividends on December 31, 2006. Alacra, based in New York, is a global
          provider
          of business and financial information. Alacra provides a diverse portfolio
          of
          fast, sophisticated online services that allow users to quickly find, analyze,
          package and present mission-critical business information. Alacra's customers
          include more than 750 financial institutions, management consulting, law
          and
          accounting firms and other corporations throughout the world.
 
 *DigiCorp*
 
 At
          June
          30, 2005, the Company held 4,016,027 shares, or 41%, of the common stock
          of
          DigiCorp recorded at its cost, as adjusted for the Company’s proportionate share
          of DigiCorp’s losses, of $549,942, or approximately $0.14 per share. Digicorp's
          common stock is traded on the OTC Bulletin Board, which reported a closing
          price, at June 30, 2005, of $0.22. The Company accounts for its investment
          in
          Digicorp under the equity method of accounting. The Company’s proportionate
          share of income or losses from this investment is recorded in interest,
          dividend
          income and other, net.
 
 *Excelsior
          Radio Networks, Inc.*
 
 During
          the period from August 12, 2003 through October 22, 2004, the Company liquidated
          its investment in Excelsior Radio Networks, Inc. ( ***“Excelsior”*** ).
          The
          Company sold a total of 1,476,804 shares and warrants to purchase 87,111
          shares
          of Excelsior common stock. Certain of these sales are subject to potential
          adjustment whereby the Company would receive additional proceeds in the
          event of
          certain circumstances. However, no value has been ascribed to this
          right.
 
 *Investments
          in Real Estate*
 
 At
          June
          30, 2005, the Company had several real estate investments, recorded at
          its cost
          of $652,320. These investments are included in long-term investments. The
          Company holds its real estate investments in Franklin Capital Properties,
          LLC
          ( ***“Franklin
          Properties”*** ).
          Franklin Properties primary focus is on the acquisition and management
          of income
          producing real estate holdings. Franklin Properties’ real estate holdings
          consist of eight vacant single family buildings and two multi-unit buildings
          in
          Baltimore, Maryland, approximately 8.5 acres of undeveloped land in Heber
          Springs, Arkansas, 0.61 acres of undeveloped land in Springfield, Tennessee,
          and
          various loans secured by real estate in Heber Springs, Arkansas. Franklin
          Properties is evaluating alternative uses for its real estate holdings,
          which
          range from development and capital investments as a means of generating
          recurring revenue to the liquidation of specific properties.
 
 **9.
          NOTES PAYABLE**
 
 The
          Company initially purchased Excelsior on August 28, 2001. As part of the
          purchase price paid by the Company for its investment in Excelsior, the
          Company
          issued a $1,000,000 note to Winstar. This note was due February 28, 2002
          with
          interest at 3.54% but in accordance with the agreement has a right of offset
          against certain representations and warranties made by Winstar. The due
          date of
          the note was extended until the lawsuit discussed in Note 13 was settled,
          which
          occurred on June 1, 2005. At June 30, 2005, the Company had incurred
          approximately $161,120 in legal expenses which have been offset against
          the
          amount due. No payment has been made as the Company is evaluating the amount
          of
          additional offsets that it believes it is entitled to.
 
 On
          April
          7, 2005, the Company issued a $1,000,000 principal amount promissory note
          (the ***"Note"*** )
          to
          Bodnar Capital Management, LLC, in consideration for a loan from Bodnar
          Capital
          Management, LLC to the Company in the amount of $1,000,000. Steven J. Bodnar
          is
          a managing member of Bodnar Capital Management, LLC. Mr. Bodnar, through
          Bodnar
          Capital Management, LLC, is a principal stockholder of the Company. The
          principal amount of the Note and interest at the rate of 6% per annum is
          payable
          on May 31, 2006. The obligations under the Note are collateralized by all
          real
          property owned by the Company.
  10
 **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
 **10.
          STOCK OPTION PLANS**
 
 On
          September 9, 1997, the Company’s stockholders approved two Stock Option Plans: a
          Stock Incentive Plan ( ***“SIP”*** )
          to be
          offered to the Company’s consultants, officers and employees (including any
          officer or employee who is also a director of the Company) and a Non-Statutory
          Stock Option Plan ( ***“SOP”*** )
          to be
          offered to the Company’s “outside” directors, (i.e., those directors who are not
          also officers or employees of The Company’). As of June 30, 2005, there were no
          outstanding options to purchase the Company’s Common Stock and no options
          available for future issuance under either the SIP or the SOP.
 
 In
          December 2004, the Board of Directors of the Company approved the 2005
          Stock
          Option and Restricted Stock Plan (the ***“2005
          SOP”*** )
          and the
          Company’s stockholders approved the Plan in March 2005. The Plan reserves
          1,319,082 shares of common stock for grants of incentive stock options,
          nonqualified stock options, and restricted stock awards to employees,
          non-employee directors and consultants performing services for the Company.
          Options granted under the Plan have an exercise price equal to or greater
          than
          the fair market value of the underlying common stock at the date of grant
          and
          become exercisable based on a vesting schedule determined at the date of
          grant. The options expire 10 years from the date of grant. Restricted stock
          awards granted under the Plan are subject to a vesting period determined
          at the
          date of grant. As of June 30, 2005, the Company has granted 272,144 shares
          of restricted stock of which 121,326 are vested. For the six months and
          three
          months ended June 30, 2005, the Company recorded compensation expense of
          approximately $949,872 and $374,898, respectively, related to these shares
          of
          restricted stock.
 
 The
          following is a summary of the status of the Stock Option Plans:
 
 **Outstanding
                    Options****Shares
                        Available for Grant**
                ****
                **Number of
                      Shares**
                ****
                **Weighted
                      Average Exercise Price****December
                    31, 2003**
                
                
                **22,500**
                
                
                **61,875**
                
                **$**
                **3.80**Grants
                
                
                (78,750
                )
                
                78,750
                
                $
                0.50Exercises
                
                
                
                
                
                (78,750
                )
                $
                0.50Cancellations
                
                
                56,250
                
                
                (56,250
                )
                $
                3.71**December
                    31, 2004**
                
                
                —
                
                
                **5,625**
                
                **$**
                **4.67**Adoption
                    of 2005 SOP
                
                
                1,319,082Exercises
                
                
                
                
                
                (5,625
                )
                $
                4.67Restricted
                    Stock Awards
                
                
                (272,144
                )Grants
                
                
                (609,000
                )
                
                609,000
                
                $
                5.27**June
                    30, 2005**
                
                
                **437,938**
                
                
                **609,000**
                
                **$**
                **5.27**
 
 11
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
  Options
                    exercisable at:December
                    31, 2003
                
                
                61,875
                
                $
                3.80December
                    31, 2004
                
                
                5,625
                
                $
                4.67June
                    30, 2005
                
                
                185,250
                
                $
                5.27
 
 The
          outstanding options, all of which are issued under the 2005 SOP, have a
          remaining contractual life of approximately 9.75 years.
 
 **11.
          WARRANTS**
 
 On
          November 3, 2004, the Company entered into a Subscription Agreement with
          several
          accredited investors (the ***"Investors"*** ),
          relating to the issuance and sale by the Company of shares of its common
          stock
          (the ***"Shares"*** )
          and
          five-year warrants (the ***"Warrants"*** )
          to
          purchase additional shares of its common stock (the ***"Warrant
          Shares"*** )
          in one
          or more closings of a private placement (the ***"Private
          Placement"*** ).
 
 During
          the period November 3, 2004 through December 21, 2004, the Company held
          a series
          of four closings of the Private Placement. In conjunction with the closings
          the
          Company issued and sold to the Investors an aggregate of 1,517,700 Shares
          and
          Warrants to purchase an aggregate of up to 758,841 Warrant Shares pursuant
          to
          the terms of the Subscription Agreement. On April 22, 2005, the Company
          entered
          into a Subscription Agreement with an accredited investor whereby the Company
          sold an additional 20,000 Shares and Warrants to purchase an additional
          20,000
          Warrant Shares. At June 30, 2005, the Warrants, including those granted
          on April
          22, 2005, weighted average exercise price was $3.91 with a remaining contractual
          life of 4.4 years.
 
 In
          March
          2005, the Company issued 177,000 warrants (including 150,000 capitalized
          as part
          of the acquisition of the SurgiCount patents) to purchase shares of common
          stock
          at $5.27 per share to various consultants. The warrants are immediately
          exercisable and have a five-year life. The warrants were valued at $633,163
          and,
          depending on the nature of the consulting services received by the Company,
          were
          either capitalized or expensed.
 
 In
          April
          2005, the Company entered into a consulting agreement with Health West
          Marketing
          Incorporated and as incentive for entering into the agreement, the Company
          agreed to issue Health West a callable warrant to purchase 150,000 (post
          3:1
          forward stock split) shares of the Company's common stock at an exercise
          price
          of $5.95, exercisable for 5 years. In addition, the Company agreed to issue
          a
          callable warrant to purchase 25,000 (post 3:1 forward stock split) shares
          of the
          Company's common stock at an exercise price of $5.95, exercisable upon
          meeting
          specified milestones. The warrants were valued at $615,951 of which $527,958
          was
          expensed during the period and the remaining amount will be expensed when
          and if
          the milestones are met.
 
 Warrants
          granted during the year were valued using the Black-Scholes valuation model
          assuming expected dividend yield, risk-free interest rate, expected life
          and
          volatility of 0%, 3.75%, five years and 83%, respectively. As of June 30,
          2005,
          all warrants issued to the consultants remain outstanding.
 
 **12.
          RELATED PARTY TRANSACTIONS**
 
 *Tuxis
          Corporation*
 
 On
          July
          22, 2005, Ault Glazer filed a Schedule 13D/A with the SEC relating to its
          holdings in Tuxis Corporation (“Tuxis”). Tuxis, a Maryland corporation,
          currently is registered under the 1940 Act as a closed-end management investment
          company. Tuxis previously received Board of Directors and shareholder approval
          to change the nature of its business so as to cease to be an investment
          company
          and on May 3, 2004, filed an application with the SEC to de-register. At
          June
          30, 2005, the Company directly held 79,800 shares and indirectly, by virtue
          of
          its relationship with Ault Glazer, held 145,400 shares of Tuxis common
          stock,
          which represented approximately 8.11% and 14.78%, respectively, of the
          total
          outstanding shares. At March 31, 2005, Tuxis had reportable net assets
          of
          approximately $9.0 million.
  12
 **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
 *Land
          Purchase*
 
 On
          April
          28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
          Tennessee from a related party. The purchase price consisted of approximately
          $90,000 in cash, 20,444 shares of common stock and 10,221 warrants to purchase
          common stock at an exercise price of $4.53 and a 5 year contractual
          life.
 
 *Ipex,
          Inc.*
 
 On
          June
          30, 2005, the Company formalized the terms of a consulting agreement, consented
          to by IPEX, whereby the Company was retained by Wolfgang Grabher, the majority
          shareholder of IPEX, former President, former Chief Executive Officer and
          former
          director of IPEX, to serve as a business consultant to IPEX. Mr. Grabher
          owns
          18,855,900 shares of IPEX's 28,195,566 outstanding shares of common stock
          and
          has granted Mr. Ault, the Company’s Chairman and Chief Executive Officer, an
          irrevocable voting proxy for his shares. At June 30, 2005, the Company
          held
          2.15% of IPEX’s outstanding shares of common stock. On June 30, 2005, the
          Company agreed with IPEX as to the scope of such consulting services and
          the
          consideration for such services. The Company has provided and/or will provide
          if
          reasonably necessary within the next 12 months, the following services
          to IPEX:
          (a) substantial review of IPEX's business and operations in order to facilitate
          an analysis of IPEX's strategic options regarding a turnaround of IPEX's
          business; (b) providing advice in the following areas: (i) identification
          of
          financing sources; (ii) providing capital introductions of financial
          institutions and/or strategic investors; (iii) evaluation and recommendation
          of
          candidates for appointment as officers, directors or employees; (iv) making
          personnel of the Company available to IPEX to provide services to IPEX
          on a
          temporary or permanent basis; (v) evaluation and/or negotiation of merger
          or
          sale opportunities, or such other form of transaction or endeavor which
          IPEX may
          elect to pursue; and (vi) providing any other services as are mutually
          agreed
          upon in writing by the Company and Wolfgang Grabher from time to time;
          and (c)
          assisting IPEX in installing a new management team.
 
 At
          June
          30, 2005, the Company had performed a significant amount of the services
          stipulated under the terms of the consulting agreement, including but not
          limited to: (i) a review of the business and operations; (ii) the execution
          of
          two purchase agreements for the purchase of certain intellectual property
          assets; (iii) the hiring of a Chief Executive Officer, Chief Operating
          Officer
          and a Vice President of Research & Development; and (iv) the appointment of
          two members to the Board of Directors of IPEX. The Company initially valued
          the
          amount of the consulting services at $1,331,250, which was due on August
          15,
          2005, and was based upon the assumption that the Company would most likely
          receive 500,000 shares of IPEX common stock as payment for the services.
          During
          the three months ended June 30, 2005, the Company recognized $576,627 in
          revenue
          as a result of this agreement and has deferred approximately $755,000 of
          revenue
          relating to this consulting agreement which management expects will be
          substantially recognized during the year ending December 31, 2005.
 
 **13.
          COMMITMENTS AND CONTINGENCIES**
 
 On
          October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership,
          L.P.
          filed a lawsuit (the ***“Leve
          Lawsuit”*** )
          against
          the Company, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
          and
          four other defendants affiliated with Winstar Communications, Inc. ( ***“Winstar”*** ).
          On
          February 25, 2003, the case against the Company and Sunshine was dismissed,
          however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
          Partnership, L.P. exercised their right to appeal. 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.
  **14.
          SEGMENT REPORTING**
  13
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
 The
          Company reports selected segment information in its financial reports to
          shareholders in accordance with SFAS No. 131, *“Disclosures
          about Segments of an Enterprise and Related Information.”* The
          segment information provided reflects the three distinct lines of business
          within the Company’s organizational structure: medical
          products, which consists of SurgiCount, a provider of patient safety devices,
          health care solutions, which consists of Patient Safety Consulting Group,
          LLC,
          and financial services and real estate, which consists of Franklin Capital
          Properties, LLC. Unallocated
          corporate expenses are centrally managed at the corporate level and not
          reviewed
          by the Company’s chief operating decision maker in evaluating results by
          segment.
 
 Transactions
          between segments are not common and are not material to the segment information.
          Some business activities that cannot be classified in the aforementioned
          segments are shown under “corporate”.
 
 Segment
          information for the three and six months ended June 30, 2005, and 2004
          is as
          follows:
  **Three
                    Months Ended**
                
                **Six
                    Months Ended****June 30,**
                
                **June
                    30,**
                
                **June 30,**
                
                **June 30,****2005**
                
                **2004**
                
                **2005**
                
                **2004****Medical
                    Products**Revenue
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (947,898
                )
                
                —
                
                $
                (1,168,629
                )
                
                —Total
                    Assets
                
                $
                4,576,262
                
                
                —
                
                $
                4,576,262
                
                
                —**Health
                    Care Solutions**Revenue
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (105,196
                )
                
                —
                
                $
                (232,921
                )
                
                —Total
                    Assets
                
                
                —
                
                
                —
                
                
                —
                
                
                —**Financial
                    Services and Real Estate**Revenue
                
                $
                586,627
                
                
                —
                
                $
                586,627
                
                
                —Net
                    income
                
                $
                237,901
                
                $
                432,435
                
                $
                313,064
                
                $
                584,837Total
                    Assets
                
                $
                6,685,736
                
                $
                3,013,708
                
                $
                6,685,736
                
                $
                3,013,708**Corporate**Revenue
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (955,240
                )
                $
                (402,791
                )
                $
                (2,465,560
                )
                $
                (695,639
                )Total
                    Assets
                
                $
                526,109
                
                $
                78,961
                
                $
                526,109
                
                $
                78,961**Total**Revenue
                
                $
                586,627
                
                
                —
                
                $
                586,627
                
                
                —Net
                    loss
                
                $
                (1,770,433
                )
                $
                29,644
                
                $
                (3,554,046
                )
                $
                (110,802
                )Total
                    Assets
                
                $
                11,788,107
                
                $
                3,092,669
                
                $
                11,788,107
                
                $
                3,092,669
 
 **14.
          SUBSEQUENT EVENTS**
  14
  **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Condensed Consolidated Financial Statements (continued)**
 During
          July 2005, Ault Glazer Bodnar Merchant Capital, Inc. purchased a 50% interest
          in
          Automotive Services Group ( ***“ASG”*** ),
          LLC,
          an Alabama Limited Liability Company, for $300,000. ASG was formed to develop
          and operate automated car wash sites with the first location under development
          in Birmingham, Alabama.
 
 On
          July
          11, 2005, Franklin Capital Properties, LLC filed a certificate of amendment
          with
          the Secretary of State of the State of Delaware changing its name to Ault
          Glazer
          Bodnar Capital Properties, LLC.
 
 On
          July
          19, 2005, the Company entered into a stock purchase agreement pursuant
          to which
          the Company sold to an investor 38,000 shares of the Company's common stock.
          As
          consideration for the PST shares, the Company received 12,000 shares of
          Tuxis
          common stock valued at $103,680.
  15
  **Item
        2.**  **Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations.**
 
 *The
        following discussion should be read in conjunction with our condensed
        consolidated financial statements and the notes thereto included elsewhere
        in
        this form 10-Q. This form 10-Q contains forward-looking statements regarding
        the
        plans and objectives of management for future operations. This information
        may
        involve known and unknown risks, uncertainties and other factors which may
        cause
        our actual results, performance or achievements to be materially different
        from
        future results, performance or achievements expressed or implied by any
        forward-looking statements. Forward-looking statements, which involve
        assumptions and describe our future plans, strategies and expectations, are
        generally identifiable by use of the words "may," "will," "should," "expect,"
        "anticipate," "estimate," "believe," "intend" or "project" or the negative
        of
        these words or other variations on these words or comparable terminology.
        These
        forward-looking statements are based on assumptions that may be incorrect,
        and
        we cannot assure you that the projections included in these forward-looking
        statements will come to pass. Our actual results could differ materially
        from
        those expressed or implied by the forward-looking statements as a result
        of
        various factors. We undertake no obligation to revise these forward-looking
        statements to reflect events or circumstances occurring after the date hereof
        or
        to reflect the occurrence of unanticipated events.*
 
 **Critical
        accounting policies and estimates**
 
 The
        below
        discussion and analysis of Patient Safety Technologies’ financial condition and
        results of operations are based upon the Company's financial statements.
        The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the amounts reported in the financial
        statements. Critical accounting policies are those that are both important
        to
        the presentation of our financial condition and results of operations and
        require management's most difficult, complex, or subjective judgments. Our
        most
        critical accounting policy relates to the valuation of our non-marketable
        equity
        securities.
 
 We
        invest
        in illiquid equity securities acquired directly from the issuer in private
        transactions. Our investments are generally subject to restrictions on resale
        or
        otherwise are illiquid and generally have no established trading market.
        Additionally, many of the securities that we may invest in will not be eligible
        for sale to the public without registration under the Securities Act of 1933.
        Because of the type of investments that we make and the nature of our business,
        our valuation process requires an analysis of various factors.
 
 Investments
        in non-marketable securities are inherently risky and a number of the companies
        we invest in are expected to fail. Their success (or lack thereof) is dependent
        upon product development, market acceptance, operational efficiency and other
        key business success factors. In addition, depending on their future prospects,
        they may not be able to raise additional funds when needed or they may receive
        lower valuations, with less favorable investment terms than in previous
        financings, and the investments would likely become impaired.
 
 We
        review
        all of our investments quarterly for indicators of impairment; however, for
        non-marketable equity securities, the impairment analysis requires significant
        judgment to identify events or circumstances that would likely have a material
        adverse effect on the fair value of the investment. The indicators that we
        use
        to identify those events or circumstances includes as relevant, the nature
        and
        value of any collateral, the portfolio company’s ability to make payments and
        its earnings, the markets in which the portfolio company does business,
        comparison to valuations of publicly traded companies, comparisons to recent
        sales of comparable companies, the discounted value of the cash flows of
        the
        portfolio company and other relevant factors. Because such valuations are
        inherently uncertain and may be based on estimates, our determinations of
        fair
        value may differ materially from the values that would be assessed if a ready
        market for these securities existed.
 
 Investments
        identified as having an indicator of impairment are subject to further analysis
        to determine if the investment is other than temporarily impaired, in which
        case
        we write the investment down to its impaired value. When a portfolio company
        is
        not considered viable from a financial or technological point of view, we
        write
        down the entire investment since we consider the estimated fair market value
        to
        be nominal. If a portfolio company obtains additional funding at a valuation
        lower than our carrying amount or requires a new round of equity funding
        to stay
        in operation and the new funding does not appear imminent, we presume that
        the
        investment is other than temporarily impaired, unless specific facts and
        circumstances indicate otherwise. We did not recognize any impairments for
        the
        six months ended June 30, 2005 and 2004.
  16
  Security
        investments which are publicly traded on a national exchange or Nasdaq Stock
        Market are stated at the last reported sales price on the day of valuation
        or,
        if no sale was reported on that date, then the securities are stated at the
        last
        quoted bid price. Our Board may determine, if appropriate, to discount the
        value
        where there is an impediment to the marketability of the securities held.
 
 **Accounting
        Developments**
 
 In
        December 2004, Statement of Financial Accounting Standards ( ***"SFAS"*** )
        No.
        123(R), " *Share-Based
        Payment* ,"
        which
        addresses the accounting for employee stock options, was issued. SFAS 123(R)
        revises the disclosure provisions of SFAS 123, " *Accounting
        for Stock Based Compensation* "
        and
        supercedes Accounting Principles Board ( ***"APB"*** )
        Opinion
        No. 25, " *Accounting
        for Stock Issued to Employees* ."
        SFAS
        123(R) requires that the cost of all employee stock options, as well as other
        equity-based compensation arrangements, be reflected in the financial statements
        based on the estimated fair value of the awards. The Company elected early
        adoption of SFAS No. 123(R) as of January 1, 2005.
 
 **Overview**
 
 Until
        March 31, 2005, Patient Safety Technologies, Inc., a Delaware corporation
        ( ***"PST"*** ,
        or the ***"Company"*** ),
        elected to be a Business Development Company ( ***“BDC”*** )
        under
        the Investment Company Act of 1940, as amended. On March 30, 2005, stockholder
        approval was obtained to withdraw our election to be treated as a BDC and
        on
        March 31, 2005 we filed an election to withdraw our election with the Securities
        and Exchange Commission.
 
 We
        are
        currently engaged in the acquisition of controlling interests in companies
        and
        research and development of products and services focused on the health care
        and
        medical products field, particularly the patient safety markets, as well
        as the
        financial services and real estate industries. SurgiCount Medical, Inc.,
        a
        provider of patient safety devices, Patient Safety Consulting Group, LLC,
        a
        healthcare consulting services company, Ault Glazer Bodnar Merchant Capital,
        Inc., a holding company for the Company’s non-patient safety related assets, and Franklin
        Capital Properties, LLC ,
        a real
        estate development and management company, are wholly-owned operating
        subsidiaries, which were either acquired or created to enhance our ability
        to
        focus our efforts in each targeted industry.
 
 SurgiCount
        is our first acquisition in our plan to become a leader in the patient safety
        field market. SurgiCount owns patents issued in the United States and Europe
        related to the Safety-Sponge TM System,
        an innovation which management believes will allow us to capture a significant
        portion of the United States and European surgical sponge sales. Based upon
        assumptions that take into consideration factors such as the approximate
        number
        of hospitals and operating rooms in the United States and Europe, the
        approximate number of surgeries performed annually, and estimates for the
        average cost of surgical sponges, incorporating the Safety-Sponge TM System,
        per surgery, we believe that the existing market for surgical sponge sales
        in
        the United States and Europe represents a market opportunity equal to or
        in
        excess of $650 million in annual sales.
 
 The
        Safety-Sponge TM System
        allows for faster and more accurate counting of surgical sponges. SurgiCount
        has
        obtained FDA 510k exempt status for the Safety-Sponge TM line.
 
 Ault
        Glazer Bodnar Merchant Capital, Inc. was formed during June 2005 as a means
        to
        separate the Companies core patient safety related business from its
        non-healthcare assets. The Company expects that Ault Glazer Bodnar Merchant
        Capital, Inc. will hold the majority of the Company’s marketable securities and
        long-term investments.
 
 The
        Company, including its subsidiaries, also provides capital and managerial
        assistance to early stage companies in the medical products, health care
        solutions, financial services and real estate industries.
 
 Our
        principal executive offices are located at 100 Wilshire Boulevard, Suite
        1500,
        Santa Monica, California 90401. Our telephone number is (310) 752-1416. Our
        website is located at http://www.patientsafetytechnologies.com .
  17
 
 **Financial
        Condition**
 
 The
        Company's cash and marketable securities were $1,493,474, at June 30, 2005,
        versus $4,334,123 at December 31, 2004. Total current liabilities, were
        $3,678,702 at June 30, 2005 versus $3,367,974 at December 31, 2004. Included
        in
        current liabilities at June 30, 2005 and December 31, 2004 is a note payable,
        and accrued interest on such note, payable to Winstar Communications, Inc.
        in
        the amount of $966,512 and $1,004,962, respectively. As discussed in Note 9
        in the Company’s notes to its condensed consolidated financial statements filed
        with this Form 10-Q, the due date on the note payable to Winstar was June
        1,
        2005, the settlement date of the Leve Lawsuit. The note payable has a right
        of
        offset against certain representations and warranties made by Winstar and
        we
        believe the amount of the offsets exceed the amount of the note payable.
        However, since Winstar may not agree with this belief, the only offsets against
        the principal balance of the note reflected in the accompanying financial
        statements relate to legal fees attributed to our defense of the lawsuits
        filed
        against us. As of June 30, 2005, we incurred $161,120 in legal fees attributed
        to our defense of lawsuits
        filed by Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. and the
        representations and warranties made by Winstar Radio Networks, Inc. These
        fees
        have been offset against the note with the remaining principal balance of
        $838,880 reflected as a note payable on the accompanying balance sheet.
 
 At
        June
        30, 2005 and December 31, 2004, we had $91,252 and $846,404 in cash and cash
        equivalents. Our Board has given our Chairman and Chief Executive Officer,
        Milton "Todd" Ault III, the authority to invest our cash balances in the
        public
        equity and debt markets as appropriate to maximize the short-term return
        on such
        assets. The making of such investments entails risks related to the loss
        of
        investment and price volatility.
 
 The
        Company had a working capital deficit of approximately $473,000 at June 30,
        2005. The Company continues to have recurring losses and has relied upon
        liquidating its portfolio companies to fund operations. In the past we have
        relied upon private placements of equity and debt securities and we may rely
        on
        private placements to fund our capital requirements in the future. The Company
        has received shareholder approval to sell equity and/or debt securities of
        the
        Company up to $10 million in any calendar year to the Company’s Chairman and
        Chief Executive Officer, Milton “Todd” Ault, III, to the Company’s President and
        Secretary, Lynne Silverstein, to the Chief Health and Science Officer of
        the
        Company’s subsidiary Patient Safety Consulting Group, LLC, Louis Glazer, and to
        the Manager of the Company’s subsidiary Franklin Capital Properties, LLC and Mr.
        Glazer’s spouse, Melanie Glazer. If the Company proposed to sell more than $10
        million of securities in a calendar year to such persons additional shareholder
        approval would be required. The Company does not currently anticipate selling
        equity or debt securities to these persons and, in the event the Company
        elected
        to pursue such an investment, the Company cannot guarantee that such persons
        would be willing to further invest in the Company. At this time, the Company
        plans to fund future operations primarily by liquidating its portfolio
        companies. On April 7, 2005, the Company issued a $1,000,000 promissory note
        (the ***"Note"*** )
        to
        Bodnar Capital Management, LLC, in consideration of a $1,000,000 loan from
        Bodnar Capital Management, LLC to the Company. Steven J. Bodnar is a managing
        member of Bodnar Capital Management, LLC. Mr. Bodnar, through Bodnar Capital
        Management, LLC, is a principal stockholder of the Company. The principal
        amount
        of the Note and interest at the rate of 6% per annum is payable on May 31,
        2006,
        the maturity date of the Note. The obligations under the Note are secured
        by all
        real property owned by the Company. Management believes that existing cash
        resources, together with proceeds from investments and anticipated revenues
        from
        its operations, should be adequate to fund its operations for the twelve
        months
        subsequent to June 30, 2005. However, long-term liquidity is dependent on
        the
        Company's ability to attain future profitable operations. Management may
        undertake additional debt or equity financings to better enable the Company
        to
        grow and meet its future operating and capital requirements.
 
 On
        November 3, 2004, the Company entered into a Subscription Agreement and sold
        an
        aggregate of 405,625 shares (1,216,875 shares post 3:1 forward stock split)
        of
        its Common Stock and warrants to purchase an aggregate of up to 202,810 shares
        (608,430 shares post split) of its Common Stock in a private placement
        transaction to certain accredited investors. Pursuant to the terms of the
        Subscription Agreement, the Company held additional closings of the private
        placement on November 15, 2004, December 2, 2004, and on December 27, 2004,
        and
        sold an aggregate of 100,275 additional shares (300,825 shares post split)
        of
        its Common Stock and warrants to purchase an aggregate of up to 50,137 shares
        (150,411 shares post split) of its Common Stock. The Company received aggregate
        net proceeds from all the closings of $3,924,786. The Company filed a
        registration statement with the SEC on May 3, 2005 registering the resale
        of the
        shares of our Common Stock (including the shares of common stock issuable
        upon
        exercise of the warrants) sold in the private placement transactions on a
        continuous or delayed basis under the Securities Act of 1933. We are required
        to
        use our reasonable best efforts to cause the registration statement to become
        effective within 90 days after the date we file such registration statement
        with
        the SEC. We intend to use the net proceeds from the private placement
        transaction primarily for general corporate purposes and in buying controlling
        equity stakes in companies and/or assets in the medical products, health
        care
        solutions, financial services and real estate industries.
  18
  As
        of
        June 30, 2005, the Company had no commitments not reflected on its balance
        sheet. As in prior acquisitions, we intend to use a combination of common
        stock
        and warrants to purchase common stock as the primary means to acquire companies.
        Accordingly, the Company’s need to raise significant amounts of cash can be
        minimized, provided the companies we acquire are willing to accept non-cash
        forms of consideration.
 
 **Investments**
 
 The
        Company’s financial condition is dependent on the success of its investments.
        The Company intends to invest a substantial portion of its assets in private
        companies in the medical products, health care solutions and financial services
        industries. These private businesses may be thinly capitalized, unproven,
        small
        companies that lack management depth, are dependent on new, commercially
        unproven technologies and have little or no history of operations. Short
        selling
        is a component of the Company’s investment strategy and these trades typically
        range, in any particular month, from 0% to 20% of total trading activity.
        The
        making of such investments entails significant risk that the price of a security
        may increase resulting in the loss of or negative return on the investment.
        The
        following is a discussion of our most significant investments at June 30,
        2005.
 
 *Alacra
        Corporation*
 
 At
        June
        30, 2005, the Company had an investment in Alacra Corporation (“Alacra”), valued
        at $1,000,000, which represents 8.5% of the Company’s total assets. Alacra, a
        privately held company based in New York, is a leading global provider of
        business and financial information. Alacra provides a diverse portfolio of
        fast,
        sophisticated online services that allow users to quickly find, analyze,
        package
        and present mission-critical business information. Alacra’s customers include
        more than 750 leading financial institutions, management consulting, law
        and
        accounting firms and other corporations throughout the world. Currently,
        the
        company’s largest customer segment is investment and commercial banking,
        followed closely by management consulting, law and multi-national
        corporations.
 
 Alacra’s
        online service allows users to search via a set of robust, sophisticated
        tools
        designed to locate and extract business information from the Internet and
        from
        the Alacra library of premium content. The company’s team of information
        professionals selects, categorizes and indexes more than 45,000 sites on
        the Web
        containing the most reliable and comprehensive business information.
        Simultaneously, users can search more than 100 premium commercial databases
        that
        contain financial information, economic data, business news, and investment
        and
        market research. Alacra provides the requisite information in the appropriate
        format, gleaned from such prestigious content partners as Thomson Financial(TM),
        Barra, The Economist Intelligence Unit, Factiva, Mergerstat(R) and many others.
 
 The
        information services industry is intensely competitive and we expect it to
        remain so. Although Alacra has been in operation since 1996 they are
        significantly smaller in terms of revenue than a large number of companies
        offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
        LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
        revenues that range anywhere from $100 million to several billion dollars,
        as
        reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
        range of products and services, greater financial and marketing resources,
        larger customer bases, greater name recognition, greater global reach and
        more
        established relationships with potential customers than Alacra has. These
        larger
        and better capitalized competitors may be better able to respond to changes
        in
        the financial services industry, to compete for skilled professionals, to
        finance investment and acquisition opportunities, to fund internal growth
        and to
        compete for market share generally.
 
 On
        April
        20, 2000, the Company purchased $1,000,000 worth of Alacra Series F Convertible
        Preferred Stock. Alacra has recorded revenue growth in every year since the
        Company’s original investment, further, 2004 revenues of approximately $11.4
        million, were in excess of the prior years revenues by approximately 38%.
        At
        December 31, 2004, Alacra had total assets of approximately $4.4 million
        with
        total liabilities of approximately $7.2 million. Deferred revenue, which
        represents subscription revenues are amortized over the term of the contract,
        which is generally one year, and represented approximately $3.3 million of
        the
        total liabilities. The Company has the right to have the preferred stock
        redeemed by Alacra for face value plus accrued dividends on December 31,
        2006.
        In connection with this investment, the Company was granted observer rights
        on
        Alacra board of directors meetings.
  19
  *China
        Nurse*
 
 On
        November 23, 2004, the Company entered into a strategic relationship with
        China
        Nurse LLC ("China Nurse"), a developmental stage international nurse-recruiting
        firm based in New York that focuses on recruiting and training qualified
        nurses
        from China and Taiwan for job placement with hospitals and other health care
        facilities in the United States. China Nurse creates an opportunity for
        hospitals and other health care providers to efficiently recruit skilled
        professionals from China and Taiwan. It maintains a customized approach to
        matching the qualifications of the nurses with the specific needs of U.S.
        clients. The primary purpose for this strategic investment was in anticipation
        of leveraging the relationships that China Nurse developed during the ordinary
        course of its business for the Company’s other patient safety products. In
        connection with this strategic relationship, the Company has agreed to provide
        referrals and other assistance and has also made a small capital investment
        in
        that company. This investment was a seed investment in a concept that may
        ultimately be completely impaired within a one year time frame if China Nurse
        is
        unable to secure additional interest both in the form of additional investment
        and from hospitals and health care facilities in the United States.
 
 *Digicorp*
 
 At
        June
        30, 2005, the Company had an investment in DigiCorp valued at $549,942, which
        represents 4.7% of the Company’s total assets. On December 29, 2004, the Company
        entered into a Common Stock Purchase Agreement with certain shareholders
        of
        DigiCorp (the "Agreement"), to purchase an aggregate of 3,453,527 shares
        of
        DigiCorp common stock. Of such shares, 1,224,000 shares of DigiCorp common
        stock
        will be purchased from the selling shareholders at such time as the shares
        are
        registered for resale with the SEC. The purchase price for such shares is
        $.135
        or $.145 per share, depending on when the closing occurs. Digicorp’s common
        stock is traded on the OTC Bulletin Board, which reported a closing price,
        at
        June 30, 2005, of $0.22. In connection with the Agreement, the Company is
        entitled to designate two members to the Board of Directors of Digicorp.
        The
        Company’s first designee, Melanie Glazer, who is also manager of our subsidiary
        Franklin Capital Properties, LLC, was appointed on December 29, 2004. Milton
        “Todd” Ault, III, our Chairman and Chief Executive Officer, was appointed Chief
        Executive Officer of Digicorp on April 26, 2005. On July 1, 2005, Philip
        Gatch,
        our Chief Technology Officer, was appointed Chief Technology Officer of
        Digicorp. On July 16, 2005, Alice M. Campbell, one of our directors, and
        Mr.
        Ault was appointed to the Board of Directors of Digicorp. On July 20, 2005,
        Lynne Silverstein, our President and Secretary, was appointed as a director
        of
        Digicorp, and William B. Horne, our Chief Financial Officer, was appointed
        as a
        director and as Chief Financial Officer of Digicorp. The Company is currently
        evaluating several strategic alternatives for the use of the DigiCorp entity.
 
 Since
        June 30, 1995, DigiCorp has been in the developmental stage and has had no
        operations other than issuing shares of common stock for financing the
        preparation of financial statements and for preparing filings for the SEC.
        On
        May 18, 2005, DigiCorp entered into a subscription agreement with Bodnar
        Capital
        Management, LLC ("Bodnar Capital"), pursuant to which DigiCorp sold Bodnar
        Capital 2,941,176 shares (the "Shares") of its common stock and warrants
        (the
        "Warrants") to purchase an additional 3,000,000 shares of its common stock.
        DigiCorp received gross proceeds of approximately $500,000 from the sale
        of
        stock and warrants to Bodnar Capital. The sale was made in a private placement
        exempt from registration requirements pursuant to Section 4(2) of the Securities
        Act of 1933, as amended, and Rule 506 promulgated thereunder.
 
 On
        July
        15, 2005, DigiCorp entered into a binding letter of intent to acquire certain
        assets which include the iCodemedia suite of websites and internet properties
        and all related intellectual property (the “iCodemedia Assets”) from Philip
        Gatch, who was recently appointed DigiCorp’s Chief Technology Officer. Digicorp
        agreed to issue Mr. Gatch 1,000,000 shares of its common stock as consideration
        for the iCodemedia Assets. Consummation of the transaction is subject to
        the
        execution of a definitive purchase and sale contract.
 
 *Excelsior
        Radio Networks, Inc.*
  20
  During
        the period from August 12, 2003 through October 22, 2004, the Company liquidated
        its investment in Excelsior Radio Networks, Inc. ( **“Excelsior”** ).
        The
        Company sold a total of 1,476,804 shares and warrants to purchase 87,111
        shares
        of Excelsior common stock. The Company has stock appreciation rights on these
        shares that begin to expire on August 8, 2005.
 
 *IPEX,
        Inc.*
 
 At
        June
        30, 2005, the Company held 607,425 shares of common stock and warrants to
        purchase 225,000 shares of common stock at $1.50 per share and warrants to
        purchase 225,000 shares of common stock at $2.00 per share of IPEX, Inc.
        (“ ***IPEX”)*** ,
        formerly Administration for International Credit & Investments, Inc, valued
        at $2,080,349. IPEX's common stock is traded on the OTC Bulletin Board, which
        reported a closing price, at June 30, 2005, of $3.55. The warrants are
        exercisable for a period of five years and are callable by IPEX in certain
        instances. IPEX operates a fully automated, software-based, centralized Voice
        over Internet Protocol ( **"VoIP"** )
        routing
        platform that exchanges international telecommunication traffic. IPEX's exchange
        operates on a software-based switching platform which monitors and dynamically
        checks up to 256 different routes for one country code, optimizing margin
        and
        quality through real time traffic adjustments. The exchange delivers seamless
        access through an Internet Protocol ( **“IP”** )
        connection which significantly reduces the time to connect to the exchange.
        IPEX
        offers its service to international telecom carriers and Internet Service
        Providers and currently has contracts with approximately 120 international
        carriers. IPEX invoices and processes payments for its members’ transactions and
        offsets credit risk through its credit management programs with third parties.
        On June 23, 2005, Alice M. Campbell, who is one of our directors, was appointed
        to the Board of Directors of IPEX. In addition, from May 26, 2005 until July
        20,
        2005, Milton “Todd” Ault, III, our Chairman and Chief Executive Officer, served
        as interim Chief Executive Officer and a director of IPEX.
 
 The
        Company’s initial investment into IPEX occurred On March 2, 2005 in the amount
        of $450,000. This investment was part of the private placement that IPEX
        completed on March 18, 2005. The total amount of IPEX’s private placement was
        for 3,500,000 shares of common stock, 1,750,000 Series A Warrants and 1,750,000
        Series B Warrants for aggregate proceeds of $3,500,000, less issuance costs
        of
        $259,980, resulting in net realized proceeds of $3,240,020. The common stock,
        Series A and Series B Warrants were sold as Units, with each Unit consisting
        of
        two shares of common stock, one series A Warrant and one Series B Warrant.
        Each
        Series A Warrant entitles the holder to purchase one share of common stock
        at
        $1.50 per share, exercisable for a period of five years. Each Series B Warrant
        entitles the holder to purchase one share of common stock at $2.00 per share,
        exercisable for a period of five years. Subsequent to the effectiveness of
        a
        registration statement covering shares underlying the warrants, the Series
        A and
        Series B Warrants are callable by IPEX, under certain circumstances, if IPEX's
        common stock trades at or above $2.00 and $2.50, respectively, for ten
        consecutive trading days.
  As
        reflected in IPEX’s March 31, 2005 Form 10-Q, sales for the quarter ended March
        31, 2005 rose to $1,801,886 as compared to sales of $629,127 from the prior
        year's quarter ended March 31, 2004. Due to prior working capital constraints
        IPEX could only maintain selling to Tier 3 customers on a weekly net 5 basis.
        The additional working capital provided by the private placement completed
        in
        March 2005 allowed IPEX to extend credit to Tier 2 carriers under net 15
        terms
        therefore increasing the number of overall customers. IPEX’s management believes
        IPEX is now in a position to increase sales in the future by moving up to
        Tier 1
        customers, which require net 30 terms for payment.
 
 *Tuxis
        Corporation*
 
 On
        July
        22, 2005, Ault Glazer filed a Schedule 13D/A with the SEC relating to its
        holdings in Tuxis Corporation ("Tuxis"). Tuxis, a Maryland corporation,
        currently is registered under the 1940 Act, as a closed-end management
        investment company. Tuxis previously received Board of Directors and shareholder
        approval to change the nature of its business so as to cease to be an investment
        company and on May 3, 2004, filed an application with the SEC to de-register.
        At
        June 30, 2005, the Company directly held 79,800 shares and indirectly, by
        virtue
        of its relationship with Ault Glazer, held 145,400 shares of Tuxis common
        stock,
        which represented approximately 8.11% and 14.78%, respectively, of the total
        outstanding shares. At March 31, 2005, Tuxis had reportable net assets of
        approximately $9.0 million.
  *Franklin
          Capital Properties, LLC*
  21
 
 At
        June
        30, 2005, the Company had several real estate investments, valued at $652,320,
        which represents 5.5% of the Company’s total assets. The Company holds its real
        estate investments in Franklin Capital Properties, LLC ***(“Franklin
        Properties”)*** ,
        a
        Delaware limited liability company and a wholly owned subsidiary. Franklin
        Properties primary focus is on the acquisition and management of income
        producing real estate holdings. Franklin Properties real estate holdings
        consist
        of eight vacant single family buildings and two multi-unit buildings in
        Baltimore, Maryland, approximately 8.5 acres of undeveloped land in Heber
        Springs, Arkansas, 0.61 acres of undeveloped land in Springfield, Tennessee,
        and
        various loans secured by real estate in Heber Springs, Arkansas. Franklin
        Properties is evaluating alternative uses for its real estate holdings, which
        range from development and capital investments as a means of generating
        recurring revenue to the liquidation of specific properties. As of June 30,
        2005, the Company had not generated revenue from rental activities, nor does
        it
        expect to generate any recurring revenue during 2005, on any of its real
        estate
        investments. Further, the Company has not defined a rental strategy for its
        existing properties. In the event that Franklin Properties elects to liquidate
        some or all of its real estate holdings the Company expects that any gain
        or
        loss recognized on the liquidation would be insignificant to the Company
        primarily due to the short period of time that the properties were owned
        combined with the absence of any significant changes in property values in
        the
        real estate markets where the Company’s real estate holdings are located.
  **Results
        of Operations**
 
 The
        Company accounts for its operations under accounting principles generally
        accepted in the United States. The principal measure of the Company’s financial
        performance is captioned “Net loss attributable to common shareholders,” which
        is comprised of the following:
 
 §
              "Revenues,"
                  which is the amount the Company receives from sales of its
                  products;
 
 §
              “Operating
                  expenses,” are the related costs and expenses of operating the
                  business;
 
 §
              “Interest,
                  dividend income and other, net,” which is the amount the Company receives
                  from interest and dividends from its short term investments and
                  money
                  market accounts, and its proportionate share of income or losses
                  from
                  investments accounted for under the equity method of
                  accounting;
 
 §
              “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 the Company’s marketable securities, net of any
                  (decrease) increase in deferred income taxes that would become
                  payable if
                  the unrealized appreciation were realized through the sale or other
                  disposition of the investment
                  portfolio.
 
 “Realized
        gains (losses) on investments, net” and “Unrealized gains (losses) on marketable
        securities, net” are directly related. When a security is sold to realize a
        gain, the net unrealized gain decreases and the net realized gain increases.
        When a security is sold to realize a loss, the net unrealized gain increases
        and
        the net realized gain decreases.
 
 The
        Company generally earns interest income from loans, preferred stock, corporate
        bonds and other fixed income securities. The amount of interest income varies
        based upon the average balance of the Company's fixed income portfolio and
        the
        average yield on this portfolio.
 
 **Revenues**
 
 The
        Company recognized revenue of $586,627 for the six and three months ended
        June
        30, 2005 as opposed to no revenues during the six and three months ended
        June
        30, 2004. Although none of the revenues that we recognized related to sales
        of
        our Safety-Sponge TM System
        we
        expect to begin recognizing revenues from the Safety-Sponge TM System
        during the three month period ending June 30, 2006 based in part upon the
        results of initial usage of the Safety-Sponge TM System
        in
        hospital operating rooms. We expect these revenues will initially have an
        insignificant impact on our results of operations, however, during the three
        month period ending December 31, 2006 we expect that revenues from our
        Safety-Sponge TM System
        will provide a material source of funds to cover a portion of our operating
        costs.
  22
  The
        increase in revenue was the result of a consulting agreement, consented to
        by
        IPEX, whereby the Company was retained by Wolfgang Grabher, the majority
        shareholder of IPEX, former President, former Chief Executive Officer and
        former
        director of IPEX, to serve as a business consultant to IPEX. In consideration
        for the services, Mr. Grabher personally agreed to pay us either 500,000
        shares
        of common stock of IPEX, or $1,500,000 in cash, as a non-refundable consulting
        fee. Whether the consulting fee is paid in the form of IPEX common stock
        or cash
        is in the sole discretion of Mr. Grabher. Although the determination of whether
        the Company will receive IPEX common stock or cash is in the discretion of
        Mr.
        Grabher, the Company has operated under the assumption that the Company will
        most likely receive 500,000 shares of IPEX common stock as payment for the
        services. Mr. Grabher owns 18,855,900 shares of IPEX's 28,195,566 outstanding
        shares of common stock and in May 2005 granted Mr. Ault, our Chairman and
        Chief
        Executive Officer, an irrevocable voting proxy for his shares for a period
        of
        three years or earlier if independent counsel hired by IPEX clears Mr. Grabher
        of any wrongdoings in connection with IPEX’s operations, if Mr. Ault releases
        the proxy or if Mr. Grabher sells the subject shares. The irrevocable voting
        proxy was granted to Mr. Ault while he served as interim Chief Executive
        Officer
        and a director of IPEX in order to distance Mr. Grabher from control over
        IPEX
        amid allegations of wrongdoing. At June 30, 2005, the Company held 2.15%
        of
        IPEX’s outstanding shares of common stock. On June 30, 2005, the Company agreed
        with IPEX as to the scope of such consulting services and the consideration
        for
        such services. The Company has provided and/or will provide if reasonably
        necessary within the next 12 months, the following services to IPEX: (a)
        substantial review of IPEX's business and operations in order to facilitate
        an
        analysis of IPEX's strategic options regarding a turnaround of IPEX's business;
        (b) providing advice in the following areas: (i) identification of financing
        sources, (ii) providing capital introductions of financial institutions and/or
        strategic investors, (iii) evaluation and recommendation of candidates for
        appointment as officers, directors or employees, (iv) making personnel of
        the
        Company available to IPEX to provide services to IPEX on a temporary or
        permanent basis, (v) evaluation and/or negotiation of merger or sale
        opportunities, or such other form of transaction or endeavor which IPEX may
        elect to pursue, and (vi) providing any other services as are mutually agreed
        upon in writing by the Company and Wolfgang Grabher, founder and majority
        shareholder of IPEX, from time to time; and (c) assisting IPEX in installing
        a
        new management team.
 
 At
        June
        30, 2005, the Company had performed a significant amount of the services
        stipulated under the terms of the consulting agreement, including but not
        limited to: (i) a review of the business and operations (ii) advice in
        connection with IPEX’s purchase of certain intellectual property assets; (iii)
        the hiring of a Chief Executive Officer, Chief Operating Officer and a Vice
        President of Research & Development, none of which would be deemed related
        parties; and (iv) the appointment of two members to the Board of Directors
        of
        IPEX. The Company has deferred approximately $755,000 of revenue relating
        to
        this consulting agreement which management expects will be substantially
        recognized during the year ended December 31, 2005.
 
 **Expenses**
 
 Operating
        expenses were $4,249,027 and $677,711 for the six months and $2,155,270 and
        $393,789 for the three months ended June 30, 2005 and June 30, 2004,
        respectively.
 
 The
        increase in operating expenses for the six months ended June 30, 2005 when
        compared to June 30, 2004, was primarily the result of legal fees and stock
        based compensation expenses, and to a lesser extent printing Amex stock
        exchange, and transfer agent fees. Until October 22, 2004, the date the
        Company’s shareholders approved certain proposals relating to the Company’s
        restructuring plan to change from a business development company to an operating
        company, the Company’s principal activities involved the management of existing
        investments. As such, compensation expense was primarily the salaries of
        the
        Company’s Chief Executive Officer and to a lesser extent the Chief Financial
        Officer. Since the restructuring plan, management has aggressively focused
        on
        expanding into the health care and medical products field, particularly the
        patient safety markets, as well as the financial services and real estate
        industries. A significant component of this strategy has resulted in the
        acquisition of assets. The Company has hired personnel in order to meet the
        increased needs of its current business focus which has resulted in increases
        in
        almost every expense category.
  23
  Legal
        fees for the six months ended June 30, 2005 were $517,064, an increase of
        $329,942 over the six months ended June 30, 2004. The increase in legal fees
        is
        attributable to work performed on the Company’s proxy statements, registration
        statements and annual report, which required a significant amount of additional
        time to prepare due to the Company’s change from a business development company
        to an operating company, filed with the SEC, as well as other corporate matters.
        Other corporate matters typically include services performed in relation
        to
        areas such as attendance at meetings, federal securities law, stock option
        plans, press releases, and corporate agreements. Additionally, the Company
        experienced an increase in ancillary fees as a direct result of the proxy
        statement and the related annual meeting of shareholders. These ancillary
        fees
        included increases in printing fees and AMEX stock exchange fees.
 
 Printing,
        Amex stock exchange, and transfer agent fees for the six months ended June
        30,
        2005 increased by $67,951, $58,533 and $43,334, respectively, over the six
        months ended June 30, 2004. The increase is primarily attributable to work
        performed on the Company’s proxy statements, registration statements, annual
        report and related annual meeting of shareholders. All of these reports required
        a significant amount of additional time to prepare due to the Company’s change
        from a business development company to an operating company. Printing fees
        increased as a direct result of the greater number of printed documents,
        including business cards and stationary, as well as revisions to those
        documents. Amex stock exchange fees primarily increased as a result of a
        non-recurring fee associated with the Company’s 3 for 1 stock split.
 
 Printing
        fees, Amex stock exchange fees and transfer agent fees are a component of
        the
        $376,806 increase reflected in general and administrative expenses for the
        six
        months ended June 30, 2005. An increase in travel related expenses of $109,381,
        another component of general and administrative expenses, was attributed
        to
        expenses incurred in identifying and reviewing investment opportunities and
        attendance at trade shows and conventions to promote the Company’s patient
        safety products. The remaining increase in general and administrative expenses
        is a direct result of an overall increase in business activity associated
        with
        being an operating company with increased personnel. These expenses, which
        are
        not significant individually, include but are not limited to office supplies,
        postage, and marketing.
 
 A
        majority of the Company's operating expenses consist of employee compensation
        and professional fees, which increased by $1,848,165 and $1,213,823,
        respectively. As discussed above, legal fees which are a component of
        professional fees increased by $329,942. Excluding legal fees, professional
        fees
        increased by $883,881, of which $624,543 is attributed to stock based
        compensation of consultants and approximately $176,000 is attributed to auditor
        and consultant fees. Stock based compensation expense, which is a component
        of
        both employee compensation and professional fees, for the six months ended
        June
        30, 2005, was approximately $624,543 relating to the issuance of warrants
        to
        consultants of the Company, as well as $890,448 relating to grants of
        nonqualified stock options and $949,872 related to restricted stock awards
        to
        the Company’s employees, non-employee directors and consultants performing
        services for the Company, all of which were expensed in accordance with SFAS
        123(R). The Company valued the nonqualified stock options and warrants using
        the
        Black-Scholes valuation model assuming expected dividend yield, risk-free
        interest rate, expected life and volatility of 0%, 3.75%, three to five years
        and 83%, respectively. The restricted stock awards were valued at the closing
        price on the date the restricted shares were granted. During the six months
        ended June 30, 2004, the Company’s total stock based compensation expense, which
        was caused from the issuance of 26,250 options to members of the Company’s Board
        of Directors, was $5,094. Thus, the increase in expenses related to the issuance
        of stock options, warrants and restricted stock awards amounted to $2,459,769.
 
 A
        significant amount of the warrants relate to a consulting agreement that
        we
        entered into in April 2005 with Health West Marketing Incorporated ( ***“Health
        West”*** )
        where
        we agreed, as an incentive for entering into the agreement, to issue Health
        West
        a callable warrant to purchase 150,000 shares of our common stock at an exercise
        price of $5.95, exercisable for 5 years. We recognized an expense of $527,958
        related to these warrants. In addition to the warrants, we have recognized
        an
        expense of $62,505 related to the issuance of 10,505 shares of our common
        stock
        upon signing the agreement with Health West. At such time as Health West
        assists
        the Company in executing a comprehensive manufacturing agreement with A Plus
        Manufacturing the Company will become obligated to issue Health West 15,756
        shares of its common stock and at that time recognize an expense of $93,748.
        In
        the event that Health West helps us develop a regional distribution network
        to
        integrate the Safety-Sponge TM System
        into the existing acute care supply chain by February 5, 2006, we will then
        issue Health West an additional 15,756 shares and at that time recognize
        an
        additional expense of $93,748.
  24
  The
        remaining difference between the amount by which stock based compensation
        increased above the overall increase in employee compensation and professional
        fees, excluding legal fees, was $272,277 and primarily attributed to an increase
        in salaries of $83,450, attributed to the increased number of employees,
        and an
        increase in cash payments to the Company’s various consultants and auditors of
        approximately $176,000 relating to services in the area of accounting, investor
        relations, and medical consulting. At June 30, 2005, we had 13 full time
        employees as opposed to 2 full time employees at June 30, 2004. Although
        we
        experienced a significant overall increase in the number of full time employees
        the actual increase in salary expense was not reflective of this increase
        because the majority of the full time employees did not begin receiving
        compensation until April 2005. At June 30, 2005, none of our executives were
        covered under employment agreements, thus, other than monthly salaries paid
        we
        were under no financial obligation for our executive management. We believe,
        as
        with all our operating expenses, that existing cash resources, together with
        proceeds from investments and anticipated revenues from our operations, should
        be adequate to fund our salary obligations. During the six month period ended
        December 31, 2005, the Company expects that salaries will increase significantly
        from the prior year’s comparable reporting period and be paid from existing cash
        resources, together with proceeds from investments and anticipated revenues
        from
        the Company’s operations
 
 The
        Company also issued 150,000 warrants, valued at $536,578, to Aegis Securities
        Corp., a nonaffiliated consultant, for providing advisory services in connection
        with the acquisition of SurgiCount Medical, Inc. The services provided by
        Aegis
        Securities Corp. included an evaluation of and oversight over completion
        of the
        transaction. The value of the warrants, along with the purchase price and
        direct
        costs incurred as a result of the transaction, were capitalized. The entire
        capitalized costs, valued at $4,684,576, have been allocated to SurgiCount’s
        patents, with an approximate useful life of 14.4 years, on a preliminary
        basis
        and may change as additional information becomes available. Amortization
        expense
        related to the patents, for the six months ended June 30, 2005, was $108,000
        as
        opposed to no expense during the six months ended June 30, 2004.
 
 **Interest,
        dividend income and other, net**
 
 The
        Company had investment income of $40,088 and $215 for the six months ended
        and
        $11,485 and $50 for the three months ended June 30, 2005 and June 30, 2004,
        respectively.
 
 The
        increase in investment income for the six and three months ended June 30,
        2005
        when compared to June 30, 2004, was primarily the result of an increased
        amount
        of fixed income investments held throughout the period. At March 31, 2005,
        the
        Company held in marketable securities approximately $2.5 million in U.S.
        Treasuries which were liquidated during the three month period ended June
        30,
        2005. At June 30, 2004, the Company’s primary contributing asset to investment
        income was its cash balance of $274,498.
 
 **Realized
        gains (losses) on investments, net**
 
 During
        the six months ended June 30, 2005, the Company realized net gains of $103,644
        from trades of marketable securities.
 
 During
        the six months ended June 30, 2004, the Company realized net gains of $500,878
        primarily from the disposition of a portion of the Company's equity interest
        in
        Excelsior and the sale of common shares in Principal Financial Group.
 
 The
        Company has relied and continues to rely to a large extent upon proceeds
        from
        sales of investments rather than investment income to defray a significant
        portion of its operating expenses. Because such sales cannot be predicted
        with
        certainty, the Company attempts to maintain adequate working capital to provide
        for fiscal periods when there are no such sales.
 
 **Unrealized
        gains (losses) on marketable securities, net**
 
 Unrealized
        gains increased by $43,203 during the six months ended June 30, 2005, primarily
        due to the Company’s investment in Tuxis which had an unrealized gain of $69,500
        for the period then ended. Additionally, any marketable securities which
        had an
        unrealized loss at December 31, 2004 had been disposed of by June 30,
        2005.
  25
  Unrealized
        gains increased by $83,744 during the six months ended June 30, 2004 primarily
        due to the increase in value of the Company’s Excelsior holdings.
 
 **Accumulated
        other comprehensive income**
 
 Unrealized
        gains (losses) on the Company’s investments designated as available-for-sale are
        recorded in accumulated other comprehensive income. At June 30, 2005, the
        Company classified all of its restricted holdings in IPEX as available-for-sale.
        At June 30, 2005, the unrealized gains on the Company’s restricted holdings in
        IPEX amounted to $1,158,750. The Company did not hold any investments classified
        as available-for-sale at June 30, 2004.
 
 **Taxes**
 
 The
        Company is taxed under Title 26, Chapter 1, Subchapter C of the Internal
        Revenue
        Code of 2004, as amended, and therefore subject to federal income tax on
        the
        portion of its taxable income.
 
 At
        December 31, 2004, the Company has a net operating loss carryforward of
        approximately $8.6 million to offset future taxable income for federal income
        tax purposes. The utilization of the loss carryforward to reduce any such
        future
        income taxes will depend on the Company’s ability to generate sufficient taxable
        income prior to the expiration of the net operating loss carryforwards. The
        carryforward expires beginning in 2011.
 
 A
        change
        in the ownership of a majority of the fair market value of the Company’s common
        stock can delay or limit the utilization of existing net operating loss
        carryforwards pursuant to the Internal Revenue Code Section 382. The Company
        believes that such a change occurred during the year ended December 31, 2004.
        Based upon a detail analysis of purchase transactions of our equity securities,
        the Company believes that its net operating loss carryforward utilization
        is
        limited to approximately $755,000 per year.
 
 **Risk
        Factors**
 
 *An
        investment in our securities involves a high degree of risk relating to our
        business, strategy, structure and investment objectives. Each of the following
        risks may materially adversely affect our business, financial condition and
        results of operations. In addition to the risk factors described below, other
        factors that could cause actual results to differ materially include:*
 
 ·
              *changes
                  in the economy;*
 ·
              *risk
                  associated with possible disruption in the Company’s operations due to
                  terrorism;*
 ·
              *future
                  regulatory actions and conditions in the Company’s operating areas or
                  target industries for investments;
                  and*
 ·
              *other
                  risks and uncertainties as may be detailed from time to time in
                  the
                  Company’s public announcements and SEC
                  filings.*
 
 **RISKS
        RELATING TO OUR BUSINESS AND STRUCTURE**
 
 **We
        recently restructured our business strategy and objective and have limited
        operating history under our new structure. If we cannot successfully implement
        our new business structure the value of your investment in our business could
        decline.**
 
 Upon
        the
        change of control that occurred in October 2004, we restructured our business
        strategy and objective to focus on the medical products, healthcare solutions,
        financial services and real estate industries instead of the radio and
        telecommunications industries. We have a limited operating history under
        this
        new structure. Historically, we have not typically invested in these industries
        and therefore our historical results of operations should not be relied upon
        as
        an indication of our future financial performance. If we do not successfully
        implement our new business structure the value of your investment in our
        business could decline substantially.
  26
  **Withdrawal
        of our election to be treated as a BDC may increase the risks to our
        shareholders since we are no longer subject the regulatory restrictions or
        financial reporting benefits of the Investment Company Act of 1940 (the “1940
        Act”).**
 
 Since
        we
        withdrew our election to be treated as a BDC, we are no longer subject to
        regulation under the 1940 Act, which is designed to protect the interests
        of
        investors in investment companies. As a non-BDC, we are no longer subject
        to
        many of the regulatory, financial reporting and other requirements and
        restrictions imposed by the 1940 Act including, but not limited to, limitations
        on the amounts, types and prices at which we may issue securities, participation
        in related party transactions, the payment of compensation to executives,
        and
        the scope of eligible investments.
 
 The
        nature of our business is changing from investing in radio and
        telecommunications companies with the goal of achieving gains on appreciation
        and dividend income, to actively operating businesses in the medical products,
        health care solutions, financial services and real estate industries, with
        the
        goal of generating income from the operations of those businesses. No assurance
        can be given that our business strategy or investment objectives will be
        achieved by withdrawing our election to be treated as a BDC.
 
 Further,
        our election to withdraw as a BDC under the 1940 Act will result in a
        significant change in our method of accounting. BDC financial statement
        presentation and accounting utilizes the value method of accounting used
        by
        investment companies, which allows BDCs to recognize income and value their
        investments at market value as opposed to historical cost. As an operating
        company, the required financial statement presentation and accounting for
        securities held will be either fair value or historical cost methods of
        accounting, depending on the classification of the investment and our intent
        with respect to the period of time we intend to hold the investment.
 
 A
        change
        in our method of accounting could reduce the market value of our investments
        in
        privately held companies by eliminating our ability to report an increase
        in the
        value of our holdings as they occur. Also, as an operating company, we will
        have
        to consolidate our financial statements with subsidiaries, thus eliminating
        the
        portfolio company reporting benefits available to BDCs.
 
 **We
        may need to undertake additional financings to meet our growth, operating
        and/or
        capital needs, which may result in dilution to your ownership and voting
        rights.**
 
 We
        anticipate that revenue from our operations for the foreseeable future may
        not
        be sufficient to meet our growth, operating and/or capital requirements.
        We
        believe that we currently have the financial resources to meet our operating
        requirements for the next twelve months. We may however undertake additional
        equity or debt financings to better enable us to meet our future growth,
        operating and/or capital requirements. We currently have no commitments for
        any
        such financings. Any equity financing may be dilutive to our stockholders,
        and
        debt financing, if available, may involve restrictive covenants or other
        adverse
        terms with respect to raising future capital and other financial and operational
        matters. We
        may
        not be able to obtain additional financing in sufficient amounts or on
        acceptable terms when needed, which could adversely affect our operating
        results
        and prospects. If we fail to arrange for sufficient capital in the future,
        we
        may be required to reduce the scope of our business activities until we can
        obtain adequate financing.
 
 **Should
        the value of our patents be less than their purchase price, we could incur
        significant impairment charges.**
 
 At
        June
        30, 2005, patents received in the acquisition of SurgiCount Medical, Inc.,
        net
        of accumulated amortization, represented $4,576,262, or 38.8%, of our total
        assets. We
        perform an annual review in the fourth quarter of each year, or more frequently
        if indicators of potential impairment exist to determine if the recorded
        amount
        of our patents is impaired. This determination requires significant judgment
        and
        changes in our estimates
        and assumptions could materially affect the determination of fair value and/or
        impairment of patents. We may incur charges for the impairment of our patents
        in
        the future if sales of our patient safety products, in particular our
        Safety-Sponge(TM) System, fail to achieve our assumed revenue growth rates
        or
        assumed operating margin results.
 
 **We
        invest in non-marketable investment securities which may subject us to
        significant impairment charges.**
  27
  We
        invest
        in illiquid equity securities acquired directly from issuers in private
        transactions. At June 30, 2005, 39% of our assets were comprised of investment
        securities, the majority of which are illiquid investments. Investments in
        illiquid, or non-marketable, securities are inherently risky and a number
        of the
        companies we invest in are expected to fail. We review all of our investments
        quarterly for indicators of impairment; however, for non-marketable equity
        securities, the impairment analysis requires significant judgment to identify
        events or circumstances that would likely have a material adverse effect
        on the
        fair value of the investment. The indicators we use to identify those events
        or
        circumstances includes as relevant, the nature and value of any collateral,
        the
        company’s ability to make payments and its earnings, the markets in which the
        company does business, comparison to valuations of publicly traded companies,
        comparisons to recent sales of comparable companies, the discounted cash
        flows
        of the company and other relevant factors. Because such valuations are
        inherently uncertain and may be based on estimates, our determinations of
        fair
        value may differ materially from the values that would be assessed if a ready
        market for these securities existed. Investments identified as having an
        indicator of impairment are subject to further analysis to determine if the
        investment is other than temporarily impaired, in which case we write the
        investment down to its impaired value. When a company is not considered viable
        from a financial or technological point of view, we write down the entire
        investment since we consider the estimated fair market value to be nominal.
        Although we did not recognize any impairment for the three months ended June
        30,
        2004, since a significant amount of our assets are comprised of non-marketable
        investment securities, any future impairment charges from the write down
        in
        value of these securities will adversely affect our financial condition. ****
 
 **We
        may not be able to effectively integrate our acquisition targets, which would
        be
        detrimental to our business.**
 
 On
        February 25, 2005, we purchased SurgiCount Medical, Inc., a holding company
        for
        intellectual property rights relating to our Safety-Sponge(TM) System. We
        anticipate seeking other acquisitions in furtherance of our plan to acquire
        assets and businesses in the medical products, health care solutions, financial
        services and real estate industries. Acquisitions involve numerous risks,
        including potential difficulty in integrating operations, technologies, systems,
        and products and services of acquired companies, diversion of management’s
        attention and disruption of operations, increased expenses and working capital
        requirements and the potential loss of key employees and customers of acquired
        companies. In addition, acquisitions involve financial risks, such as the
        potential liabilities of the acquired businesses, the dilutive effect of
        the
        issuance of additional equity securities, the incurrence of additional debt,
        the
        financial impact of transaction expenses and the amortization of goodwill
        and
        other intangible assets involved in any transactions that are accounted for
        by
        using the purchase method of accounting, and possible adverse tax and accounting
        effects. Any of the foregoing could materially and adversely affect our
        business.
 
 **Failure
        to properly manage our potential growth would be detrimental to our
        business.**
 
 Any
        growth in our operations will place a significant strain on our resources
        and
        increase demands on our management and on our operational and administrative
        systems, controls and other resources. There can be no assurance that our
        existing personnel, systems, procedures or controls will be adequate to support
        our operations in the future or that we will be able to successfully implement
        appropriate measures consistent with our growth strategy. As part of this
        growth, we may have to implement new operational and financial systems,
        procedures and controls to expand, train and manage our employee base and
        maintain close coordination among our technical, accounting, finance, marketing,
        sales and editorial staffs. We cannot guarantee that we will be able to do
        so,
        or that if we are able to do so, we will be able to effectively integrate
        them
        into our existing staff and systems. We may fail to adequately manage our
        anticipated future growth. We will also need to continue to attract, retain
        and
        integrate personnel in all aspects of our operations. Failure to manage our
        growth effectively could hurt our business.
 
 **If
        the protection of our intellectual property rights is inadequate, our ability
        to
        compete successfully could be impaired.**
 
 In
        connection with our purchase of SurgiCount Medical, Inc., we acquired one
        registered U.S. patent and one registered international patent of the Safety-Sponge(TM)
        System. We regard our patents, copyrights, trademarks, trade secrets and
        similar
        intellectual property as critical to our business. We rely on a combination
        of
        patent, trademark and copyright law and trade secret protection to protect
        our
        proprietary rights. Nevertheless, the steps we take to protect our proprietary
        rights may be inadequate. Detection and elimination of unauthorized use of
        our
        products is difficult. We may not have the means, financial or otherwise,
        to
        prosecute infringing uses of our intellectual property by third parties.
        Further, effective patent, trademark, service mark, copyright and trade secret
        protection may not be available in every country in which we will sell our
        products and offer our services. If we are unable to protect or preserve
        the
        value of our patents, trademarks, copyrights, trade secrets or other proprietary
        rights for any reason, our business, operating results and financial condition
        could be harmed.
  28
  Litigation
        may be necessary in the future to enforce our intellectual property rights,
        to
        protect our trade secrets, to determine the validity and scope of the
        proprietary rights of others, or to defend against claims that our products
        infringe upon the proprietary rights of others or that proprietary rights
        that
        we claim are invalid. Litigation could result in substantial costs and diversion
        of resources and could harm our business, operating results and financial
        condition regardless of the outcome of the litigation.
 
 Other
        parties may assert infringement or unfair competition claims against us.
        We
        cannot predict whether third parties will assert claims of infringement against
        us, or whether any future claims will prevent us from operating our business
        as
        planned. If we are forced to defend against third-party infringement claims,
        whether they are with or without merit or are determined in our favor, we
        could
        face expensive and time-consuming litigation, which could distract technical
        and
        management personnel. If an infringement claim is determined against us,
        we may
        be required to pay monetary damages or ongoing royalties. Further, as a result
        of infringement claims, we may be required, or deem it advisable, to develop
        non-infringing intellectual property or enter into costly royalty or licensing
        agreements. Such royalty or licensing agreements, if required, may be
        unavailable on terms that are acceptable to us, or at all. If a third party
        successfully asserts an infringement claim against us and we are required
        to pay
        monetary damages or royalties or we are unable to develop suitable
        non-infringing alternatives or license the infringed or similar intellectual
        property on reasonable terms on a timely basis, it could significantly harm
        our
        business.
 
 **We
        may not seek a public listing for our subsidiary Ault Glazer Bodnar Merchant
        Capital, Inc. as we disclosed we would in our June 30, 2005 press
        release.**
 
 Ault
        Glazer Bodnar Merchant Capital, Inc. was formed on June 27, 2005 to hold
        our
        non-patient safety related assets, such as Franklin Capital Properties, LLC,
        a
        real estate development and management company, and to focus on the financial
        services and real estate industries. On June 30, 2005, we issued a press
        release
        indicating that we would immediately initiate appropriate regulatory filings
        to
        secure a public listing for Ault Glazer Bodnar Merchant Capital, Inc. early
        next
        year. A public listing for Ault Glazer Bodnar Merchant Capital, Inc. would
        significantly increase the liquidity and potential value of our non-patient
        safety related assets. We are currently considering alternative structures
        for
        our business and we may decide not to pursue a public listing for Ault Glazer
        Bodnar Merchant Capital, Inc.
 
 **There
        are significant potential conflicts of interest with our officers, directors
        and
        our affiliated entities which could adversely affect our results from
        operations.**
 
 Certain
        of our officers, directors and/or their family members have existing
        responsibilities and, in the future, may have additional responsibilities,
        to
        act and/or provide services as executive officers, directors, owners and/or
        managers of Ault Glazer Bodnar & Company Investment Management LLC. In
        particular, Milton “Todd” Ault, III, our Chairman and Chief Executive Officer,
        Melanie Glazer, Manager of our subsidiary Franklin Capital Properties, LLC,
        and
        Lynne Silverstein, our President and Secretary, are all principals of Ault
        Glazer Bodnar & Company Investment Management LLC. Mr. Ault and Ms.
        Silverstein devote approximately 85% of their time to our business, based
        on a
        60-hour, 6-day workweek. Ms. Glazer works full time for Franklin Capital
        Properties, LLC. Ms. Silverstein is the stepdaughter of Louis Glazer, one
        of our
        Directors and Chief Health and Science Officer of Patient Safety Consulting
        Group, LLC. Accordingly, certain conflicts of interest may arise from time
        to
        time with our officers, directors and Ault Glazer Bodnar & Company
        Investment Management LLC. Because of these possible conflicts of interest,
        such
        individuals may direct potential business and investment opportunities to
        other
        entities rather than to us, which may not be in the best interest of our
        stockholders. We will attempt to resolve any such conflicts of interest in
        our
        favor.
  29
  Our
        Board
        of Directors does not believe that we currently have any conflicts of interest
        with the business of Ault Glazer Bodnar & Company Investment Management LLC,
        other than certain of our officers’ responsibility to provide management and
        administrative services to Ault Glazer Bodnar & Company Investment
        Management LLC. and its clients from time-to-time. However, subject to
        applicable law, we may engage in transactions with Ault Glazer Bodnar &
Company Investment Management LLC. and other related parties in the future.
        These related party transactions may raise conflicts of interest and, although
        we do not have a formal policy to address such conflicts of interest, our
        Audit
        Committee intends to evaluate relationships and transactions involving conflicts
        of interest on a case-by-case basis and the approval of our Audit Committee
        is
        required for all such transactions. The Audit Committee intends that any
        related
        party transactions will be on terms and conditions no less favorable to us
        than
        terms and conditions reasonably obtainable from third parties and in accordance
        with applicable law.
 
 **Our
        management has limited experience in managing and operating a public company.
        Any failure to comply or adequately comply with federal securities laws,
        rules
        or regulations could subject us to fines or regulatory actions, which may
        materially adversely affect our business, results of operations and financial
        condition.**
 
 Prior
        to
        the change in control that occurred in October 2004, our current senior
        management was primarily engaged in operating a private investment management
        firm. In this capacity they developed a general understanding of the
        administrative and regulatory environment in which public companies operate.
        However, our senior management lacks practical experience operating a public
        company and relies in many instances on the professional experience and advice
        of third parties including its consultants, attorneys and accountants. Failure
        to comply or adequately comply with any laws, rules, or regulations applicable
        to our business may result in fines or regulatory actions, which may materially
        adversely affect our business, results of operation, or financial condition.
 
 **We
        are dependent on our Chief Executive Officer for our future success. The
        departure of our Chief Executive Officer could materially adversely affect
        our
        ability to run our business.**
 
 Our
        future success is dependent on the personal efforts, performance and abilities
        of Milton “Todd” Ault, III, our Chairman and Chief Executive Officer. Mr. Ault
        is an integral part of our daily operations. Although Mr. Ault does not
        currently have any plans to retire or leave our company in the near future,
        he
        is not currently subject to an employment contract with us. The departure
        of Mr.
        Ault as our Chief Executive Officer could have a material adverse effect
        on our
        ability to implement our business strategy or achieve our investment objective.
 
 **Our
        Chief Executive Officer controls a significant portion of our outstanding
        common
        stock and his ownership interest may conflict with our outside stockholders
        who
        may be unable to influence management and exercise control over our business.**
 
 As
        of
        April 26, 2005, Milton “Todd” Ault, III, our Chief Executive Officer and
        Chairman, beneficially owned approximately 27.2% of our common stock. As
        a
        result, Mr. Ault may be able to exert significant influence over our management
        and policies to:
 
 ·
              elect
                  or defeat the election of our directors;
 ·
              amend
                  or prevent amendment of our certificate of incorporation or bylaws;
 ·
              effect
                  or prevent a merger, sale of assets or other corporate transaction;
                  and
 ·
              control
                  the outcome of any other matter submitted to the shareholders for
                  vote.
 
 Accordingly,
        our outside stockholders may be unable to influence management and exercise
        control over our business.
 
 **RISKS
        RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED
        BUSINESS**
 
 **We
        intend to rely on third party manufacturers and suppliers to manufacture
        our
        Safety-SpongeTMSystem, the loss of which may interrupt our
        operations.**
 
 We
        have
        not begun commercial manufacturing of our Safety-SpongeTM System.
        Before we begin to commercially manufacture the system, we intend to enter
        into
        agreements or relationships with several vendors to commercially produce
        the
        product. We cannot assure you that we will be able to enter into such agreements
        or relationships, maintain such relationships if attained or secure additional
        suppliers and manufacturers on favorable terms as needed. Although we believe
        the materials used in the manufacture of the Safety-SpongeTM System
        are readily available and can be purchased and/or produced by multiple vendors,
        the loss of a major supplier or manufacturer, the deterioration of our
        relationship with a major supplier or manufacturer, changes in the
        specifications of components used in our products, or our failure to establish
        good relationships with major new suppliers or manufacturers could have a
        material adverse effect on our business, financial condition and results
        of
        operations.
  30
  **The
        unpredictable product cycles of the medical device and healthcare-related
        industries and uncertain demand for products could cause our revenues to
        fluctuate.**
 
 Our
        target customer base includes hospitals, physicians, nurses and clinics.
        The
        medical device and healthcare-related industries are subject to rapid
        technological changes, short product life cycles, frequent new product
        introductions and evolving industry standards, as well as economic cycles.
        If
        the market for our products does not grow as rapidly as our management expects,
        our revenues could be less than expected. We also face the risk that changes
        in
        the medical device industry, for example, cost-cutting measures, changes
        to
        manufacturing techniques or production standards, could cause our manufacturing,
        design and engineering capabilities to lose widespread market acceptance.
        If our
        products do not gain market acceptance or suffer because of competing products,
        unfavorable regulatory actions, alternative treatment methods or cures, product
        recalls or liability claims, they will no longer have the need for our products
        and we may experience a decline in revenues. Adverse economic conditions
        affecting the medical device and healthcare-related industries, in general,
        or
        the market for our products in particular, could result in diminished sales,
        reduced profit margins and a disruption in our business.
 
 **We
        are subject to changes in the regulatory and economic environment in the
        healthcare industry, which could adversely affect our
        business.**
 
 The
        healthcare industry in the United States continues to experience change.
        In
        recent years, the United States Congress and state legislatures have introduced
        and debated various healthcare reform proposals. Federal, state and local
        government representatives will, in all likelihood, continue to review and
        assess alternative healthcare delivery systems and payment methodologies,
        and
        ongoing public debate of these issues is expected. Cost containment initiatives,
        market pressures and proposed changes in applicable laws and regulations
        may
        have a dramatic effect on pricing or potential demand for medical devices,
        the
        relative costs associated with doing business and the amount of reimbursement
        by
        both government and third-party payers to persons providing medical services.
        In
        particular, the healthcare industry is experiencing market-driven reforms
        from
        forces within the industry that are exerting pressure on healthcare companies
        to
        reduce healthcare costs. Managed care and other healthcare provider
        organizations have grown substantially in terms of the percentage of the
        population in the United States that receives medical benefits through such
        organizations and in terms of the influence and control that they are able
        to
        exert over an increasingly large portion of the healthcare industry. Managed
        care organizations are continuing to consolidate and grow, increasing the
        ability of these organizations to influence the practices and pricing involved
        in the purchase of medical devices, including our products, which is expected
        to
        exert downward pressure on product margins. Both short-and long-term cost
        containment pressures, as well as the possibility of continued regulatory
        reform, may have an adverse impact on our business, financial condition and
        operating results.
  **We
        are subject to government regulation in the United States and abroad, which
        can
        be time consuming and costly to our business.**
 
 Our
        products and operations are subject to extensive regulation by numerous
        governmental authorities, including, but not limited to, the FDA and state
        and
        foreign governmental authorities. In particular, we must obtain specific
        clearance or approval from the FDA before we can market new products or certain
        modified products in the United States. The FDA administers the Food, Drug
        and
        Cosmetics Act (the “FDC Act”). Under the FDC Act, most medical devices must
        receive FDA clearance through the Section 510(k) notification process
        (“510(k)”) or the more lengthy premarket approval (“PMA”) process before they
        can be sold in the United States. All of our products, currently comprising
        only
        the Safety-Sponge(TM) System, must receive 510(k) clearance or PMA approval.
        The
        Safety-Sponge(TM) System has already received 501(k) exempt status from the
        FDA.
        To obtain 510(k) marketing clearance, a company must show that a new product
        is
“substantially equivalent” in terms of safety and effectiveness to a product
        already legally marketed and which does not require a PMA. Therefore, it
        is not
        always necessary to prove the actual safety and effectiveness of the new
        product
        in order to obtain 510(k) clearance for such product. To obtain a PMA, we
        must
        submit extensive data, including clinical trial data, to prove the safety,
        effectiveness and clinical utility of our products. The process of obtaining
        such clearances or approvals can be time-consuming and expensive, and there
        can
        be no assurance that all clearances or approvals sought by us will be granted
        or
        that FDA review will not involve delays adversely affecting the marketing
        and
        sale of our products. FDA’s quality system regulations also require companies to
        adhere to certain good manufacturing practices requirements, which include
        testing, quality control, storage, and documentation procedures. Compliance
        with
        applicable regulatory requirements is monitored through periodic site
        inspections by the FDA. In addition, we are required to comply with FDA
        requirements for labeling and promotion. The Federal Trade Commission also
        regulates most device advertising.
  31
  In
        addition, international regulatory bodies often establish varying regulations
        governing product testing and licensing standards, manufacturing compliance,
        such as compliance with ISO 9001 standards, packaging requirements, labeling
        requirements, import restrictions, tariff regulations, duties and tax
        requirements and pricing and reimbursement levels. Our inability or failure
        to
        comply with the varying regulations or the imposition of new regulations
        could
        restrict our ability to sell our products internationally and thereby adversely
        affect our business, financial condition and operating results.
 
 Failure
        to comply with applicable federal, state or foreign laws or regulations could
        subject us to enforcement actions, including, but not limited to, product
        seizures, injunctions, recalls, possible withdrawal of product clearances,
        civil
        penalties and criminal prosecutions, any one or more of which could have
        a
        material adverse effect on our business, financial condition and operating
        results. Federal, state and foreign laws and regulations regarding the
        manufacture and sale of medical devices are subject to future changes, as
        are
        administrative interpretations of regulatory requirements. Any such changes
        may
        have a material adverse effect on our business, financial condition and
        operating results.
 
 **We
        are subject to intense competition in the medical products and health-care
        related markets, which could harm our business.**
 
 The
        medical products and healthcare solutions industry is highly competitive.
        We
        compete against other medical products and healthcare solutions companies,
        some
        of which are much larger and have significantly greater financial resources,
        management resources, research and development staffs, sales and marketing
        organizations and experience in the medical products and healthcare solutions
        industries than us. In addition, these companies compete with us to acquire
        technologies from universities and research laboratories. We also compete
        against large companies that seek to license medical products and healthcare
        solutions technologies for themselves. We cannot assure you that we will
        be able
        to successfully compete against these competitors in the acquisition,
        development, or commercialization of any medical products and healthcare
        solutions, funding of medical products and healthcare solutions companies
        or
        marketing of our products and solutions. If we cannot compete effectively
        against our competitors, our business, financial condition and results of
        operations may be materially adversely affected.
 
 **We
        may be subject to product liability claims and if our insurance is not
        sufficient to cover product liability claims our business and financial
        condition will be materially adversely affected.**
 
 The
        nature of our business exposes us to potential product liability risks, which
        are inherent in the distribution of medical equipment and healthcare products.
        We may not be able to avoid product liability exposure, since third parties
        develop and manufacture our equipment and products. If a product liability
        claim
        is successfully brought against us or any third party manufacturer then we
        would
        experience adverse consequences to our reputation, we might be required to
        pay
        damages, our insurance, legal and other expenses would increase, we might
        lose
        customers and/or suppliers and there may be other adverse results.
 
 Through
        our subsidiary SurgiCount Medical, Inc. we are in the process of obtaining
        general liability insurance to cover claims up to $1,000,000. This insurance,
        if
        obtained, will cover the clinical trial/time study relating to the bar coding
        of
        surgical sponges only. In addition, A Plus International, Inc., the manufacturer
        of our surgical sponges, maintains general liability insurance for claims
        up to
        $4,000,000 that covers product liability claims against SurgiCount Medical,
        Inc.
        There can be no assurance that one or more liability claims will not exceed
        the
        coverage limits of any of such policies. If we or our manufacturer are subjected
        to product liability claims, the result of such claims could harm our reputation
        and lead to less acceptance of our products in the healthcare products market.
        In addition, if our insurance or our manufacturer’s insurance is not sufficient
        to cover product liability claims, our business and financial condition will
        be
        materially adversely affected.
  32
  **RISKS
        RELATED TO OUR INVESTMENTS**
 
 **We
        operate in a highly competitive market for investment opportunities.**
 
 A
        large
        number of entities compete with us to make the types of investments that
        we
        make. We compete with a large number of private equity and venture capital
        funds, other equity and non-equity based investment funds, investment banks
        and
        other sources of financing, including traditional financial services companies
        such as commercial banks and specialty finance companies. Many of our
        competitors are substantially larger and have considerably greater financial,
        technical and marketing resources than we do. For example, some competitors
        may
        have a lower cost of funds and access to funding sources that are not available
        to us. In addition, some of our competitors may have higher risk tolerances
        or
        different risk assessments, which could allow them to consider a wider variety
        of investments and establish more relationships than us. There can be no
        assurance that the competitive pressures we face will not have a material
        adverse effect on our business, financial condition and results of operations.
        Also, as a result of this competition, we may not be able to take advantage
        of
        attractive investment opportunities from time to time, and we can offer no
        assurance that we will be able to identify and make investments that are
        consistent with our investment objective.
 
 **Our
        business model depends upon the development of strong referral relationships
        with private equity and venture capital funds and investment banking firms.**
 
 If
        we
        fail to maintain our relationships with key firms, or if we fail to establish
        strong referral relationships with other firms or other sources of investment
        opportunities, we may not be able to achieve our investment objective. In
        addition, persons with whom we have informal relationships are not obligated
        to
        provide us with investment opportunities, and therefore there is no assurance
        that such relationships will lead to the origination of equity or other
        investments.
 
 **We
        may experience fluctuations in our quarterly results.**
 
 We
        may
        experience fluctuations in our quarterly operating results due to a number
        of
        factors, including the success rate of our new investments, the level of
        our
        expenses, variations in and the timing of the recognition of realized and
        unrealized gains or losses, the degree to which we encounter competition
        in our
        markets and general economic conditions. As a result of these factors, results
        for any period should not be relied upon as being indicative of performance
        in
        future periods.
 
 **Economic
        recessions or downturns could impair investments and harm our operating results.**
 
 Many
        of
        the companies in which we have made or will make investments may be susceptible
        to economic slowdowns or recessions. An economic slowdown may affect the
        ability
        of a company to engage in a liquidity event such as a sale, recapitalization,
        or
        initial public offering. Our nonperforming assets are likely to increase
        and the
        value of our investments is likely to decrease during these periods. These
        conditions could lead to financial losses in our investments and a decrease
        in
        our revenues, net income, and assets.
 
 Our
        business of making private equity investments and positioning them for liquidity
        events also may be affected by current and future market conditions. The
        absence
        of an active senior lending environment may slow the amount of private equity
        investment activity generally. As a result, the pace of our investment activity
        may slow. In addition, significant changes in the capital markets could have
        an
        effect on the valuations of private companies and on the potential for liquidity
        events involving such companies. This could affect the amount and timing
        of
        gains realized on our investments.
 
 **The
        inability of our portfolio companies to successfully market their products
        would
        have a negative impact on our investment returns**
 
 Even
        if
        our portfolio companies are able to develop commercially viable products
        and
        services, the market for new products and services is highly competitive
        and
        rapidly changing. Commercial success is difficult to predict and the marketing
        efforts of our portfolio companies may not be successful.
  33
  **Investing
        in private companies involves a high degree of risk** .
 
 The
        Company’s portfolio may include investments in private companies. Investments in
        private businesses involve a high degree of business and financial risk,
        which
        can result in substantial losses and accordingly should be considered
        speculative. Because of the speculative nature and the lack of a public market
        for these investments, there is significantly greater risk of loss than is
        the
        case with traditional investment securities. The Company has invested a
        substantial portion of its assets in small private companies or start-up
        companies. These private businesses tend to be thinly capitalized and unproven,
        with risky technologies that lack management depth and have not attained
        profitability or have no history of operations. In addition, some smaller
        businesses have narrower product lines and market shares than their competition
        and may be more vulnerable to customer preferences, market conditions, loss
        of
        key personnel, or economic downturns, which may adversely affect the return
        on,
        or the recovery of, our investment in such businesses.
 
 The
        Company expects that some of its investments will be a complete loss or will
        be
        unprofitable and that some will appear to be likely to become successful
        but
        never realize their potential. The Company has been risk seeking rather than
        risk averse in its approach to its investments. The Company has in the past
        relied, and continues to rely to a large extent, upon proceeds from sales
        of
        investments rather than investment income or revenue generated from its
        operating activities to defray a significant portion of its operating expenses.
 
 **Our
        investments may be concentrated in one or more industries and if these
        industries should decline or fail to develop as expected our investments
        will be
        lost.**
 
 Our
        investments may be concentrated in one or more industries. This concentration
        will mean that our investments will be particularly dependent on the development
        and performance of those industries. Accordingly, our investments may not
        benefit from any advantages, which might be obtained with greater
        diversification of the industries in which our portfolio companies operate.
        If
        those industries should decline or fail to develop as expected, our investments
        in those industries will be subject to loss.
 
 **The
        lack of liquidity in our investments may adversely affect our business.**
 
 A
        portion
        of the Company's investments consist of securities acquired directly from
        the
        issuer in private transactions. They may be subject to restrictions on resale
        or
        otherwise be illiquid. There may not be an established trading market for
        such
        securities. Additionally, many of the securities that the Company may invest
        in
        will not be eligible for sale to the public without registration under the
        Securities Act of 1933, which could prevent or delay any sale by the Company
        of
        such investments or reduce the amount of proceeds that might otherwise be
        realized therefrom. Restricted securities generally sell at a price lower
        than
        similar securities not subject to restrictions on resale. Further, even if
        a
        portfolio company registers its securities and becomes a reporting corporation
        under the Securities Exchange Act of 1934, the Company may be considered
        an
        insider by virtue of its board representation and would be restricted in
        sales
        of such corporation's securities.
 
 We
        typically exit our investments when the portfolio company has a liquidity
        event
        such as a sale, recapitalization, or initial public offering of the company.
        The
        illiquidity of our investments may adversely affect our ability to dispose
        of
        debt and equity securities at times when it may be otherwise advantageous
        for us
        to liquidate such investments. In addition, if we were forced to immediately
        liquidate some or all of the investments in the portfolio, the proceeds of
        such
        liquidation would be significantly less than the value at which we acquired
        those investments.
 
 **Our
        failure to make follow-on investments in our portfolio companies could impair
        the value of our portfolio.**
 
 Following
        its initial investments in portfolio companies, the Company may make additional
        investments in such portfolio companies as "follow-on" investments, in order
        to
        increase its investment in a portfolio company, and exercise warrants, options
        or convertible securities that may be acquired in the original financing.
        Such
        follow-on investments may be made for a variety of reasons including: 1)
        to
        increase the Company's exposure to a portfolio company, 2) to acquire securities
        issued as a result of exercising convertible securities that were purchased
        in a
        prior financing, 3) to preserve or reduce dilution of the Company's
        proportionate ownership in a subsequent financing, or 4) in an attempt to
        preserve or enhance the value of the Company's investment.
  34
  There
        can
        be no assurance that the Company will make follow-on investments or have
        sufficient funds to make such investments; the Company will have the discretion
        to make any follow-on investments as it determines, subject to the availability
        of capital resources. The failure to make such follow-on investments may,
        in
        certain circumstances, jeopardize the continued viability of a portfolio
        company
        and the Company's initial investment, or may result in a missed opportunity
        for
        the Company to increase its participation in a successful operation. Even
        if the
        Company has sufficient capital to make a follow-on investment, we may elect
        not
        to make the follow-on investment because we may not want to increase our
        concentration of risk or because we prefer other opportunities.
 
 **We
        may not realize gains from our equity investments.**
 
 We
        primarily invest in the equity securities of other companies. However, these
        equity interests may not appreciate in value and, in fact, may decline in
        value.
        Accordingly, we may not be able to realize gains from our equity interests,
        and
        any gains that we do realize on the disposition of any equity interests may
        not
        be sufficient to offset any other losses we experience.
 
 **There
        is uncertainty regarding the value of our investments that are not publicly
        trades securities, which could adversely affect the determination of our
        asset
        value.**
 
 The
        fair
        value of investments that are not publicly traded securities is not readily
        determinable. Therefore, we value these securities at fair value as determined
        in good faith by our Board of Directors. The types of factors that our Board
        of
        Directors takes into account include, as relevant, the nature and value of
        any
        collateral, the portfolio company’s ability to make payments and its earnings,
        the markets in which the portfolio company does business, comparison to
        valuations of publicly traded companies, comparisons to recent sales of
        comparable companies, the discounted value of the cash flows of the portfolio
        company and other relevant factors. Because such valuations are inherently
        uncertain and may be based on estimates, our determinations of fair value
        may
        differ materially from the values that would be assessed if a ready market
        for
        these securities existed.
 
 **Our
        financial results could be negatively affected if a significant investment
        fails
        to perform as expected.**
 
 We
        acquire controlling equity stakes in companies and our total debt and equity
        investment in controlled companies may be significant individually or in
        the
        aggregate. Investments in controlled portfolio companies are generally larger
        and in fewer companies than our investments in companies that we do not control.
        As a result, if a significant investment in one or more controlled companies
        fails to perform as expected, our financial results could be more negatively
        affected and the magnitude of the loss could be more significant than if
        we had
        made smaller investments in more companies.
 
 **We
        borrow money, which magnifies the potential for gain or loss on amounts invested
        and may increase the risk of investing in us.**
 
 Borrowings,
        also known as leverage, magnify the potential for gain or loss on amounts
        invested and, therefore, increase the risks associated with investing in
        our
        securities. We may borrow from and issue senior debt securities to banks,
        insurance companies, and other lenders. Lenders of these senior securities
        have
        fixed dollar claims on our consolidated assets that are superior to the claims
        of our common shareholders. If the value of our consolidated assets increases,
        then leveraging would cause the value of our consolidated assets to increase
        more sharply than it would have had we not leveraged. Conversely, if the
        value
        of our consolidated assets decreases, leveraging would cause the value of
        our
        consolidated net assets to decline more sharply than it otherwise would have
        had
        we not leveraged. Similarly, any increase in our consolidated income in excess
        of consolidated interest payable on the borrowed funds would cause our net
        income to increase more than it would without the leverage, while any decrease
        in our consolidated income would cause net income to decline more sharply
        than
        it would have had we not borrowed. Leverage is generally considered a
        speculative investment technique.
 
 **Changes
        in interest rates may affect our cost of capital and net investment income.**
  35
  Because
        we may borrow money to make investments, our net income is partially dependent
        upon the difference between the rate at which we borrow funds and the rate
        at
        which we invest these funds. As a result, there can be no assurance that
        a
        significant change in market interest rates will not have a material adverse
        effect on our net income. In periods of rising interest rates, our cost of
        funds
        would increase, which would reduce our net income. We may use a combination
        of
        long-term and short-term borrowings and equity capital to finance our investing
        activities. We may use interest rate risk management techniques in an effort
        to
        limit our exposure to interest rate fluctuations. Such techniques may include
        various interest rate hedging activities. Accordingly, no assurances can
        be
        given that such changes will not have a material adverse effect on the return
        on, or the recovery of, the Company’s investments.
 
 **RISKS
        RELATED TO OUR REAL ESTATE HOLDINGS**
 
 **The
        value of real estate fluctuates depending on conditions in the general economy
        and the real estate business. These conditions may limit revenues from our
        real
        estate properties and available cash.**
 
 The
        value
        of our real estate holdings is affected by many factors including, but not
        limited to: national, regional and local economic conditions; consequences
        of
        any armed conflict involving or terrorist attacks against the United States;
        our
        ability to secure adequate insurance; local conditions such as an oversupply
        of
        space or a reduction in demand for real estate in a particular area; competition
        from other available space; whether tenants consider a property attractive;
        the
        financial condition of tenants, including the extent of tenant bankruptcies
        or
        defaults; whether we are able to pass some or all of any increased operating
        costs through to tenants; how well we manage our properties; fluctuations
        in
        interest rates; changes in real estate taxes and other expenses; changes
        in
        market rental rates; the timing and costs associated with property improvements
        and rentals; changes in taxation or zoning laws; government regulation;
        potential liability under environmental or other laws or regulations; and
        general competitive factors. The rents we expect to receive and the occupancy
        levels at our properties may not materialize as a result of adverse changes
        in
        any of these factors. If our rental revenue fails to materialize, we generally
        would expect to have less cash available to pay our operating costs. In
        addition, some expenses, including mortgage payments, real estate taxes and
        maintenance costs, generally do not decline when the related rents decline.
 
 **Our
        current real estate holdings are concentrated in Baltimore, Maryland and
        Heber
        Springs, Arkansas. Adverse circumstances affecting these areas generally
        could
        adversely affect our business.**
  A
        significant proportion of our real estate investments are in Baltimore, Maryland
        and Heber Springs, Arkansas and are affected by the economic cycles and risks
        inherent to those regions. Like other real estate markets, the real estate
        markets in these areas have experienced economic downturns in the past, and
        we
        cannot predict how the current economic conditions will impact these markets
        in
        both the short and long term. Further declines in the economy or a decline
        in
        the real estate markets in these areas could hurt our financial performance
        and
        the value of our properties. The factors affecting economic conditions in
        these
        regions include: business layoffs or downsizing; industry slowdowns; relocations
        of businesses; changing demographics; and any oversupply of or reduced demand
        for real estate.
 
 **RISKS
        RELATED TO OUR FINANCING**
 
 **There
        are a large number of shares of common stock and shares underlying outstanding
        warrants from our recent private placement that may be available for future
        sale
        and the sale of these shares may depress the market price of our common stock.**
 
 As
        of
        April 26, 2005, we had 5,276,328 shares of common stock outstanding. There
        are
        1,517,700 outstanding shares of common stock and 758,841 shares of common
        stock
        issuable upon exercise of outstanding warrants from our recent private placement
        being offered pursuant to a Form S-3 filed with the SEC on May 3, 2005. After
        the Form S-3 is declared effective by the SEC, all of these shares may be
        sold
        without restriction. The sale of these shares may adversely affect the market
        price of our common stock.
 
 **The
        issuance of shares upon exercise of outstanding warrants may cause immediate
        and
        substantial dilution to our existing stockholders.**
  36
  The
        issuance of shares upon exercise of our outstanding warrants may result in
        substantial dilution to the interests of other stockholders since the selling
        stockholders may ultimately exercise and sell the full amount issuable on
        exercise.
 
 **RISKS
        RELATED TO OUR COMMON STOCK**
 
 **Our
        historic stock price has been volatile and the future market price for our
        common stock may continue to be volatile. Further, the limited market for
        our
        shares will make our price more volatile. This may make it difficult for
        you to
        sell our common stock for a positive return on your investment.**
 
 The
        public market for our common stock has historically been very volatile. Over
        the
        past two fiscal years and the interim quarterly periods, the market price
        for
        our common stock has ranged from $0.50 to $14.75. Any future market price
        for
        our shares may continue to be very volatile. This price volatility may make
        it
        more difficult for you to sell shares when you want at prices you find
        attractive. We do not know of any one particular factor that has caused
        volatility in our stock price. However, the stock market in general has
        experienced extreme price and volume fluctuations that often are unrelated
        or
        disproportionate to the operating performance of companies. Broad market
        factors
        and the investing public’s negative perception of our business may reduce our
        stock price, regardless of our operating performance. Further, the market
        for
        our common stock is limited and we cannot assure you that a larger market
        will
        ever be developed or maintained. Our common stock is currently listed on
        the
        American Stock Exchange (“AMEX”). The average daily trading volume of our common
        stock over the past three months was approximately 16,909 shares. The last
        reported sales price for our common stock on April 26, 2005, was $4.51 per
        share. Market fluctuations and volatility, as well as general economic, market
        and political conditions, could reduce our market price. As a result, this
        may
        make it difficult or impossible for you to sell our common stock.
 
 **If
        we fail to meet continued listing standards of AMEX, our common stock may
        be
        delisted which would have a material adverse effect on the price of our common
        stock.**
 
 Our
        common stock is currently traded on the American Stock Exchange (“AMEX”) under
        the symbol “PST”. In order for our securities to be eligible for continued
        listing on AMEX, we must remain in compliance with certain listing standards.
        On
        June 24, 2004, we received a letter from AMEX inquiring as to our ability
        to
        remain listed on AMEX. Specifically, AMEX indicated that our common stock
        was
        subject to delisting under sections 1003(a)(i) and 1003(a)(ii) of AMEX’s Company
        Guide because our stockholders’ equity was below the level required by AMEX’s
        continued listing standards. Accordingly, AMEX requested information relating
        to
        our plan to retain listing. On September 13, 2004, we presented the final
        components of our proposed plan to AMEX to comply with AMEX’s continued listing
        standards and on September 15, 2004, AMEX notified us that it accepted our
        plan
        and granted us an extension until December 26, 2005 to regain compliance,
        during
        which time AMEX will continue our listing subject to certain conditions.
        We have
        cooperated, and will continue to cooperate, with AMEX regarding these issues
        and
        we intend to make every effort to remain listed on AMEX. AMEX has notified
        us,
        however, that failure to make progress consistent with the plan of compliance
        or
        to regain compliance with the continued listing standards by December 26,
        2005
        could result in our common stock being delisted. As of June 30, 2005, we
        believe
        we have re-gained compliance with AMEX’s continued listing requirements. If we
        were to again become noncompliant with AMEX’s continued listing requirements,
        our common stock may be delisted which would have a material adverse affect
        on
        the price and liquidity of our common stock.
 
 **If
        we are delisted from AMEX, our common stock may be subject to the “penny stock”
rules of the SEC, which would make transactions in our common stock cumbersome
        and may reduce the value of an investment in our stock.**
 
 The
        Securities and Exchange Commission has adopted Rule 3a51-1 which establishes
        the
        definition of a “penny stock,” for the purposes relevant to us, as any equity
        security that has a market price of less than $5.00 per share or with an
        exercise price of less than $5.00 per share, subject to certain exceptions.
        For
        any transaction involving a penny stock, unless exempt, Rule 15g-9
        require:
 
 ·
              that
                  a broker or dealer approve a person's account for transactions
                  in penny
                  stocks; and
 ·
              the
                  broker or dealer receive from the investor a written agreement
                  to the
                  transaction, setting forth the identity and quantity of the penny
                  stock to
                  be purchased.
  37
  In
        order
        to approve a person’s account for transactions in penny stocks, the broker or
        dealer must:
 
 ·
              obtain
                  financial information and investment experience objectives of the
                  person;
                  and
 ·
              make
                  a reasonable determination that the transactions in penny stocks
                  are
                  suitable for that person and the person has sufficient knowledge
                  and
                  experience in financial matters to be capable of evaluating the
                  risks of
                  transactions in penny stocks.
 
 The
        broker or dealer must also deliver, prior to any transaction in a penny stock,
        a
        disclosure schedule prescribed by the SEC relating to the penny stock market,
        which, in highlight form:
 
 ·
              sets
                  forth the basis on which the broker or dealer made the suitability
                  determination; and
 ·
              that
                  the broker or dealer received a signed, written agreement from
                  the
                  investor prior to the transaction.
 
 Generally,
        brokers may be less willing to execute transactions in securities subject
        to the
“penny stock” rules. This may make it more difficult for investors to dispose of
        our common stock and cause a decline in the market value of our
        stock.
 
 Disclosure
        also has to be made about the risks of investing in penny stocks in both
        public
        offerings and in secondary trading and about the commissions payable to both
        the
        broker-dealer and the registered representative, current quotations for the
        securities and the rights and remedies available to an investor in cases
        of
        fraud in penny stock transactions. Finally, monthly statements have to be
        sent
        disclosing recent price information for the penny stock held in the account
        and
        information on the limited market in penny stocks.
 
 **Item
        3. Quantitative and Qualitative Disclosures About Market Risk.**
 
 The
        Company's business activities contain elements of risk. The Company considers
        a
        principal type of market risk to be valuation risk. Investments and other
        assets
        are valued at fair value as determined in good faith by the Board of Directors.
 
 The
        Company has invested a substantial portion of its assets in private development
        stage or start-up companies. These private businesses tend to be thinly
        capitalized, unproven, small companies that lack management depth and have
        not
        attained profitability or have no history of operations. Because of the
        speculative nature and the lack of public market for these investments, there
        is
        significantly greater risk of loss than is the case with traditional investment
        securities. The Company expects that some of its venture capital investments
        will be a complete loss or will be unprofitable and that some will appear
        to be
        likely to become successful but never realize their potential.
 
 Because
        there is typically no public market for the equity interests of the small
        companies in which the Company invests, the valuation of the equity interests
        in
        the Company's portfolio is subject to the estimate of the Company's Board
        of
        Directors. In making its determination, the Board may consider valuation
        information provided by an independent third party or the portfolio company
        itself. In the absence of a readily ascertainable market value, the estimated
        value of the Company's portfolio of equity interests may differ significantly
        from the values that would be placed on the portfolio if a ready market for
        the
        equity interests existed. Any changes in valuation are recorded in the Company's
        consolidated statements of operations as "Net increase (decrease) in unrealized
        appreciation on investments."
 
 **Item
        4. Controls and Procedures.**
 
 As
        of the
        end of the period covered by this report, we conducted an evaluation, under
        the
        supervision and with the participation of our chief executive officer and
        chief
        financial officer of our disclosure controls and procedures (as defined in
        Rule
        13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
        our chief executive officer and chief financial officer concluded that our
        disclosure controls and procedures are effective to ensure that all information
        required to be disclosed by us in the reports that we file or submit under
        the
        Exchange Act is: (1) accumulated and communicated to our management, including our chief executive
        officer and chief financial officer, as appropriate to allow timely decisions
        regarding required disclosure ;
        and (2)
        recorded, processed, summarized and reported, within the time periods specified
        in the Commission's rules and forms. There was no change in our internal
        controls or in other factors that could affect these controls during our
        last
        fiscal quarter that has materially affected, or is reasonably likely to
        materially affect, our internal control over financial reporting.
  38
  **PART
        II - OTHER INFORMATION**
 
 **Item
        1.**  **Legal
        Proceedings.**
  On
        October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
        filed a lawsuit against Franklin Capital Corp. (n/k/a Patient Safety
        Technologies, Inc.), Sunshine Wireless, LLC, and four other defendants
        affiliated with Winstar Communications, Inc. On February 25, 2003, the case
        against Franklin Capital and Sunshine Wireless was dismissed. However, on
        October 19, 2004, the plaintiffs exercised their right to appeal. 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. The initial lawsuit alleged that the Winstar Communications
        defendants conspired to commit fraud and breached their fiduciary duty to
        the
        plaintiffs in connection with the acquisition of the plaintiffs' radio
        production and distribution business. The complaint further alleged that
        Franklin Capital and Sunshine Wireless, which were co-investors in the
        acquisition of the plaintiffs’ radio production and distribution business,
        joined the alleged conspiracy in structuring a transaction in which the
        plaintiffs’ business was transferred to a venture primarily composed of and
        operated by Franklin Capital and Sunshine Wireless and where the proceeds
        were
        retained by non-bankrupt affiliates of Winstar Communications. The plaintiffs
        sought recovery of damages in excess of $10,000,000, costs and attorneys'
        fees.
 
 **Item
        2.****Unregistered
        Sales of Equity Securities and Use of Proceeds.**
 
 On
        April
        5, 2005, we entered into a consulting agreement with Health West Marketing
        Incorporated, a California corporation ("Health West"). Under the agreement,
        Health West agreed to help the Company establish a comprehensive manufacturing
        and distribution strategy for the Company's Safety-Sponge(TM) System worldwide.
 In
        consideration for Health West's services, the Company agreed to issue Health
        West 42,017 shares of the Company's common stock, to be issued as follows:
        (a)
        10,505 shares were issued upon signing the agreement; (b) if Health West
        helps
        the Company structure a comprehensive manufacturing agreement with A Plus
        Manufacturing by July 5, 2005, then the Company will issue Health West an
        additional 15,756 shares; and (c) if Health West helps the Company develop
        a
        regional distribution network to integrate the Safety-Sponge(TM) System into
        the
        existing acute care supply chain by February 5, 2006, then the Company will
        issue Health West the remaining 15,756 shares. As incentive for entering
        into
        the agreement, the Company agreed to issue Health West a callable warrant
        to
        purchase 150,000 (post 3:1 forward stock split) shares of the Company's common
        stock at an exercise price of $5.95, exercisable for 5 years. In addition,
        the
        Company agreed to issue a callable warrant to purchase 25,000 (post 3:1 forward
        stock split) shares of the Company's common stock at an exercise price of
        $5.95,
        exercisable upon meeting specified milestones. These securities will be issued
        pursuant to Section 4(2) of the Securities Act of 1933, as amended.
 
 On
        May
        12, 2005, the Company purchased certain assets from Philip Gatch, our current
        Chief Technology Officer, for use in a production and post-production media
        content facility. As consideration for the assets the Company issued Mr.
        Gatch:
        (1) 17,241 shares of common stock; and (2) warrants to purchase 8,621 shares
        of
        common stock with a three-year term and an exercise price of $5.80 per share.
        These securities were issued pursuant to Rule 506 under the Securities Act
        of
        1933, as amended.
 
 On
        April
        22, 2005, we entered into a subscription agreement with an accredited investor,
        pursuant to which we sold 20,000 shares of common stock and warrants to purchase
        an additional 20,000 shares of common stock. We received gross proceeds of
        $100,000 from the sale of stock and warrants. These securities were issued
        pursuant to Rule 506 under the Securities Act of 1933, as amended.
 
 On
        April
        28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
        Tennessee from two trusts related to Melanie Glazer, Manager of our subsidiary
        Franklin Capital Properties, LLC. The purchase price consisted of approximately
        $90,000 in cash, 20,444 shares of common stock and 10,221 warrants to purchase
        common stock at an exercise price of $4.53 and a 5 year contractual
        life.
  39
  We
        sold
        shares of common stock at a price of $5.00 per share. For each two shares
        of
        common stock purchased we issued one callable warrant and one non-callable
        warrant to purchase additional shares of our common stock. In aggregate,
        the
        accredited investor purchased 20,000 shares of common stock, callable warrants
        to purchase 10,000 shares of common stock and non-callable warrants to purchase
        10,000 shares of common stock. Pursuant to the subscription agreement, we
        granted piggy back registration rights to register the resale of the shares
        of
        common stock and shares issuable upon exercise of the warrants.
 
 Both
        the
        callable and non-callable warrants are exercisable for a period of five years
        from April 22, 2005 and have an exercise price per share equal to $6.05.
        In the
        event the closing sale price of our common stock equals or exceeds $7.50
        for at
        least five consecutive trading days, upon 30 days prior written notice we
        may
        call the callable warrant at a redemption price equal to $0.01 per share
        of
        common stock then purchasable pursuant to such warrant. Notwithstanding such
        notice, the warrant holder may exercise the callable warrant prior to the
        end of
        the 30-day notice period.
 
 On
        June
        13, 2005, we entered into an employment agreement with William B. Horne as
        our
        Chief Financial Officer. Pursuant to the employment agreement we agreed to
        issue
        Mr. Horne 26,315 shares of common stock which shares will vest quarterly
        over
        each year of the agreement. The number of shares to be issued to Mr. Horne
        for
        the first year of the agreement will be reduced by the value of any unvested
        restricted stock that he would be entitled to under his prior consulting
        agreement with the Company.
 
 Except
        as
        expressly set forth above, for transactions exempt from registration under
        Rule
        506, the individuals and entities to whom we issued securities are unaffiliated
        with us. For each of such sales, no advertising or general solicitation was
        employed in offering the securities. The offerings and sales were made to
        a
        limited number of persons, all of whom were accredited investors, business
        associates of ours or our executive officers, and transfer was restricted
        by us
        in accordance with the requirements of the Securities Act. Each of the above
        security holders who were not our executive officers represented that they
        are
        accredited and sophisticated investors, that they are capable of analyzing
        the
        merits and risks of their investment, and that they understand the speculative
        nature of their investment. Furthermore, all of the above-referenced persons
        had
        access to our Securities and Exchange Commission filings.
 
 **Item
        3.**  **Defaults
        Upon Senior Securities.**
 
 None.
 
 **Item
        4.**  **Submission
        of Matters to a Vote of Security Holders.**
  None.
  **Item
        5.**  **Other
        Information.**
 
 None.
 
 40
 
 **Item
                  6.**
              **Exhibits.**
 
 **Exhibit
                  Number**
              
              **Description**4.1
              
              $1,000,000
                  principal amount Promissory Note dated April 7, 2005 issued to
                  Bodnar
                  Capital Management, LLC (Incorporated by reference to the Company’s Form
                  8-K filed with the Securities and Exchange Commission on April
                  13,
                  2005)4.2
              
              Security
                  Agreement dated April 7, 2005 in favor of Bodnar Capital Management,
                  LLC
                  (Incorporated by reference to the Company’s Form 8-K filed with the
                  Securities and Exchange Commission on April 13, 2005)4.3
              
              Form
                  of non-callable Warrant issued to James Colen (Incorporated by
                  reference
                  to the Company’s Form 8-K filed with the Securities and Exchange
                  Commission on April26,
                  2005)4.4
              
              Form
                  of callable Warrant issued to James Colen (Incorporated by reference
                  to
                  the Company’s Form 8-K filed with the Securities and Exchange Commission
                  on April26,
                  2005)10.1
              
              Consulting
                  Agreement entered into as of April 5, 2005 by and between Health
                  West
                  Marketing Incorporated and Patient Safety Technologies, Inc. (Incorporated
                  by reference to the Company’s Form 8-K filed with the Securities and
                  Exchange Commission on April 11, 2005)10.2
              
              Subscription
                  Agreement dated April 22, 2005 between Patient Safety Technologies,
                  Inc.
                  and James Colen (Incorporated by reference to the Company’s Form 8-K filed
                  with the Securities and Exchange Commission on April 26,
                  2005)10.3
              
              Employment
                  Agreement entered into as of June 13, 2005 by and between Patient
                  Safety
                  Technologies, Inc. and William B. Horne (Incorporated by reference
                  to the
                  Company’s Form 8-K filed with the Securities and Exchange Commission on
                  June 16, 2005)10.4
              
              Consulting
                  Agreement among Wolfgang Grabher and Patient Safety Technologies,
                  Inc.
                  (Incorporated by reference to the Company’s Form 8-K filed with the
                  Securities and Exchange Commission on July 7, 2005)10.5
              
              Agreement
                  between Patient Safety Technologies, Inc. and IPEX, Inc. dated
                  July 7,
                  2005 (Incorporated by reference to the Company’s Form 8-K filed with the
                  Securities and Exchange Commission on July 7, 2005)31.1
              
              Certification
                  by Chief Executive Officer, required by Rule 13a-14(a) or Rule
                  15d-14(a)
                  of the Exchange Act31.2
              
              Certification
                  by Chief Financial Officer, required by Rule 13a-14(a) or Rule
                  15d-14(a)
                  of the Exchange Act32.1
              
              Certification
                  by Chief Executive Officer, required by Rule 13a-14(b) or Rule
                  15d-14(b)
                  of the Exchange Act and Section 1350 of Chapter 63 of Title 18
                  of the
                  United States Code32.2
              
              Certification
                  by Chief Executive Officer, required by Rule 13a-14(b) or Rule
                  15d-14(b)
                  of the Exchange Act and Section 1350 of Chapter 63 of Title 18
                  of the
                  United States Code
 
 41
  **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:
                February 13, 2006
              By:
              /s/
                  Louis Glazer, M.D., Ph.GLouis
                  Glazer, M.D., Ph.GChief
                  Executive Officer and
                Chairman
                  of the Board
 Date:
                February 13, 2006
              By:
              /s/
                  William B. HorneWilliam
                  B. HorneChief
                  Financial Officer
                and
                  Principal Accounting Officer
  42