UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   -----------
                                    FORM 10-Q

(Mark One)

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

                                       OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM           TO

                             COMMISSION FILE NUMBER

                        PATIENT SAFETY TECHNOLOGIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                           13-3419202
(STATE OR OTHER JURISDICTION OF                             (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NUMBER)

             1800 CENTURY PARK EAST, STE. 200, LOS ANGELES, CA 90067
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 895-7750

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the past 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes |X| No |_|.


     Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

Large accelerated filer |_|    Accelerated filer |_|   Non-accelerated filer |X|

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

     There were 6,636,889 shares of the registrant's common stock outstanding as
of December 15, 2006.


<PAGE>


                        PATIENT SAFETY TECHNOLOGIES, INC.

                        FORM 10-Q FOR THE FISCAL QUARTER
                            ENDED SEPTEMBER 30, 2006

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

                         PART I - FINANCIAL INFORMATION

Item 1.       Financial Statements..........................................   1
Item 2.       Management's Discussion and Analysis of Financial Condition
                and Results of Operations...................................  23
Item 3.       Quantitative and Qualitative Disclosures About Market Risk....  36
Item 4.       Controls and Procedures.......................................  37

                           PART II - OTHER INFORMATION

Item 1.       Legal Proceedings.............................................  37
Item 1A.      Risk Factors..................................................  37
Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds...  50
Item 3.       Defaults Upon Senior Securities...............................  51
Item 4.       Submission of Matters to a Vote of Security Holders...........  51
Item 5.       Other Information.............................................  51
Item 6.       Exhibits......................................................  51

SIGNATURES..................................................................  53






<PAGE>


                          "SAFE HARBOR" STATEMENT UNDER
              THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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

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

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


<PAGE>


                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

               PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
================================================================================


CONSOLIDATED BALANCE SHEETS (UNAUDITED)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                  SEPTEMBER 30,      DECEMBER 31,
                                                                                                      2006              2005
                                                                                                  ------------       ------------
<S>                                                                                               <C>                <C>
ASSETS

CURRENT ASSETS

Cash                                                                                              $     26,322       $     79,373
Receivables from investments                                                                                --            934,031
Notes receivable                                                                                        32,603                 --
Marketable securities                                                                                       --            923,800
Inventories                                                                                             67,210             77,481
Prepaid expenses                                                                                       189,549            112,734
Other current assets                                                                                   152,124            118,394
                                                                                                  ------------       ------------

TOTAL CURRENT ASSETS                                                                                   467,808          2,245,813

Restricted certificate of deposit                                                                       87,500             87,500
Property and equipment, net                                                                          3,568,822          1,348,275
Goodwill                                                                                             1,687,527          2,301,555
Patents, net                                                                                         4,170,085          4,413,791
Long-term investments                                                                                1,672,693          5,636,931
                                                                                                  ------------       ------------
TOTAL ASSETS                                                                                      $ 11,654,435       $ 16,033,865
                                                                                                  ============       ============

---------------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES

Notes payable, current portion                                                                    $  4,287,761       $  1,796,554
Accounts payable                                                                                     1,319,648            785,507
Accrued liabilities                                                                                    814,338            569,116
Due to broker                                                                                               --            801,863
                                                                                                  ------------       ------------

TOTAL CURRENT LIABILITIES                                                                            6,421,747          3,953,040
                                                                                                  ------------       ------------

LONG-TERM LIABILITIES

Notes payable, less current portion                                                                  1,495,000          1,116,838
Deferred tax liabilities                                                                             1,502,311          1,590,045
                                                                                                  ------------       ------------

TOTAL LONG-TERM LIABILITIES                                                                          2,997,311          2,706,883
                                                                                                  ------------       ------------

MINORITY INTEREST                                                                                           --            252,992

CONTINGENCIES

STOCKHOLDERS' EQUITY

Convertible  preferred  stock, $1 par value, cumulative 7% dividend:
    1,000,000 shares  authorized;  10,950 issued and outstanding at
    September 30, 2006 and December 31, 2005 (Liquidation preference
    $1,171,650)                                                                                         10,950             10,950
Common stock, $0.33 par value: 25,000,000 shares authorized;
    7,479,026 shares issued and 6,561,195 shares outstanding as of
    September 30, 2006;  6,995,276 shares issued and 5,672,445 shares
    outstanding at December 31, 2005                                                                 2,468,079          2,308,441
Additional paid-in capital                                                                          29,399,670         22,600,165
Accumulated other comprehensive (loss) income                                                          (33,753)         2,374,858
Accumulated deficit                                                                                (27,951,692)       (15,784,108)
                                                                                                  ------------       ------------

                                                                                                     3,893,254         11,510,306
Less: 917,831 and 1,322,831 shares of treasury stock,
    at cost, at September 30, 2006 and December 31, 2005, respectively                              (1,657,877)        (2,389,356)
                                                                                                  ------------       ------------

TOTAL STOCKHOLDERS' EQUITY                                                                           2,235,377          9,120,950
                                                                                                  ------------       ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                        $ 11,654,435       $ 16,033,865
                                                                                                  ============       ============
</TABLE>
--------------------------------------------------------------------------------

        The accompanying notes are an integral part of these consolidated
                         interim financial statements.


                                        1
<PAGE>

               PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
================================================================================

Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                        FOR THE THREE MONTHS            FOR THE NINE MONTHS
                                                                         ENDED SEPTEMBER 30,            ENDED SEPTEMBER 30,

                                                                          2006           2005           2006            2005
<S>                                                               <C>               <C>             <C>             <C>
REVENUES                                                          $     122,249     $     29,693    $    357,740    $    616,320
                                                                  -------------     ------------    ------------    ------------

OPERATING EXPENSES

    Cost of sales                                                       101,478               --         101,478              --
    Salaries and employee benefits                                      632,269        1,105,152       3,685,922       3,215,248
    Professional fees                                                   450,429          497,984       1,578,450       1,952,929
    Rent                                                                 27,023           35,367          91,085          59,845
    Insurance                                                            62,670           27,594         146,345          71,172
    Taxes other than income taxes                                        25,909           34,385          89,246          80,367
    Amortization of patents                                              81,235           81,235         243,706         189,549
    Goodwill impairment                                                 614,028               --         971,036              --
    General and administrative                                          321,114          346,715         945,135         807,744
                                                                  -------------     ------------    ------------    ------------

    TOTAL OPERATING EXPENSES                                          2,316,155        2,128,432       7,852,403       6,376,854
                                                                  -------------     ------------    ------------    ------------

    OPERATING LOSS                                                   (2,193,906)      (2,098,739)     (7,494,663)     (5,760,534)

OTHER INCOME (EXPENSES)
   Interest, dividend income and other                                    1,141            1,234           2,250          41,321
   Equity in loss of investee                                                --          (59,796)             --         (76,816)
   Realized gain (loss) on investments, net                          (1,387,328)         149,204      (1,437,481)        252,848
   Interest expense                                                  (2,040,302)         (23,899)     (3,284,838)        (85,460)
   Unrealized gain (loss) on marketable securities, net                 (27,682)        (123,318)         16,901         (80,115)
                                                                  -------------     ------------    ------------    ------------
   LOSS BEFORE DEFERRED INCOME TAX BENEFIT                           (5,648,077)      (2,155,314)    (12,197,831)     (5,708,756)
   INCOME TAX BENEFIT                                                    29,245               --          87,734              --
                                                                  -------------     ------------    ------------    ------------
   NET LOSS                                                          (5,618,832)      (2,155,314)    (12,110,097)     (5,708,756)

   PREFERRED DIVIDENDS                                                  (19,162)         (19,162)        (57,487)        (56,538)
                                                                  -------------     ------------    ------------    ------------
   LOSS AVAILABLE TO COMMON SHAREHOLDERS                          $  (5,637,994)    $ (2,174,476)   $(12,167,584)   $ (5,765,294)
                                                                  =============     ============    ============    ============
   BASIC AND DILUTED NET LOSS PER COMMON SHARE                    $       (0.87)    $      (0.39)   $      (1.94)   $      (1.09)


   WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                         6,499,929        5,515,360       6,258,461       5,287,831
   COMPREHENSIVE LOSS:
     NET LOSS                                                     $  (5,618,832)    $ (2,155,314)   $(12,110,097)   $ (5,708,756)
     OTHER COMPREHENSIVE GAIN (LOSS), UNREALIZED GAIN (LOSS)
       ON AVAILABLE-FOR-SALE INVESTMENTS                               (176,168)        (680,625)     (2,408,611)        478,125
                                                                  -------------     ------------    ------------    ------------

          TOTAL COMPREHENSIVE LOSS                                $  (5,795,000)    $ (2,835,939)   $(14,518,708)   $ (5,230,631)
                                                                  =============     ============    ============    ============
</TABLE>
--------------------------------------------------------------------------------

        The accompanying notes are an integral part of these consolidated
                         interim financial statements.






                                        2
<PAGE>

               PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
================================================================================

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                    FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                                                                         2006                   2005
<S>                                                                                 <C>                   <C>
Cash flows from operating activities:
  Net loss                                                                          $  (12,110,097)       $   (5,708,756)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation                                                                            68,807                13,207
    Amortization of patents                                                                243,706               189,549
    Non-cash interest                                                                    2,879,603                    --
    Goodwill impairment                                                                    971,036                    --
    Realized (gain) loss on investments, net                                             1,437,481              (252,848)
    Unrealized gain on marketable securities                                               (16,901)               80,115
    Stock-based compensation to employees and directors                                  2,399,269             2,518,047
    Stock-based compensation to consultants                                                604,445             1,191,232
    Stock received for services                                                                 --               (10,000)
    Loss on investee                                                                            --                76,816
    Deferred income tax benefit                                                            (87,734)                   --
    Changes in operating assets and liabilities:
      Restricted cash                                                                           --              (237,731)
      Receivables from investments                                                         901,428              (937,500)
      Marketable securities, net                                                           809,260             1,576,299
      Inventories                                                                           10,271                    --
      Prepaid expenses                                                                     (26,815)                   --
      Other current assets                                                                 (33,730)              (72,174)
      Accounts payable and accrued liabilities                                             721,876               567,143
      Due to broker                                                                       (801,863)              413,724
                                                                                    --------------        --------------

          Net cash used in operating activities                                         (2,029,958)             (592,877)
                                                                                    --------------        --------------

Cash flows from investing activities:

  Purchase of property and equipment                                                    (2,289,355)             (124,827)
  Purchase of Surgicount                                                                        --              (432,398)
  Proceeds from sale of long-term investments                                              249,585               376,720
  Purchases of long-term investments                                                            --              (903,173)
                                                                                    --------------        --------------

          Net cash used in investing activities                                         (2,039,770)           (1,083,678)
                                                                                    --------------        --------------

Cash flows from financing activities:
  Proceeds from issuance of common stock and warrants                                      250,000               100,000
  Proceeds from exercise of stock options                                                       --                26,250
  Purchases of treasury stock                                                                   --               (36,931)
  Payments of preferred dividends                                                               --               (19,162)
  Proceeds from notes payable                                                            6,939,119             1,000,000
  Payments and decrease in notes payable                                                (3,172,442)              (77,026)
                                                                                    --------------        --------------

          Net cash provided by financing activities                                      4,016,677               993,131
                                                                                    --------------        --------------

Net decrease in cash                                                                       (53,051)             (683,424)

Cash at beginning of period                                                                 79,373               846,404
                                                                                    --------------        --------------

Cash at end of period                                                               $       26,322        $      162,980
                                                                                    ==============        ==============
</TABLE>
--------------------------------------------------------------------------------

        The accompanying notes are an integral part of these consolidated
                         interim financial statements.







                                        3
<PAGE>

               PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
================================================================================

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                FOR THE NINE MONTHS ENDED
                                                                                                     SEPTEMBER 30,
                                                                                                   2006           2005
<S>                                                                                            <C>             <C>
  Supplemental disclosures of cash flow information:
      Cash paid during the period for interest                                                 $  216,779      $   33,904

  Supplemental schedule of non cash investing and financing activities:
      Dividends accrued                                                                        $   57,487      $   56,538
      Issuance of common stock and warrants in connection with Surgicount acquisition          $       --      $4,232,178
      Issuance of common stock in connection with asset purchase agreement                     $       --      $   66,895
      Issuance of common stock in connection with land acquisition                             $       --      $   85,619
      Issuance of common stock in connection with purchase of marketable securities            $       --      $  101,640
      Issuance of common stock in connection with prepaid asset                                $   50,000      $       --

      Purchase of the remaining 50% interest in ASG,  through issuance of common
stock, resulting in the following asset acquired and liabilities assumed:

                                                                                                    ASG
    Goodwill                                                                                   $  357,008      $       --
    Common stock issued                                                                        $ (610,000)     $       --
    Minority interest                                                                          $  252,992      $       --
</TABLE>
--------------------------------------------------------------------------------

        The accompanying notes are an integral part of these consolidated
                         interim financial statements.









                                       4
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED
SEPTEMBER 30, 2006


1. DESCRIPTION OF BUSINESS AND GOING CONCERN CONSIDERATION

Patient Safety  Technologies,  Inc. ("PST", or the "COMPANY") (formerly known as
Franklin Capital Corporation) is a Delaware corporation.  Currently, the Company
has three wholly-owned operating  subsidiaries:  (1) Surgicount Medical, Inc., a
California  corporation;  (2) Patient Safety  Consulting  Group, LLC, a Delaware
Limited Liability Company;  and (3) Automotive  Services Group, Inc.,  (formerly
known as Ault Glazer Bodnar Merchant Capital, Inc.) a Delaware corporation.

The Company,  including its wholly-owned operating  subsidiaries,  is engaged in
the  acquisition  of  controlling   interests  in  companies  and  research  and
development  of products and services  focused  primarily in the health care and
medical  products field,  particularly  the patient safety  markets.  Surgicount
Medical, Inc.  ("SURGICOUNT"),  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.  Automotive Services Group, Inc.  ("AUTOMOTIVE SERVICES GROUP") holds the
Company's investment in Automotive Services Group, LLC ("ASG"), its wholly-owned
subsidiary.  Additionally, the Company holds various other unrelated investments
which it is in the  process of  liquidating.  These  unrelated  investments  are
included in a separate segment, financial services and real estate. As discussed
in Note 3, the Company  purchased the remaining  equity interest in ASG in March
2006.

GOING CONCERN

The accompanying  unaudited  consolidated interim financial statements have been
prepared  assuming  that  the  Company  will  continue  as a going  concern.  At
September 30, 2006, the Company has an accumulated  deficit of approximately $28
million and a working capital deficit of approximately $6 million.  For the nine
months ended  September 30, 2006, the Company  incurred a loss of  approximately
$12.2 million. Further, as of September 30, 2006, the Company has only generated
minimal  revenues from its medical products and healthcare  solutions  segments.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. During the nine months ended September 30, 2006, the Company
has relied on liquidating  investments and primarily  short-term debt financings
to fund its  operations.  As a result  of the  short-term  debt  financings  the
Company has incurred a significant  amount of non-cash  interest expense related
to  debt  discount  and  beneficial  conversion  features  associated  with  the
borrowings.  In order to ensure the continued  viability of the Company,  equity
financing must be obtained in order to repay the existing short-term debt and to
provide a  sufficient  source of  operating  capital.  The  Company  has not yet
secured any  significant  levels of equity  financing  during 2006, and although
management is currently  seeking  equity  financing and believes that it will be
successful,  no assurances  can be made that it will be  successful  obtaining a
sufficient  amount of equity  financing to continue to fund its operations until
the  fruition  of  adequate  cash flow from its medical  products  segment.  The
unaudited   consolidated   interim  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND USE OF ESTIMATES

The accompanying  unaudited  consolidated interim financial statements have been
prepared  in  accordance  with the  instructions  to Form 10-Q and Article 10 of
Regulation S-X and do not include all the information  and disclosures  required
by accounting principles generally accepted in the United States of


                                       5
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


America.  The preparation of financial  statements in conformity with accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the amounts reported in
the financial  statements and accompanying notes. The 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 consolidated  interim financial  information is unaudited,  but reflects all
normal adjustments that are, in the opinion of management,  necessary to provide
a fair statement of results for the interim periods presented.  The consolidated
interim financial statements should be read in conjunction with the consolidated
financial  statements in the  Company's  Annual Report on Form 10-K for the year
ended  December 31, 2005.  Results of the three and nine months ended  September
30, 2006 are not  necessarily  indicative  of the results to be expected for the
full year ending  December 31, 2006.  All  intercompany  transactions  have been
eliminated in consolidation.

REVENUE RECOGNITION

The Company  complies  with SEC Staff  Accounting  Bulletin  (SAB) 101,  Revenue
Recognition,  amended  by  SAB  104.  Consulting  service  contract  revenue  is
recognized when the service is performed.  Consequently, the recognition of such
consulting service contract 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.  Revenues  generated by the Company's  automated  car wash  subsidiary,
Automotive  Services Group are recognized at the time of service.  Revenues from
sales of the Safety-Sponge(TM) System are recorded upon shipment.

GOODWILL AND INTANGIBLE ASSETS

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
GOODWILL  AND  INTANGIBLE  ASSETS ,  goodwill  is tested for  impairment  at the
reporting unit level (operating segment or one level below an operating segment)
on an annual basis in the Company's  fourth fiscal quarter or more frequently if
indicators of impairment  exist. The performance of the test involves a two-step
process. The first step of the impairment test involves comparing the fair value
of the Company's reporting units with each respective  reporting unit's carrying
amount,  including  goodwill.  The fair value of  reporting  units is  generally
determined using the income approach. If the carrying amount of a reporting unit
exceeds  the  reporting  unit's  fair  value,  the second  step of the  goodwill
impairment test is performed to determine the amount of any impairment loss. The
second step of the goodwill  impairment test involves comparing the implied fair
value  of the  reporting  unit's  goodwill  with  the  carrying  amount  of that
goodwill.  As discussed in Note 5, the Company believed there were indicators of
impairment  present for its car wash services  segment and after  performing the
tests described above,  recorded  impairment charges during each of the quarters
ended June 30, 2006 and September 30, 2006.

LONG-LIVED ASSETS

The Company  evaluates  long-lived assets for impairment in accordance with SFAS
No. 144,  ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS,  which
requires  impairment  evaluation  on long-lived  assets used in operations  when
indicators of impairment are present. Reviews are performed to determine


                                       6
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


whether the  carrying  value of assets is  impaired,  based on a  comparison  to
undiscounted expected future cash flows. If this comparison indicates that there
is  impairment,  the  impaired  asset is written  down to fair  value,  which is
typically  calculated using discounted expected future cash flows and a discount
rate based upon the  Company's  weighted  average  cost of capital  adjusted for
risks associated with the related operations.  Impairment is based on the excess
of the carrying amount over the fair value of those assets.

STOCK-BASED COMPENSATION

The Company  adopted SFAS No.  123(R),  "SHARE-BASED  PAYMENT," as of January 1,
2005 using the  modified  retrospective  application  method as provided by SFAS
123(R).  During the three and nine months ended  September 30, 2006, the Company
had  stock-based  compensation  expense,  related to issuances to the  Company's
employee  and  directors,  included  in  reported  net  loss,  of  $274,000  and
$2,399,000,  respectively.  The total amount of stock-based compensation for the
nine months ended September 30, 2006, of $2,399,000,  included  restricted stock
grants valued at $1,102,000 and stock options  valued at $1,297,000.  During the
three and nine months  ended  September  30, 2005,  the Company had  stock-based
compensation  expense,  from issuances to the Company's  employee and directors,
included in reported net loss,  of $751,000 and  $2,158,000,  respectively.  The
total amount of stock based compensation for the nine months ended September 30,
2005, of $2,518,000,  included  restricted stock grants valued at $1,287,000 and
stock options valued at $1,231,000.

During the three and nine  months  ended  September  30,  2006,  the Company had
stock-based  compensation  expense,  from  issuances  of  restricted  stock  and
warrants to  consultants  of the  Company,  included in  reported  net loss,  of
$56,000 and $604,000, respectively.  Additionally,  during the nine months ended
September 30, 2006,  the Company issued  restricted  stock valued at $50,000 for
prepaid  legal  expenses.  During the three and nine months ended  September 30,
2005,  the Company had  stock-based  compensation  expense,  from  issuances  of
restricted  stock and  warrants  to  consultants  of the  Company,  included  in
reported net loss, of $493,000 and $1,191,000, respectively.

A summary of stock option  activity for the nine months ended September 30, 2006
is presented below:

<TABLE>
<CAPTION>
                                                                             OUTSTANDING OPTIONS
                                                         ------------------------------------------------------------
                                                                                                        WEIGHTED
                                                                                   WEIGHTED             AVERAGE
                                        SHARES                                      AVERAGE             REMAINING
                                       AVAILABLE                                   EXERCISE         CONTRACTUAL LIFE
                                       FOR GRANT         NUMBER OF SHARES            PRICE               (YEARS)
                                     --------------      -----------------       --------------     -----------------
<S>                                        <C>                    <C>            <C>                      <C>
DECEMBER 31, 2005                          1,074,204              1,044,000      $      5.02              9.39
     Restricted Stock Awards                (321,928)
     Grants                                 (785,000)               785,000      $      3.80              9.46
     Cancellations                           105,000               (105,000)     $      4.38              9.19
                                      --------------      -----------------

SEPTEMBER 30, 2006                            72,276              1,724,000      $      4.50              8.98

Options exercisable at:
  December 31, 2005                                                 220,125      $      5.27              9.25
  September 30, 2006                                                843,875      $      4.90              8.78
</TABLE>





                                       7
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


All options  that the Company  granted in 2006 and 2005 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:
<TABLE>
<CAPTION>
                                                            NINE MONTHS ENDED SEPTEMBER 30,
                                                           2006                   2005
                                                      ----------------     ------------------
<S>                                                     <C>                   <C>
   Weighted average risk free interest rate                    3.75%               3.75%
   Weighted average life (in years)                             3.0                 3.0
   Volatility                                               87 - 89%                 83%
   Expected dividend yield                                        0%                  0%
   Weighted average grant-date fair value per
   share of options granted                              $     3.78           $    5.03
</TABLE>

EARNINGS PER COMMON SHARE

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

Since the  effects  of  outstanding  options,  warrants  and the  conversion  of
convertible  preferred  stock  and  convertible  debt are  anti-dilutive  in all
periods  presented shares of common stock underlying these instruments have been
excluded from the computation of loss per common share.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial  Accounting  Standards  Board  ("FASB")  issued FASB
Interpretation  Number  48 ("FIN  48"),  ACCOUNTING  FOR  UNCERTAINTY  IN INCOME
TAXES--AN  INTERPRETATION OF FASB STATEMENT NO. 109. The interpretation contains
a two step  approach  to  recognizing  and  measuring  uncertain  tax  positions
accounted for in accordance with SFAS No. 109. The first step is to evaluate the
tax position for recognition by determining if the weight of available  evidence
indicates  it is more likely than not that the  position  will be  sustained  on
audit, including resolution of related appeals or litigation processes,  if any.
The second step is to measure the tax  benefit as the  largest  amount  which is
more than 50% likely of being realized upon ultimate  settlement.  Effective for
the Company beginning January 1, 2007, FIN 48 is not expected to have any impact
on the Company's financial position, results of operations or cash flows.

In September 2006, the FASB issued Statement of Financial  Accounting  Standards
("SFAS") No. 157, FAIR VALUE MEASUREMENTS  ("SFAS NO. 157"). The purpose of SFAS
No. 157 is to define fair value,  establish a framework for measuring fair value
and enhance  disclosures  about fair value  measurements.  The  measurement  and
disclosure  requirements  are effective  for the Company  beginning in the first
quarter of fiscal 2008. The Company is currently evaluating whether SFAS No. 157
will result in a change to its fair value measurements.



                                       8
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


In  September  2006,  the FASB issued SFAS No. 158,  EMPLOYERS'  ACCOUNTING  FOR
DEFINED BENEFIT  PENSION AND OTHER  POSTRETIREMENT  PLANS--AN  AMENDMENT OF FASB
STATEMENTS  NO. 87, 88, 106,  AND 132R ("SFAS NO.  158").  SFAS No. 158 requires
that the funded status of defined benefit  postretirement plans be recognized on
the company's  balance  sheet,  and changes in the funded status be reflected in
comprehensive  income.  SFAS No. 158 also requires the  measurement  date of the
plan's funded status to be the same as the company's fiscal year-end.  Effective
for the Company  beginning  January 1, 2007,  FIN 48 is not expected to have any
impact on the Company's financial position, results of operations or cash flows.

3.  ACQUISITION

AUTOMOTIVE SERVICES GROUP, LLC

In July 2005, the Company  purchased 50% of the outstanding  equity interests of
Automotive  Services Group, LLC ("ASG"),  an Alabama limited liability  company,
from an  unrelated  party for  $300,000.  ASG was formed to develop  and operate
automated  car wash sites under the trade name  "Bubba's  Express  Wash".  ASG's
first site, developed in Birmingham,  Alabama, had its grand opening on March 8,
2006. From the Company's  initial  purchase  through  November 2005, the Company
accounted for its 50%  investment in ASG under the equity method of  accounting.
However,  as a result of negotiations  which commenced during the 4th quarter of
2005, and ultimately resulted in the Company's  acquisition of the remaining 50%
equity interest of ASG on March 15, 2006, the Company  determined that it became
the primary  beneficiary  of ASG, a Variable  Interest  Entity as  determined by
Financial   Accounting   Standards  Board  ("FASB")   Interpretation   No.  46R,
"CONSOLIDATION  OF VARIABLE  INTEREST  ENTITIES" ("FIN 46R").  Accordingly,  the
Company has consolidated the accounts of ASG since the 4th quarter of 2005.

On March 15, 2006,  the Company  entered  into a Unit  Purchase  Agreement  (the
"AGREEMENT") for Automotive  Services Group to purchase the remaining 50% equity
interest (the  "MEMBERSHIP  INTEREST") in ASG. After completing the transaction,
Automotive  Services Group now owns 100% of the outstanding  equity interests in
ASG. As consideration  for the Membership  Interest,  the Company issued 200,000
shares of the  Company's  common stock valued at $610,000,  based on the closing
stock price at March 15, 2006.

The  Company  has not  provided  pro  forma  data  summarizing  the  results  of
operations  for  the  periods  indicated  as if the  ASG  acquisition  had  been
completed as of the  beginning of each period  presented  since the effects were
considered immaterial to actual operating results.








                                       9
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


Upon initial measurement, components of the purchase price were as follows:

         Land                                    $        480,211
         Furniture and equipment                              972
         Notes payable                                   (495,211)
                                                 ----------------
   Net liabilities assumed                                (14,028)
   Goodwill                                               614,028
   Minority interest                                     (300,000)
                                                 ----------------
   Purchase price                                $        300,000
                                                 ================

In March 2006,  upon the  purchase of the remaining 50% interest,  components of
the purchase price were as follows:

   Goodwill                                      $        357,008
   Minority interest                                      252,992
                                                 ----------------
   Purchase price                                $        610,000
                                                 ================

As discussed in Note 5, all goodwill  previously recorded in connection with the
acquisition  of ASG was written off during the quarters  ended June 30, 2006 and
September 30, 2006.

4. OTHER CURRENT ASSETS

At September 30, 2006 and December 31, 2005,  the Company had an amount due from
related  parties  of  $97,000  and  $85,000,   respectively,   recorded  in  the
consolidated  balance sheets in other current assets.  This amount relates to an
allocation  of expenses from the Company to the related  parties.  The remaining
amount at September  30, 2006 and  December  31,  2005,  of $55,000 and $33,000,
respectively,  consists  primarily  of amounts due the Company for  reimbursable
expenses and to a lesser extent security deposits.

5. GOODWILL

The Company's goodwill relates to the Medical Products reporting segment. During
the quarters ended June 30, 2006 and September 30, 2006, the Company  recognized
a  goodwill  impairment  charge  of  $357,000  and  $614,000,  respectively.  As
discussed in Note 1, the Company has an accumulated deficit of approximately $28
million  and a working  capital  deficit  of  approximately  $6  million.  These
financial  constraints  have  prevented the Company from  continuing the planned
build-out of the additional car wash facilities.  In response to these financial
constraints,  coupled with the Company's emphasis on the patient safety markets,
the Company has  evaluated  alternative  methods to divest the car wash services
segment.  Recognizing  that revenues and cash flows would be lower than expected
from the car wash services  segment,  the Company  determined  that a triggering
event had occurred and conducted an interim goodwill  impairment analysis in the
quarters  ended June 30,  2006 and  September  30,  2006 which  resulted  in the
recording  of total  goodwill  impairment  charges of  $971,036  in the car wash
services  operating  segment.  This impairment related to goodwill that resulted
from the Company's acquisition of ASG.






                                       10
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


The change in goodwill  for the nine months  ended  September  30,  2006,  is as
follows:

                                                              GOODWILL
                                                           ----------------
Balance as of December 31, 2005                            $     2,301,555
Goodwill for purchase of ASG                                       357,008
Impairment of ASG Goodwill                                        (971,036)
                                                           ----------------
Balance as of September 30, 2006                           $     1,687,527
                                                           ================

6. LONG-TERM INVESTMENTS

Long-term  investments at September 30, 2006 and December 31, 2005 are comprised
of the following:

                                           SEPTEMBER 30,         DECEMBER 31,
                                               2006                 2005
                                         ----------------     ----------------
   Alacra Corporation                    $      1,000,000     $     1,000,000
   Digicorp                                       242,130           3,025,398
   IPEX, Inc.                                          --           1,130,500
   Investments in Real Estate                     430,563             481,033
                                         ----------------     ----------------
                                         $      1,672,693     $     5,636,931
                                         ================     ================

ALACRA CORPORATION

At  September  30,  2006,  the Company had an  investment  in shares of Series F
convertible  preferred  stock  of  Alacra  Corporation  ("ALACRA"),   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 September 30, 2006, the Company held 2,421,292 shares, or approximately 6.5%,
of the common  stock of  Digicorp.  Prior to  December  31,  2005,  the  Company
accounted for its  investment in Digicorp  under the equity method of accounting
and the Company's  proportionate  share of income or losses from this investment
was recorded in equity in income  (loss) of investee.  However,  on December 29,
2005,  Digicorp  completed  the  purchase  of all of the issued and  outstanding
shares of capital stock of Rebel Crew Films,  Inc.  ("REBEL CREW"), a California
corporation. Digicorp issued approximately 21 million shares of its common stock
to the  shareholders  of Rebel  Crew which  decreased  the  Company's  ownership
interest from  approximately 20% at September 30, 2005, to approximately 7.5% at
December  29,  2005,  and  accordingly,  the Company  began  accounting  for the
investment under the cost method. As of September 30, 2006, the 2,421,292 shares
of common stock are valued at $242,130. Digicorp's common stock is traded on the
OTC Bulletin  Board,  which reported a closing price,  at September 30, 2006, of
$0.32 per  share.  The  Company  has  valued  its  holdings  in  Digicorp  at an
approximate 69% discount to the $0.32 closing price, or $0.10 per share,  due to
the limited average number of shares traded on the OTC



                                       11
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


Bulletin Board.  Based on the volatility of the Digicorp share price,  increases
and decreases in the carrying value of this investment are considered temporary,
and as such are  reported as  unrealized  gains or losses and  included in other
comprehensive income (loss).

IPEX, INC.

At September  30, 2006,  we held 950,000  shares of common stock and warrants to
purchase  787,500  shares  of  common  stock at $1.00  per  share of IPEX,  Inc.
("IPEX"),  valued at $9,500.  On December 15, 2006, Sothi  Thillairajah,  IPEX's
Chief  Executive  Officer,  Principal  Financial  and  Accounting  Officer,  and
director,  resigned  citing that IPEX no longer had any  operations,  and was no
longer  conducting  business  as the reason for his  resignation.  As IPEX is no
longer conducting business operations, the carrying value of this investment has
been written  down to zero,  as of  September  30,  2006,  and a related loss of
$1,458,000 has been recognized.

INVESTMENTS IN REAL ESTATE

At September 30, 2006, the Company had several real estate investments, recorded
at  their  cost  of  $430,563.  These  investments  are  included  in  long-term
investments.  The Company holds its real estate  investments in AGB  Properties.
AGB  Properties  real  estate  holdings  consist of  approximately  8.5 acres of
undeveloped  land in Heber Springs,  Arkansas and 0.61 acres of undeveloped land
in Springfield, Tennessee.

7. NOTES PAYABLE

Notes  payable at September  30, 2006 and December 31, 2005 are comprised of the
following:
<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30,         DECEMBER 31,
                                                                             2006                  2005
                                                                      ----------------       ----------------
<S>                                                                   <C>                    <C>
    Note payable to Winstar (a)                                       $         634,862      $        796,554
    Note payable to Bodnar Capital Management, LLC (b)                               --             1,000,000
    Notes payable to Ault Glazer Bodnar Acq. Fund, LLC (c)                    2,450,935             1,116,838
    Note payable to Steven J. Caspi (d)                                       1,000,000                    --
    Note payable to Steven J. Caspi (e)                                       1,495,281                    --
    Note payable to Herb Langsam (f)                                            500,000                    --
    Note payable to Charles Kalina III (g)                                      250,000                    --
    Other notes payable                                                         356,758                    --
                                                                      -----------------      ---------------
       Total notes payable                                                    6,687,836                    --
    Less: debt discount on beneficial conversion feature                       (905,075)                   --
                                                                      -----------------      ----------------
                                                                      $       5,782,761      $      2,913,392
                                                                      =================      ================
</TABLE>

                                       12
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


Aggregate  future required  principal  payments on these notes during the twelve
month period subsequent to September 30, 2006 are as follows:

                    2006                   $    5,192,836
                    2007                               --
                    2008                               --
                    2009                               --
                    2010                        1,495,000
                                           --------------
                                           $    6,687,836
                                           ==============

(a)  On August 28, 2001,  the Company  made an  investment  in  Excelsior  Radio
     Networks,  Inc.  ("EXCELSIOR") which was completely liquidated during 2005.
     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% per annum but in  accordance
     with the agreement has a right of offset  against  certain  representations
     and  warranties  made by  Winstar.  The only  offsets  applied  against the
     principal  balance of the note reflected in the  accompanying  consolidated
     interim financial statements relate to legal fees of $215,000 attributed to
     our defense of the lawsuits filed against us. The Company has  consistently
     asserted  that the due  date of the  note is  extended  until  the  lawsuit
     discussed  in Note 12 is settled.  However,  on  February 3, 2006,  Winstar
     Global  Media,  Inc.  ("WGM")  filed a lawsuit  against  the  Company in an
     attempt to  collect  upon the  $1,000,000  note  between  the  Company  and
     Winstar. On September 5, 2006, subject to the approval of The United States
     Bankruptcy  Court for the  District  of  Delaware,  the  Company  reached a
     settlement  agreement  with WGM whereas  the Company  agreed to pay Winstar
     $750,000, pursuant to an agreed upon payment schedule, on or before July 2,
     2007.  However, in the event that either the prescribed payment schedule is
     not met or the  $750,000  is not paid on or  before  July 2, 2007 a default
     judgment  in the amount of  $1,200,000,  less any  amounts  paid,  shall be
     entered  against the Company.  Pursuant to the  settlement  agreement,  the
     Company made an initial  payment of $150,000  during  September  2006. Once
     payment of the remaining $600,000 can be assured, the Company will record a
     gain  on the  elimination  of  principal  and  interest  in  excess  of the
     remaining $600,000 liability.

(b)  On  April  7,  2005,  the  Company  issued a  $1,000,000  principal  amount
     promissory note (the "BODNAR 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  Bodnar  Note and  interest  at the rate of 6% per annum was
     payable on May 31, 2006. The obligations under the Note were collateralized
     by all real  property  owned by the  Company.  During the nine months ended
     September  30, 2006 and 2005,  the  Company  incurred  interest  expense of
     $25,000 and $29,000, respectively.  During the quarter ended June 30, 2006,
     the Company repaid the outstanding  principal  balance and accrued interest
     totaling $68,000.

(c)  From  January 11, 2006  through  June 30,  2006,  AGB  Acquisition  Fund, a
     related  party,  loaned the Company a total of  $443,000,  all of which was
     repaid.  As consideration for the loans, the Company issued AGB Acquisition
     Fund secured  promissory  notes with an interest  rate of 7% per annum (the
     "AGB  ACQUISITION  FUND  NOTES"),  and  entered  into a security  agreement
     granting AGB Acquisition Fund a security interest in the Company's personal
     property and fixtures, inventory, products and


                                       13
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


     proceeds  as  security  for  the  Company's   obligations   under  the  AGB
     Acquisition  Fund Notes.  During the six months  ended June 30,  2006,  the
     Company incurred and paid interest expense of $2,000 on the AGB Acquisition
     Fund Notes.

     On February 8, 2006,  AGB  Acquisition  Fund loaned  $687,000 to ASG and at
     September 30, 2006 the entire amount was outstanding.  As consideration for
     the loan, ASG issued AGB Acquisition Fund a secured  promissory note in the
     principal  amount of  $687,000  (the "ASG  NOTE") and granted a real estate
     mortgage in favor of AGB Acquisition Fund relating to certain real property
     located in Jefferson County, Alabama (the "ASG PROPERTY"). The ASG Note, as
     amended,  bears  interest  at the  rate  of  10%  per  annum  and is due on
     September 15, 2006.  AGB  Acquisition  Fund  received  warrants to purchase
     20,608 shares of the Company's  common stock at an exercise  price of $3.86
     per share as additional consideration for entering into the loan agreement.
     The  Company  recorded  debt  discount  in the  amount  of  $44,000  as the
     estimated  value  of the  warrants.  The debt  discount  was  amortized  as
     non-cash  interest  expense  over the  initial  term of the debt  using the
     effective  interest  method.  The entire  amount of the debt  discount  was
     amortized as interest  expense.  As security for the  performance  of ASG's
     obligations  pursuant to the ASG Note, ASG granted AGB  Acquisition  Fund a
     security  interest in all personal property and fixtures located at the ASG
     Property.  During the nine months ended September 30, 2006, the Company had
     incurred  interest  expense,  excluding  amortization of debt discount,  of
     $44,000 on the ASG Note, all of which is accrued at September 30, 2006.

     As of September 30, 2006 and December 31, 2005, AGB Acquisition Fund loaned
     of $1,495,000 and $1,117,000,  respectively,  to ASG in addition to the ASG
     Note. The loans were advanced to ASG pursuant to the terms of a Real Estate
     Note dated July 27, 2005,  as amended (the "REAL  ESTATE  NOTE").  The Real
     Estate  Note  bears  interest  at the rate of 3% above  the  Prime  Rate as
     published in the Wall Street  Journal  (8.25% at September 30,  2006).  All
     unpaid  principal,  interest and charges under the Real Estate Note are due
     in full on July 31,  2010.  The Real  Estate  Note is  collateralized  by a
     mortgage  on certain  real estate  owned by ASG  pursuant to the terms of a
     Future  Advance  Mortgage  Assignment  of Rents  and  Leases  and  Security
     Agreement dated July 27, 2005 between ASG and AGB Acquisition  Fund. During
     the nine months ended September 30, 2006 and 2005, the Company had incurred
     interest  expense of  $118,000  and nil,  respectively,  on the Real Estate
     Note, all of which is accrued at September 30, 2006.

     From March 7, 2006 through  September 30, 2006, AGB Acquisition Fund loaned
     the  Company  a total  of  $379,000,  of which  $110,000  was  repaid.  The
     outstanding  balance at  September  30,  2006 is  $269,000.  The loans were
     advanced to the Company  pursuant to a Revolving  Line of Credit  Agreement
     (the "REVOLVING LINE OF CREDIT")  entered into with AGB Acquisition Fund on
     March 7, 2006.  The Revolving  Line of Credit allows the Company to request
     advances of up to $500,000 from AGB  Acquisition  Fund. The initial term of
     the  Revolving  Line of  Credit is for a period  of six  months  and may be
     extended for one or more additional six month periods upon mutual agreement
     of the parties.  Each advance  under the  Revolving  Line of Credit will be
     evidenced  by a  secured  promissory  note and a  security  agreement.  The
     secured  promissory  notes issued  pursuant to the Revolving Line of Credit
     must be repaid with  interest at the Prime Rate plus 1% within 60 days from
     issuance and will be convertible  into shares of the Company's common stock
     at the option of AGB  Acquisition  Fund at a price of $3.10 per share.  The
     obligations of the Company  pursuant to such secured  promissory  notes are
     secured by the Company's assets, personal property and fixtures, inventory,
     products and proceeds therefrom. During the nine months ended September 30,
     2006, the Company had incurred  interest expense of $8,000 on the Revolving
     Line of Credit, of which $7,000 is accrued at September 30, 2006.

                                       14
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


(d)  On January 12, 2006, Steven J. Caspi ("CASPI") loaned $1,000,000 to ASG. As
     consideration  for the loan,  ASG  issued  Caspi a  promissory  note in the
     principal  amount of  $1,000,000  (the "CASPI  NOTE") and  granted  Caspi a
     mortgage on certain real estate owned by ASG and a security interest on all
     personal  property and fixtures located on such real estate as security for
     the obligations under the Caspi Note. In addition, the Company entered into
     an agreement  guaranteeing ASG's obligations pursuant to the Caspi Note and
     Caspi received  warrants to purchase 30,000 shares of the Company's  common
     stock at an exercise  price of $4.50 per share.  The Company  recorded debt
     discount in the amount of $92,000 based on the estimated  fair value of the
     warrants. The debt discount was amortized as non-cash interest expense over
     the  initial  term of the debt using the  effective  interest  method.  The
     entire amount of the debt discount was amortized as interest  expense.  The
     Caspi Note accrues  interest at the rate of 10% per annum,  which  together
     with  principal,  was due to be repaid on July 13, 2006.  The Company is in
     the process of amending  the Caspi Note to extend the due date.  During the
     nine months ended  September  30, 2006,  the Company had incurred  interest
     expense  of  $87,000  on the Caspi  Note,  of which  $32,000  is accrued at
     September 30, 2006.

(e)  From September 8, 2006 through September 19, 2006, Caspi loaned the Company
     a total of  $1,495,000,  all of which is outstanding at September 30, 2006.
     As  consideration  for the loan,  the Company  issued  Caspi a  Convertible
     Promissory  Note in the principal  amount of $1,495,000  (the "SECOND CASPI
     NOTE").  The Second Caspi Note bears  interest at the rate of 12% per annum
     and is due upon the  earlier  of March 8,  2007 or,  at the  discretion  of
     Caspi,  September 8, 2007. As security for the performance of the Company's
     obligations  pursuant to the Second Caspi Note, the Company granted Caspi a
     security  interest in certain real  property.  Caspi  received  warrants to
     purchase  250,000 shares of the Company's common stock at an exercise price
     of $1.25 per share as additional  consideration  for entering into the loan
     agreement. During the nine months ended September 30, 2006, the Company had
     incurred  interest  expense,  excluding  amortization of debt discount,  of
     $11,000 on the Second Caspi Note,  all of which is accrued at September 30,
     2006

     As the effective  conversion  price of the Second Caspi Note on the date of
     issuance was below the fair market value of the  underlying  common  stock,
     the Company  recorded debt discount in the amount of $769,000  based on the
     intrinsic value of the beneficial conversion feature of the note. Since the
     Second  Caspi  Note  was  convertible  at the  time of  issuance,  the debt
     discount as a result of the beneficial  conversion feature was amortized as
     non-cash interest expense.

     The warrant issued to Caspi in conjunction  with the Second Caspi Note will
     expire after  September 8, 2011. The Company  recorded debt discount in the
     amount of $231,000 based on the estimated  fair value of the warrants.  The
     debt discount will be amortized as non-cash  interest expense over the term
     of the debt using the  effective  interest  method.  Through  September 30,
     2006,  interest expense of $95,000 has been recorded from the debt discount
     amortization.

     (f) On May 1, 2006,  Herbert  Langsam,  a Class II Director of the Company,
     loaned the Company  $500,000.  The loan is documented by a $500,000 Secured
     Promissory  Note  (the  "LANGSAM  NOTE")  payable  to the  Herbert  Langsam
     Irrevocable Trust. The Langsam Note accrues interest at the rate of 12% per
     annum and has a maturity date of November 1, 2006. This note was not repaid
     by the scheduled  maturity and to date has not been extended.  Accordingly,
     the note is currently in default.  In the event of breach or default on any
     provision of the Langsam  Note,  the interest rate will increase to 16% per
     annum. Pursuant to the terms of a Security Agreement dated May 1, 2006, the
     Company granted the Herbert Langsam  Revocable Trust a security interest in
     all  of the  Company's  assets  as  collateral  for  the  satisfaction  and
     performance of the Company's obligations pursuant to the Langsam Note.



                                       15
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


(g)  On July 12, 2006 the Company, executed a Convertible Promissory Note in the
     principal  amount of  $250,000  (the  "KALINA  Note") and a warrant for the
     purchase  of 85,000  Shares of the  Company's  Common  Stock  (the  "KALINA
     WARRANT") in favor of Charles J. Kalina,  III, an existing  shareholder  of
     the Company.  The Kalina Note accrues interest at the rate of 12% per annum
     throughout  the term of the loan.  The principal  amount of the Kalina Note
     and any accrued  but unpaid  interest is due to be paid upon the earlier of
     October 10, 2006, or the  occurrence of an event of default.  Principal and
     interest on the Kalina  Note is  convertible  into shares of the  Company's
     common stock at a conversion  price of $3.00.  The conversion  price of the
     Kalina  Note will be  adjusted if the  Company  pays a stock  dividend,  or
     subdivides or combines outstanding shares of common stock into a greater or
     lesser number of shares.

     The  Kalina  Warrant  has an  exercise  price of $ 2.69 per  share and will
     expire on July 11, 2011.  The Company  recorded debt discount in the amount
     of $161,000 based on the estimated fair value of the Kalina  Warrants.  The
     debt discount was amortized as non-cash  interest  expense over the initial
     term of the debt using the effective interest method.

     In  November  2006 the balance due under the Kalina note was added to a new
     note  agreement,  pursuant  to  which  the  Company  received  proceeds  of
     approximately $150,000, which is due on January 31, 2008.

MORELLI NOTE AND WARRANT

On June 6, 2006 the Company entered into a Secured  Convertible Note and Warrant
Purchase Agreement (the "PURCHASE AGREEMENT") pursuant to which the Company sold
a $1,100,000 principal amount Secured Convertible  Promissory Note (the "MORELLI
NOTE") and a warrant to purchase  401,460  shares of the Company's  common stock
(the "MORELLI WARRANT") to Alan E. Morelli.

The Morelli Note accrued  interest at the rate of 12% per annum  through July 6,
2006, after which the interest rate increased to 15% per annum from July 6, 2006
through the date the loan is repaid.  The  principal  amount of the Morelli Note
and any accrued but unpaid  interest  was due to be paid on October 6, 2006,  or
the occurrence of an event of default. On August 15, 2006 the Company received a
notice of default regarding the Morelli Note. The notice of default specifically
cited the Company's  failure to obtain the prior written  consent of Mr. Morelli
to the incurrence of  indebtedness  and failure to repay the  obligations  owing
under the Morelli Note in an amount  equal to the proceeds of the  indebtedness.
Upon the occurrence of an event of default the interest rate increase to 19% per
annum.  During  September  2006, from the proceeds of the Second Caspi Note, the
Company repaid the outstanding principal amount and accrued interest of $51,000.

In August 2006,  prior to the  repayment of the Morelli  Note,  the Company sold
shares of its common  stock at $1.25 per share  (See Note 9)  thereby  requiring
modifications to both the Morelli Warrant and Morelli Note. These  modifications
resulted  in an  adjustment  to the  conversion  price of the Morelli  Note,  an
adjustment to the exercise  price of the Morelli  Warrant and an increase in the
number of shares of common  stock  available  to purchase  upon  exercise of the
Morelli  Warrant.  These  modifications  were  sufficiently  different  from the
initial terms of the Morelli Note and Morelli Warrant,  requiring the Company to
account for the change in  conversion  terms as a  substantial  modification  of
terms in  accordance  with  EITF  Issue  No.  96-19,  "DEBTOR'S  ACCOUNTING  AND
MODIFICATION ON EXCHANGE OF DEBT INSTRUMENTS".

The original notes converted into common stock at a rate of $2.74 per share with
401,460  warrants to purchase common stock  exercisable at $3.04 per share.  The
new terms provided  conversion into common stock at $1.25 per share with 976,351
warrants  to  purchase   common  stock   exercisable  at  $1.25  per  share.  On
extinguishment  of the original  terms of the Morelli Note and Morelli  Warrant,
the Company  recorded  non-cash  interest  expense of $880,000 as the  estimated
difference in the fair value of the Morelli Warrant


                                       16
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


under the  original  terms to that of the  modified  terms and further  recorded
entries  to  record  discounts  related  to the  beneficial  conversion  feature
totaling $572,000 which was amortized as non-cash interest expense.

8. ACCRUED LIABILITIES

Accrued liabilities at September 30, 2006 and December 31, 2005 are comprised of
the following:

                                      SEPTEMBER 30,             DECEMBER 31,
                                          2006                     2005
                                    ---------------          ---------------
   Accrued officer's severance      $       152,729          $        22,716
   Accrued interest                         441,771                  215,093
   Accrued professional fees                 52,500                  160,000
   Deferred revenue                              --                  103,875
   Accrued salaries                          59,864                   45,833
   Other                                    107,474                   21,599
                                    ---------------           --------------
                                    $       814,338           $      569,116
                                    ===============           ==============

9. EQUITY TRANSACTIONS

In August 2006, the Company  entered into  subscription  agreements  pursuant to
which the Company sold to investors shares of the Company's common stock held in
treasury at a price of $1.25 per share.  The Company  received gross proceeds of
$250,000 from the sale of stock.

10. WARRANTS

In April 2005,  the Company  entered  into a consulting  agreement  for investor
communications  services and as incentive for entering into the  agreement,  the
Company  agreed to issue a warrant to purchase  100,000  shares of the Company's
common  stock  at an  exercise  price of  $5.85,  exercisable  for 5 years.  The
warrants were valued at $397,000 of which $265,000 was expensed during 2005. The
Company asserts that the investor  communications  services were not provided to
the extent of the consulting agreement and disputes the grant. Accordingly,  the
Company has not expensed the remaining amount of warrants, $132,000.

During the nine months ended September 30, 2006, a total of 1,569,079  warrants,
at  exercise  prices  ranging  from  $1.25 to $4.50 per share were  issued.  The
warrants were valued using the  Black-Scholes  valuation model assuming expected
dividend  yield,  risk-free  interest rate,  expected life and volatility of 0%,
3.75% - 4.50%, three to five years and 63% - 89%, respectively. Warrants granted
during the year ended  December 31, 2005 were valued using the same  assumptions
with the exception that the Company used  volatility of 83%. As of September 30,
2006, a total of 2,847,641  warrants,  at exercise  prices ranging from $1.25 to
$6.05 remain outstanding.

11. RELATED PARTY TRANSACTIONS

During the nine months  ended  September  30, 2006 and year ended  December  31,
2005, the Company paid approximately 25% and 75%, respectively, of the base rent
on the corporate offices and Ault Glazer Bodnar & Company Investment  Management
LLC  ("AULT  GLAZER"),  based  upon  their  usage  of the  facilities,  paid the
remaining  base rent.  Together,  Milton  "Todd" Ault III  ("AULT"),  our former
Chairman


                                       17
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


and current Chief Executive  Officer of the Company,  and Louis Glazer,
Chief  Health and  Science  Officer  and Class I Director  of the  Company,  and
Melanie  Glazer,  Manager  of  AGB  Propeties,  (together,  the  "GLAZERS")  own
approximately 69% of the outstanding  membership interests in Ault Glazer. As of
September  30, 2006 and  December 31,  2005,  Ault Glazer,  Ault and the Glazers
indirectly  beneficially own or control approximately 50% and 25%, respectively,
of  the  outstanding   common  stock  of  the  Company  and   beneficially   own
approximately 98.2% of the outstanding preferred stock of the Company.

At September 30, 2006 and December 31, 2005,  the Company had an amount due from
Strome  Securities  of nil and $9,000,  respectively,  recorded in other current
assets.  Until October 31, 2005, the Company maintained a brokerage account with
Strome   Securities  and  until  December  31,  2004,   Ault  was  a  registered
representative  of Strome  Securities.  Beginning  November 1, 2005, the Company
moved its brokerage  account from Strome  Securities to AGB Securities,  Inc., a
related  party.  A nominal  amount of  commissions  were incurred by the Company
during the nine  months  ended  September  30, 2006 as a result of trades in the
Company's brokerage account.

AGB PROPERTIES

On  April  28,  2005,  the  Company  purchased  0.61  acres  of  vacant  land in
Springfield,  Tennessee  from a related party.  The purchase price  consisted of
$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 valued
at $86,000.

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. At June
30, 2005, Mr. Grabher owned 18,855,900 shares of IPEX's  28,195,566  outstanding
shares of common stock and granted Mr. Ault,  the  Company's  Chairman and Chief
Executive  Officer at that time, an irrevocable  voting proxy for his shares. At
December 31, 2005, the Company held 7.8% 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 services, which
the Company agreed to perform over the following 12 month period,  included: (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 were 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.

The Company has performed all 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


                                       18
<PAGE>


PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


amount of the  consulting  services at  $1,331,000,  which was due on August 15,
2005. The Company  received 500,000 shares of IPEX common stock in December 2005
as payment for the  services.  At the time of payment,  the fair market value of
IPEX common stock had decreased by approximately 33%.  Accordingly,  the Company
reduced  the  initial  value of the  consulting  services  by the  amount of the
decrease in the fair market value of IPEX common stock, $675,000. As a result of
the  decrease  in the  fair  market  value of IPEX  common  stock,  the  Company
ultimately  recognized  $656,000  in revenue as a result of this  agreement,  of
which $104,000 was recognized during the nine months ended September 30, 2006.

The Company's  Chairman and Chief Executive  Officer and significant  beneficial
owner of the  Company,  Milton  "Todd"  Ault III,  served as a director of IPEX.
Further,  the Chief  Executive  Officer  of ASG served as an IPEX  director  and
member of IPEX's Audit Committee from August 2005 through January 2006.

DIGICORP

At September 30, 2006,  the Company had an  investment  in Digicorp  recorded in
long-term investments.  The Company's Chief Financial Officer, William B. Horne,
is also Chief Financial Officer of Digicorp and a director of the Company. Alice
M. Campbell, a director of the Company, is also a director of Digicorp. Further,
certain Company officers and directors, both past and present, served in various
management and director roles at Digicorp.

LOANS

During the nine months  ended  September  30, 2006 and year ended  December  31,
2005, the Company  received loans from AGB  Acquisition  Fund (see Note 7). Ault
Glazer Bodnar & Company Investment  Management,  LLC ("AGB & COMPANY IM") is the
managing member of AGB Acquisition Fund. The managing member of AGB & Company IM
is Ault Glazer Bodnar & Company, Inc. ("AGB & Company").  The Company's Chairman
and Chief  Executive  Officer,  Milton  "Todd"  Ault,  III, is  Chairman,  Chief
Executive Officer and President of AGB & Company.  The Company's Chief Financial
Officer,  William B.  Horne,  was the former  Chief  Financial  Officer of AGB &
Company.  Melanie  Glazer,  former  Manager  of  the  Company's  subsidiary  AGB
Properties, is also a director of AGB & Company.

DUE FROM RELATED PARTIES

At September 30, 2006 and December 31, 2005,  the Company had an amount due from
related  parties  of  $97,000  and  $85,000,   respectively,   recorded  in  the
consolidated  balance sheets in other current assets.  This amount relates to an
allocation of expenses from the Company to the related parties.

12.  CONTINGENCIES

LEGAL PROCEEDINGS

On October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family  Partnership,  L.P.
filed a lawsuit (the "LEVE LAWSUIT") against the Company, Sunshine Wireless, LLC
("SUNSHINE"),  and four other defendants affiliated with Winstar Communications,
Inc.  ("WINSTAR").  On  February  25,  2003,  the case  against  the Company and
Sunshine  was  dismissed,  however,  on October  19,  2004,  Jeffrey A. Leve and
Jeffrey  Leve Family  Partnership,  L.P.  exercised  their right to appeal.  The
initial  lawsuit alleged that the Winstar  defendants  conspired to commit fraud
and breached  their  fiduciary  duty to the  plaintiffs in  connection  with the
acquisition of the plaintiff's radio production and distribution  business.  The
complaint  further  alleged  that the  Company and  Sunshine  joined the alleged
conspiracy.  On June 1, 2005,  the United States


                                       19
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


Court of Appeals for the Second Circuit  affirmed the February 25, 2003 judgment
of the district court dismissing the claims against the Company.

On July 28,  2005,  Jeffrey A. Leve and Jeffrey  Leve Family  Partnership,  L.P.
filed a new  lawsuit  (the "NEW LEVE  LAWSUIT")  against the  Company,  Sunshine
Wireless,  LLC ("SUNSHINE"),  and four other defendants  affiliated with Winstar
Communications,  Inc.  ("WINSTAR").  The new Leve Lawsuit  attempts to collect a
federal default judgment of $5,014,000 entered against only two entities,  i.e.,
Winstar Radio  Networks,  LLC and Winstar  Global Media,  Inc., by attempting to
enforce  the  judgment  against  a number  of  additional  entities  who are not
judgment  debtors.  Further,  the new  Leve  Lawsuit  attempts  to  enforce  the
plaintiffs  default  judgment  against entities who were dismissed on the merits
from the underlying action in which plaintiffs  obtained their default judgment.
An unfavorable outcome in the lawsuit, may have a material adverse effect on the
Company's business,  financial condition and results of operations.  The Company
believes the lawsuit is without merit and intends to vigorously  defend  itself.
These consolidated  interim financial  statements do not include any adjustments
for the possible outcome of this uncertainty.

On February 3, 2006,  WGM filed a lawsuit  against the Company.  The WGM lawsuit
attempts to collect  upon the  $1,000,000  note  between the Company and Winstar
discussed in Note 7. On September 5, 2006, subject to the approval of The United
States  Bankruptcy  Court for the  District of Delaware,  the Company  reached a
settlement  agreement  with  WGM  whereas  the  Company  agreed  to pay  Winstar
$750,000,  pursuant to an agreed  upon  payment  schedule,  on or before July 2,
2007.

The  Company is the owner of U.S.  Patent no.  5,931,824  (the '824  Patent) and
corresponding European Patent 1032911. The Company became aware of certain prior
knowledge cited against the then pending European patent  application  which had
not been  considered  during  prosecution of the U.S. patent  application  which
eventually   issued  as  the  '824  Patent.   The  knowledge  was   successfully
distinguished in the European  proceeding,  and the European patent granted.  In
order to strengthen  the  enforceability  of the U.S.  '824 Patent,  the Company
filed a  request  for  reexamination.  The  U.S.  Patent  Office  has  sent  two
rejections of the reexamination request, both of which have been responded to by
the  Company.  As a  result  of these  responses,  the U.S.  Patent  Office  has
abandoned its earlier  grounds,  included  within the two rejections sent by the
U.S. Patent Office, for rejecting the reexamination  request. On August 9, 2006,
the U.S. Patent Office mailed a third rejection based on different grounds.  The
Company believes,  based upon advice of legal counsel, that it will overcome the
new grounds for rejection and ultimately prevail in its reexamination.  However,
in the  event  that  the  Company  was  to  receive  a  complete  denial  of its
reexamination  the U.S.  '824  Patent  would be  deemed  to be  revoked.  If the
Company's  U.S. `824 Patent was to be revoked,  the Company  believes,  based on
advice of legal counsel,  the one  provisional  and one  non-provisional  patent
application  filed in the U.S.  Patent  Office,  covering  improved  methods and
systems for the  automated  counting  and tracking of surgical  articles,  would
provide  the  Company's  Safety-Sponge(TM)  System  with a  sufficient  level of
protection  to prevent  competitors  from  attempting  to replicate and market a
similar version of the Company's  Safety-Sponge(TM)  System.  These consolidated
interim  financial  statements do not include any  adjustments  for the possible
outcome of this uncertainty.

SEVERANCE AGREEMENT

On January 9, 2006,  Milton "Todd" Ault, III resigned as the Company's  Chairman
and Chief  Executive  Officer,  pursuant to a Severance  Agreement,  the Company
agreed to pay Mr. Ault $180,000 and to grant Mr. Ault 60,000  restricted  shares
of common  stock and options to purchase  90,000  shares of common stock with an
exercise  price of $4.50 per share and an  expiration  date of July 8, 2007.  In
addition,  Mr.  Ault will be  eligible  for health  insurance,  life  insurance,
disability  and 401(k)  participation  continuing  for


                                       20
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


a period of twelve months from his  resignation  date.  Effective July 11, 2006,
Mr. Ault was re-appointed Chief Executive Officer and a director of the Company.
In consideration of his re-appointment as Chief Executive Officer,  Mr. Ault has
agreed to cash compensation of only $1 per year.

13. SEGMENT REPORTING

The Company reports  selected  segment  information in its financial  reports to
shareholders in accordance with SFAS No. 131,  "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED  INFORMATION." The segment information  provided reflects
the  three  distinct  lines of  business  within  the  Company's  organizational
structure:  medical  products,  which  consists of Surgicount and Patient Safety
Consulting  Group,  LLC, a provider  of patient  safety  devices and health care
solutions,  financial services and real estate, which consists of AGB Properties
and car wash services,  which consists of Automotive Services Group. 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.









                                       21
<PAGE>

PATIENT SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS - UNAUDITED (CONTINUED)
SEPTEMBER 30, 2006


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 nine months ended September 30, 2006 and
2005 is as follows:
<TABLE>
<CAPTION>
                                       (UNAUDITED)                                (UNAUDITED)
                                    THREE MONTHS ENDED                        NINE MONTHS ENDED
                             SEPTEMBER 30,       SEPTEMBER 30,          SEPTEMBER 30,      SEPTEMBER 30,
                                 2006                2005                   2006               2005
<S>                        <C>                  <C>                    <C>                 <C>
MEDICAL PRODUCTS

Revenue                    $       18,514       $           --         $       18,514      $          --
Net loss                   $     (803,018)      $     (745,144)        $   (2,161,607)     $  (2,146,693)
Total Assets               $    6,272,723       $    4,603,439         $    6,272,723      $   4,603,439

FINANCIAL SERVICES AND
REAL ESTATE

Revenue                    $           --       $       29,693         $      103,875      $     616,320
Net income (loss)          $   (1,372,398)      $     (158,219)        $   (1,340,060)     $     154,845
Total Assets               $    1,705,295       $    5,807,207         $    1,705,295      $   5,807,207

CAR WASH SERVICES

Revenue                    $      103,735       $           --         $      235,351      $          --
Goodwill impairment        $     (614,028)      $           --         $     (971,036)     $          --
Net loss                   $     (767,868)      $           --         $   (1,497,227)     $          --
Total Assets               $    3,252,319       $           --         $    3,252,319      $          --

CORPORATE

Revenue                    $           --       $           --         $           --      $          --
Net loss                   $   (2,675,550)      $   (1,251,951)        $   (7,111,203)     $  (3,716,908)
Total Assets               $      424,098       $      387,477         $      424,098      $     387,477

TOTAL

Revenue                    $      122,249       $       29,693         $      357,740      $     616,320
Goodwill impairment        $     (614,028)      $           --         $     (971,036)     $         --
Net loss                   $   (5,618,832)      $   (2,155,314)        $  (12,110,097)     $  (5,708,756)
Total Assets               $   11,654,435       $   10,798,123         $   11,654,435      $  10,798,123
</TABLE>

14. SUBSEQUENT EVENTS

On November 7, 2006,  The United  States  Bankruptcy  Court for the  District of
Delaware,  approved  the  Company's  settlement  agreement  with WGM whereas the
Company  agreed to pay Winstar  $750,000,  pursuant  to an agreed  upon  payment
schedule, on or before July 2, 2007.


                                       22
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

         THE FOLLOWING  DISCUSSION  AND ANALYSIS OF OUR FINANCIAL  CONDITION AND
RESULTS  OF  OPERATIONS  SHOULD  BE  READ  IN  CONJUNCTION  WITH  OUR  FINANCIAL
STATEMENTS AND THE RELATED NOTES THERETO CONTAINED  ELSEWHERE IN THIS FORM 10-Q.
THIS  DISCUSSION  CONTAINS  FORWARD-LOOKING  STATEMENTS  THAT INVOLVE  RISKS AND
UNCERTAINTIES.  ALL STATEMENTS  REGARDING  FUTURE EVENTS,  OUR FUTURE  FINANCIAL
PERFORMANCE AND OPERATING RESULTS, OUR BUSINESS STRATEGY AND OUR FINANCING PLANS
ARE FORWARD-LOOKING  STATEMENTS. IN MANY CASES, YOU CAN IDENTIFY FORWARD-LOOKING
STATEMENTS  BY  TERMINOLOGY,  SUCH AS  "MAY,"  "SHOULD,"  "EXPECTS,"  "INTENDS,"
"PLANS," "ANTICIPATES,"  "BELIEVES,"  "ESTIMATES,"  "PREDICTS,"  "POTENTIAL," OR
"CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE
STATEMENTS  ARE ONLY  PREDICTIONS.  KNOWN AND UNKNOWN RISKS,  UNCERTAINTIES  AND
OTHER FACTORS  COULD CAUSE OUR ACTUAL  RESULTS TO DIFFER  MATERIALLY  FROM THOSE
PROJECTED IN ANY FORWARD-LOOKING STATEMENTS. IN EVALUATING THESE STATEMENTS, YOU
SHOULD  SPECIFICALLY  CONSIDER VARIOUS FACTORS,  INCLUDING,  BUT NOT LIMITED TO,
THOSE SET FORTH IN PART II OF THIS  REPORT  UNDER "ITEM 1A.  RISK  FACTORS"  AND
ELSEWHERE IN THIS REPORT ON FORM 10-Q.

         THE FOLLOWING  "OVERVIEW" SECTION IS A BRIEF SUMMARY OF THE SIGNIFICANT
ISSUES ADDRESSED IN MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ("MD&A").  INVESTORS SHOULD READ THE RELEVANT SECTIONS
OF THE MD&A FOR A COMPLETE DISCUSSION OF THE ISSUES SUMMARIZED BELOW. THE ENTIRE
MD&A  SHOULD  BE  READ IN  CONJUNCTION  WITH  ITEM 1 OF  PART I OF THIS  REPORT,
"FINANCIAL STATEMENTS."

OVERVIEW

         Until March 31, 2005,  Patient  Safety  Technologies,  Inc., a Delaware
corporation  (referred  to  herein as the  "COMPANY,"  "WE,"  "US," and  "OUR"),
elected  to be a  Business  Development  Company  ("BDC")  under the  Investment
Company Act of 1940, as amended (the "1940 ACT"). 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.  At September 30, 2006, 10.7% of our assets, consisting
of our investments in Alacra  Corporation,  Digicorp,  Inc. and Ipex, Inc., on a
consolidated  basis with  subsidiaries  were comprised of investment  securities
within the meaning of the 1940 Act  ("INVESTMENT  SECURITIES").  If the value of
our assets that consist of Investment Securities were to exceed 40% of our total
assets  (excluding  government  securities and cash items) on an  unconsolidated
basis we could be required to  re-register  as an  investment  company under the
1940 Act unless an exemption or exclusion applies.  We continue to evaluate ways
in which we can dispose of these  Investment  Securities and do not believe that
the value of our  Investment  Securities  will  increase in an amount that would
require us to re-register as a BDC.  Registration as an investment company would
subject us to restrictions that are inconsistent  with our fundamental  business
strategy of equity growth through creating,  building and operating companies in
the patient safety medical products  industry.  Registration  under the 1940 Act
would also subject us to increased  regulatory and compliance  costs,  and other
restrictions on the way we operate and would change the method of accounting for
our assets under GAAP.

         Our  operations  currently  focus  on the  acquisition  of  controlling
interests in companies and research and  development of products and services in
the health care and medical  products  field,  particularly  the patient  safety
markets.  In the past we also focused on the financial  services and real estate
industries.  On October  2005 our Board of Directors  authorized  us to evaluate
alternative  strategies for the divesture of our  non-healthcare  assets.  As an
extension  on our prior  focus on real  estate,  in March 2006 we  acquired  the
remaining 50% equity interest in Automotive Services Group, LLC ("ASG") and upon
doing so we entered the business of developing  properties  for the operation of
automated  express  car wash sites.  However,  on March 29,  2006,  our Board of
Directors  determined to focus our business  exclusively  on the patient  safety
medical  products  field.  The Board of  Directors  is  continuing  to  evaluate
available alternatives to determine the most beneficial method to divest ASG and
our other real estate assets.

         Surgicount  Medical,  Inc., developer of the  Safety-Sponge(TM) System,
Patient Safety Consulting Group, LLC, a healthcare  consulting services company,
Automotive  Services Group, Inc.  (formerly Ault Glazer Bodnar Merchant Capital,
Inc.), a holding company for ASG, Ault Glazer Bodnar Capital Properties,  LLC, a
real estate  development  and management  company,  and ASG, a company formed to
develop   properties  for  the  operation  of  automated  car  wash  sites,  are
wholly-owned  operating  subsidiaries,  which were either acquired or created to

                                       23
<PAGE>

enhance our ability to focus our efforts in each targeted  industry.  Currently,
we are  evaluating  ways in which to monetize  our  non-patient  safety  related
assets (the  "NON-CORE  ASSETS").  However,  the divesture of any assets will be
dependent  on a number  of  factors  including:  (1) lack of a liquid  market to
dispose of such assets;  (2) potential  adverse tax effects from a  disposition;
and/or (3) our Board of Directors and  management  may change their  decision to
dispose of certain of the assets.

         Our principal  executive offices are located at 1800 Century Park East,
Suite  200,  Los  Angeles,  California  90067.  Our  telephone  number  is (310)
895-7750. Our website is located at http://www.patientsafetytechnologies.com.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         The below  discussion  and  analysis  of our  financial  condition  and
results of operations is based upon the accompanying  financial statements.  The
preparation of financial  statements in conformity  with  accounting  principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that affect the amounts  reported in the  financial
statements.  Critical  accounting  policies are those that are both important to
the  presentation  of our  financial  condition  and results of  operations  and
require management's most difficult,  complex, or subjective judgments. Our most
critical  accounting  policy  relates to the  valuation  of our  investments  in
non-marketable equity securities.

         In the past we invested in illiquid equity securities acquired directly
from issuers in private  transactions.  These investments were generally subject
to  restrictions  on resale or  otherwise  are  illiquid  and  generally  had no
established  trading market.  Additionally,  many of the securities that we have
invested in were not eligible for sale to the public without  registration under
the Securities Act of 1933.  Because of the type of investments that we made and
the nature of our  business,  our  valuation  process  required  an  analysis of
various factors.

         Investments in  non-marketable  securities  are inherently  risky and a
number of the  companies we have  invested in may fail.  Their  success (or lack
thereof) is dependent upon product development,  market acceptance,  operational
efficiency and other key business  success  factors.  In addition,  depending on
their  future  prospects,  they may not be able to raise  additional  funds when
needed or they may receive  lower  valuations,  with less  favorable  investment
terms than in previous  financings,  likely  causing our  investments  to become
impaired.

         We  review  all  of  our   investments   quarterly  for  indicators  of
impairment;  however,  for  non-marketable  equity  securities,  the  impairment
analysis requires  significant judgment to identify events or circumstances that
would likely have a material adverse effect on the fair value of the investment.
The indicators that we use to identify those events or circumstances includes as
relevant,  the  nature  and value of any  collateral,  the  portfolio  company's
ability to make  payments and its  earnings,  the markets in which the portfolio
company does business,  comparison to valuations of publicly  traded  companies,
comparisons to recent sales of comparable companies, the discounted value of the
cash flows of the portfolio  company and other  relevant  factors.  Because such
valuations  are  inherently  uncertain  and  may  be  based  on  estimates,  our
determinations of fair value may differ materially from the values that would be
assessed if a liquid market for these securities existed.

         Investments identified as having an indicator of impairment are subject
to further  analysis to determine if the  investment  is other than  temporarily
impaired, in which case we write the investment down to its impaired value. When
a portfolio  company is not considered  viable from a financial or technological
point of view,  we  write  down the  entire  investment  since we  consider  the
estimated  fair market  value to be  nominal.  If a  portfolio  company  obtains
additional  funding at a valuation  lower than our carrying amount or requires a
new round of equity  funding to stay in  operation  and the new funding does not
appear  imminent,  we presume  that the  investment  is other  than  temporarily
impaired, unless specific facts and circumstances indicate otherwise.

         Security investments which are publicly traded on a national securities
exchange or  over-the-counter  market are stated at the last reported sale price
on the day of  valuation  or, if no sale was  reported  on that  date,  then the
securities are stated at the last quoted bid price. Management may determine, if
appropriate,  to  discount  the  value  where  there  is an  impediment  to  the
marketability of the securities held.

                                       24
<PAGE>

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. We elected
early adoption of SFAS No. 123(R) as of January 1, 2005.

See Note 2 to the condensed  consolidated  financial statements for a discussion
of recent accounting pronouncements.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

         Our cash and marketable  securities were $26,000 at September 30, 2006,
versus  $1,003,000  at  December  31,  2005.  Total  current   liabilities  were
$6,400,000  at  September  30,  2006,  versus  $4,000,000  at December 31, 2005.
Included in current liabilities at September 30, 2006 and December 31, 2005 is a
note  payable,   and  accrued   interest  on  such  note,   payable  to  Winstar
Communications,  Inc.  ("WINSTAR")  in the  amount  of  $791,000  and  $939,000,
respectively.  As discussed in Note 6 in the notes to the accompanying condensed
consolidated financial statements filed with this Form 10-Q, the due date on the
note  payable to Winstar was  February  28,  2002.  However,  as a result of the
lawsuits   filed  against  us  by  Jeffrey  A.  Leve  and  Jeffrey  Leve  Family
Partnership,  L.P.  the due date of the  note was  extended  until  the  lawsuit
discussed in Note 11 is settled.  However,  on February 3, 2006  Winstar  Global
Media,  Inc.  ("WGM") filed a lawsuit claiming that we were in default under the
terms of the note.  On September 5, 2006,  subject to the approval of The United
States  Bankruptcy  Court for the  District  of  Delaware,  which was granted on
November 7, 2006,  the Company  reached a settlement  agreement with WGM whereas
the Company agreed to pay Winstar  $750,000,  pursuant to an agreed upon payment
schedule,  on or before  July 2, 2007.  However,  in the event  that  either the
prescribed  payment schedule is not met or the $750,000 is not paid on or before
July 2, 2007 a default  judgment in the amount of  $1,200,000,  less any amounts
paid,  shall  be  entered  against  the  Company.  Pursuant  to  the  settlement
agreement,  the Company  made an initial  payment of $150,000  during  September
2006.  Once payment of the remaining  $600,000 can be assured,  the Company will
record a gain on the  elimination  of  principal  and  interest in excess of the
remaining $600,000 liability.

         At  September  30,  2006 and  December  31,  2005,  we had  $26,000 and
$79,000,  respectively,  in cash.  During 2005 our Board authorized us to invest
our cash  balances  in the public  equity and debt  markets  as  appropriate  to
maximize the short-term  return on such assets.  Such  investments are typically
short-term and focus on what we believe to be mispriced domestic public equities
and instruments.

         In  August  2005,  we  entered  into an  agreement  with the  financial
institution IXIS  Derivatives  Inc. to borrow against  securities which we hold.
The agreement, which extended for 53 weeks, was subject to a premium of up to 6%
of the amount of the borrowings which is amortized on a straight line basis over
the term of the  agreement.  At December 31, 2005, we terminated the August 2005
agreement with IXIS  Derivatives Inc. To the extent the agreement was terminated
early,  we did not incur a premium for the amount of time that the agreement was
terminated.  The agreement also provided that in addition to the securities held
by the  financial  institution,  we  pledge a total  of 25% of the  value of the
securities  in cash.  The pledged  cash was  reduced  daily by the amount of the
earned  premium and protected the financial  institution  from  decreases in the
market value of the securities.  Any decrease in the market value of the pledged
securities in excess of 5% over the  securities  notional value would require us
to fund additional monies,  such that 25% of the initial borrowing,  as adjusted
by the earned premium,  was covered.  If we failed to fund additional monies the
financial institution had the right to liquidate the pledged securities.  In the
event the proceeds from liquidation were insufficient to cover the amount of the
borrowings,  the financial  institution's  sole recourse was against the pledged
cash.  During  January  2006,  we renewed  our August


                                       25
<PAGE>

2005  agreement  with IXIS  Derivatives  Inc. to borrow  against  securities and
during the quarter ended  September 30, 2006  terminated  this agreement and the
agreement was closed upon our liquidation of the underlying assets. We currently
have no plans to renew this form of financing in the future.

         We had a working  capital  deficit  of  approximately  $6.0  million at
September 30, 2006 and we continue to have recurring losses. In the past we have
relied upon private placements of equity and debt securities and we plan to rely
on private  placements to fund our capital  requirements in the future.  We have
received  shareholder  approval to sell equity  and/or  debt  securities  of the
Company  up to $10  million in any  calendar  year to our  former  Chairman  and
current  Chief  Executive  Officer,  Milton  "Todd" Ault,  III, to the Company's
President and Secretary,  Lynne Silverstein,  to our current Chairman and former
Chief  Executive  Officer  and the  Chief  Health  and  Science  Officer  of our
subsidiary Patient Safety Consulting Group, LLC, Louis Glazer, and to the former
Manager of our closed subsidiary Ault Glazer Bodnar Capital Properties,  LLC and
Mr. Glazer's spouse, Melanie Glazer. If we propose to sell more than $10 million
of securities in a calendar year to such persons additional shareholder approval
would  be  required.  We do not  currently  anticipate  selling  equity  or debt
securities  to these  persons  and,  in the event we elected  to pursue  such an
investment,  we cannot  guarantee  that such persons would be willing to further
invest in the  Company.  We have,  however,  received  funding  from Ault Glazer
Bodnar  Acquisition  Fund, LLC ("AGB  ACQUISITION  FUND").  Ault Glazer Bodnar &
Company Investment  Management,  LLC ("AGB & COMPANY IM") is the managing member
of AGB Acquisition  Fund. The managing member of AGB & Company IM is Ault Glazer
Bodnar & Company,  Inc.  ("AGB & COMPANY").  The Company's  former  Chairman and
current Chief Executive  Officer,  Milton "Todd" Ault,  III, is Chairman,  Chief
Executive Officer and President of AGB & Company.

         On January 12, 2006,  Steven J. Caspi  ("CASPI")  loaned  $1,000,000 to
ASG. As  consideration  for the loan, ASG issued Caspi a promissory  note in the
principal  amount of $1,000,000  (the "CASPI NOTE") and granted Caspi a mortgage
on certain  real estate  owned by ASG and a security  interest  on all  personal
property  and  fixtures  located  on  such  real  estate  as  security  for  the
obligations  under the Caspi Note.  In  addition,  we entered  into an agreement
guaranteeing  ASG's  obligations  pursuant to the Caspi Note and Caspi  received
warrants to purchase  30,000 shares of our common stock at an exercise  price of
$4.50 per  share.  We  recorded  debt  discount  in the amount of $92,000 as the
estimated  value of the  warrants.  The debt  discount was amortized as non-cash
interest expense over the initial term of the debt using the effective  interest
method.  The Caspi Note initially accrued interest at the rate of 10% per annum,
which  together  with  principal,  was due to be  repaid on July 13,  2006.  The
Company  is in the  process of  amending  the Caspi Note to extend the due date,
however,  the Caspi Note is in default and we are incurring  interest expense at
the default rate of 24% per annum.  During the nine months ended  September  30,
2006, the Company had incurred and paid interest expense of $87,000 on the Caspi
Note, of which $32,000 is accrued at September 30, 2006.

         From  September 8, 2006 through  September  19, 2006,  Caspi loaned the
Company a total of  $1,495,000,  all of which is  outstanding  at September  30,
2006.  As  consideration  for the loan,  the Company  issued Caspi a Convertible
Promissory Note in the principal amount of $1,495,000 (the "SECOND CASPI NOTE").
The Second Caspi Note,  bears interest at the rate of 12% per annum, is due upon
the earlier of March 8, 2007 or, at the discretion of Caspi,  September 8, 2007,
and is convertible into shares of the Company's common stock at $1.25 per share.
As security for the  performance  of the Company's  obligations  pursuant to the
Second Caspi Note, the Company granted Caspi a security interest in certain real
property.  Caspi received  warrants to purchase  250,000 shares of the Company's
common stock at an exercise price of $1.25 per share as additional consideration
for entering into the loan agreement. During the nine months ended September 30,
2006, the Company had incurred interest expense,  excluding amortization of debt
discount,  of  $11,000  on the  Second  Caspi  Note,  all of which is accrued at
September 30, 2006

         As the effective  conversion price of the Second Caspi Note on the date
of issuance was below the fair market value of the underlying  common stock, the
Company  recorded debt discount in the amount of $769,000 based on the intrinsic
value of the beneficial  conversion  feature of the note. Since the Second Caspi
Note was  convertible at the time of issuance,  the debt discount as a result of
the beneficial conversion feature was amortized as non-cash interest expense.

                                       26
<PAGE>

         The warrant issued to Caspi in  conjunction  with the Second Caspi Note
will expire after  September 8, 2011. The Company  recorded debt discount in the
amount of $231,000 based on the estimated  fair value of the warrants.  The debt
discount  will be  amortized as non-cash  interest  expense over the term of the
debt using the effective interest method.  Through September 30, 2006,  interest
expense of $95,000 has been recorded from the debt discount amortization.

         From January 11, 2006 through  September 30, 2006 AGB Acquisition Fund,
a  related  party,  loaned  the  Company a total of  $443,000,  all of which was
repaid.  As consideration for the loans, the Company issued AGB Acquisition Fund
secured  promissory  notes  with an  interest  rate of 7% per  annum  (the  "AGB
ACQUISITION  FUND NOTES"),  and entered into a security  agreement  granting AGB
Acquisition  Fund a security  interest in the  Company's  personal  property and
fixtures,  inventory,  products  and  proceeds  as  security  for the  Company's
obligations under the AGB Acquisition Fund Notes.

         On February 8, 2006, AGB  Acquisition  Fund loaned  $687,000 to ASG. As
consideration for the loan, ASG issued AGB Acquisition Fund a secured promissory
note in the  principal  amount of  $687,000  (the "ASG NOTE") and granted a real
estate  mortgage  in favor of AGB  Acquisition  Fund  relating  to certain  real
property located in Jefferson County, Alabama (the "Property"). The ASG Note, as
amended, bears interest at the rate of 10% per annum and is due on September 15,
2006. AGB  Acquisition  Fund received  warrants to purchase 20,608 shares of our
common stock at an exercise price of $3.86 per share as additional consideration
for entering into the loan agreement. We recorded debt discount in the amount of
$44,000 based on the estimated fair value of the warrants. The debt discount was
amortized as non-cash  interest  expense over the initial term of the debt using
the  effective  interest  method.  As  security  for the  performance  of  ASG's
obligations  pursuant  to the ASG  Note,  ASG  granted  AGB  Acquisition  Fund a
security  interest in all  personal  property  and  fixtures  located at the ASG
Property.  During the nine months  ended  September  30,  2006,  we had incurred
interest expense, excluding amortization of debt discount, of $44,000 on the ASG
Note, all of which is accrued at September 30, 2006.

         In addition,  as of September 30, 2006, AGB Acquisition Fund had loaned
an  aggregate of  $1,495,000  to ASG pursuant to the terms of a Real Estate Note
dated July 27, 2005, as amended (the "REAL ESTATE  NOTE").  The Real Estate Note
bears  interest at the rate of 3% above the Prime Rate as  published in the Wall
Street Journal (8.25% at September 30, 2006). All unpaid principal, interest and
charges  under the Real Estate Note are due in full on July 31,  2010.  The Real
Estate Note is  collateralized by a mortgage on certain real estate owned by ASG
pursuant  to the  terms of a Future  Advance  Mortgage  Assignment  of Rents and
Leases  and  Security  Agreement  dated  July  27,  2005  between  ASG  and  AGB
Acquisition  Fund.  During  the nine  months  ended  September  30,  2006 we had
incurred  interest  expense of $118,000 on the Real Estate Note, all of which is
accrued at September 30, 2006.

         From March 7, 2006  through  September  30, 2006 AGB  Acquisition  Fund
loaned us a total of $379,000,  of which  $110,000 was repaid.  The  outstanding
balance  at  September  30,  2006 is  $269,000.  The loans were  advanced  to us
pursuant  to a  Revolving  Line of  Credit  Agreement  (the  "REVOLVING  LINE OF
CREDIT")  entered into with AGB Acquisition Fund on March 7, 2006. The Revolving
Line of  Credit  allows  us to  request  advances  of up to  $500,000  from  AGB
Acquisition  Fund.  The initial  term of the  Revolving  Line of Credit is for a
period of six months and may be extended  for one or more  additional  six month
periods upon mutual  agreement of the parties.  Each advance under the Revolving
Line of  Credit  is  evidenced  by a  secured  promissory  note  and a  security
agreement. The secured promissory notes issued pursuant to the Revolving Line of
Credit  must be repaid  with  interest  at the Prime Rate plus 1% within 60 days
from issuance and are convertible  into shares of our common stock at the option
of AGB Acquisition Fund at a price of $3.10 per share. Our obligations  pursuant
to such secured  promissory notes are secured by our assets,  personal  property
and fixtures, inventory, products and proceeds therefrom. During the nine months
ended September 30, 2006, we had incurred  interest expense of $8,000 on the ASG
Note, of which $7,000 is accrued at September 30, 2006.

         On May 1, 2006,  Herbert  Langsam,  a Class II Director of the Company,
loaned the  Company  $500,000.  The loan is  documented  by a  $500,000  Secured
Promissory Note (the "LANGSAM NOTE") payable to the Herbert Langsam  Irrevocable
Trust.  The Langsam Note accrues interest at the rate of 12% per annum and has a
maturity  date of  November  1,  2006.  In the event of breach or default on any
provision of the Langsam Note, the interest rate will increase to 16% per annum.
Pursuant  to the terms of a Security  Agreement  dated May 1, 2006,  the Company



                                       27
<PAGE>

granted the Herbert Langsam  Revocable  Trust a security  interest in all of the
Company's  assets as collateral  for the  satisfaction  and  performance  of the
Company's obligations pursuant to the Langsam Note.

         On June 6, 2006 the Company entered into a Secured Convertible Note and
Warrant  Purchase  Agreement  (the "PURCHASE  AGREEMENT")  pursuant to which the
Company sold a $1,100,000  principal amount Secured Convertible  Promissory Note
(the "MORELLI  NOTE") and a warrant to purchase  401,460 shares of the Company's
common stock (the "MORELLI WARRANT") to Alan E. Morelli.

         The Morelli Note accrued  interest at the rate of 12% per annum through
July 6, 2006, after which the interest rate increased to 15% per annum from July
6, 2006 through the date the loan is repaid. The principal amount of the Morelli
Note and any accrued but unpaid  interest was due to be paid on October 6, 2006,
or the  occurrence  of an event of  default.  On  August  15,  2006 the  Company
received a notice of default  regarding the Morelli Note.  The notice of default
specifically  cited the Company's failure to obtain the prior written consent of
Mr.  Morelli  to the  incurrence  of  indebtedness  and  failure  to  repay  the
obligations  owing under the Morelli  Note in an amount equal to the proceeds of
the  indebtedness.  Upon the occurrence of an event of default the interest rate
increase  to 19% per annum.  During  September  2006,  from the  proceeds of the
Second  Caspi Note,  the Company  repaid the  outstanding  principal  amount and
accrued interest of $51,000.

         In August 2006, prior to the repayment of the Morelli Note, the Company
sold  shares  of  its  common  stock  at  $1.25  per  share  thereby   requiring
modifications to both the Morelli Warrant and Morelli Note. These  modifications
resulted  in an  adjustment  to the  conversion  price of the Morelli  Note,  an
adjustment to the exercise  price of the Morelli  Warrant and an increase in the
number of shares of common  stock  available  to purchase  upon  exercise of the
Morelli  Warrant.  These  modifications  were  sufficiently  different  from the
initial terms of the Morelli Note and Morelli Warrant,  requiring the Company to
account for the change in  conversion  terms as a  substantial  modification  of
terms in  accordance  with  EITF  Issue  No.  96-19,  "DEBTOR'S  ACCOUNTING  AND
MODIFICATION ON EXCHANGE OF DEBT INSTRUMENTS".

         The original  notes  converted into common stock at a rate of $2.74 per
share with 401,460  warrants to purchase  common stock  exercisable at $3.04 per
share.  The new terms provided  conversion  into common stock at $1.25 per share
with 976,351  warrants to purchase common stock  exercisable at $1.25 per share.
On extinguishment of the original terms of the Morelli Note and Morelli Warrant,
the Company  recorded  non-cash  interest  expense of $880,000 as the  estimated
difference in the fair value of the Morelli  Warrant under the original terms to
that of the  modified  terms and further  recorded  entries to record  discounts
related  to the  beneficial  conversion  feature  totaling  $572,000  which  was
amortized as non-cash interest expense.

         On July 12,  2006 we  executed  a  Convertible  Promissory  Note in the
principal  amount of $250,000 (the "KALINA NOTE") and a warrant for the Purchase
of 85,000 Shares of our common stock (the "KALINA  WARRANT") in favor of Charles
J. Kalina, III ("KALINA"),  an existing  shareholder of the Company.  The Kalina
Note accrues  interest at the rate of 12% per annum  throughout  the term of the
loan.  The  principal  amount of the  Kalina  Note and any  accrued  but  unpaid
interest  was due to be paid  upon the  earlier  of  October  10,  2006,  or the
occurrence of an event of default. Principal and interest on the Kalina Note was
convertible  into our shares of common stock at a conversion price of $3.00. The
Kalina Warrant has an exercise price of $ 2.69 per share and will expire on July
11,  2011.  We recorded  debt  discount  in the amount of $161,000  based on the
estimated fair value of the Kalina Warrants.  The debt discount was amortized as
non-cash interest expense over the term of the debt using the effective interest
method.

         On  November  3, 2006,  Kalina  converted  the  Kalina  Note into a new
Convertible  Promissory  Note in the  principal  amount of $400,000 (the "SECOND
KALINA  NOTE") and a warrant for the  Purchase  of 100,000  Shares of our common
stock (the "SECOND KALINA  WARRANT").  The Second Kalina Note, bears interest at
the  rate  of 12% per  annum,  is due to be paid on  January  31,  2008,  and is
convertible into shares of the Company's common stock at $1.25 per share.

         As the effective conversion price of the Second Kalina Note on the date
of issuance was below the fair market value of the underlying  common stock, the
Company  will  record  debt  discount  in the  amount  of  $77,000  based on the
intrinsic value of the beneficial conversion feature of the note.



                                       28
<PAGE>

         The Second  Kalina  Warrant  will expire  after  November 3, 2011.  The
Company  will  record  debt  discount  in the  amount  of  $29,000  based on the
estimated  fair value of the  warrants.  The debt  discount will be amortized as
non-cash interest expense over the term of the debt using the effective interest
method.

         Management is currently seeking additional  financing and believes that
it will be  successful.  However,  in the event  management is not successful in
obtaining additional financing,  existing cash resources, together with proceeds
from investments and anticipated  revenues from operations,  may not be adequate
to fund our  operations  for the twelve months  subsequent to December 31, 2006.
However,  ultimately  long-term  liquidity is dependent on our ability to attain
future profitable  operations.  We intend to undertake additional debt or equity
financings  to better  enable us to grow and meet future  operating  and capital
requirements.

         As of  September  30,  2006,  other  than our office  lease,  we had no
commitments not reflected in our condensed consolidated financial statements.

         Cash  decreased  by  $53,000 to $26,000  during the nine  months  ended
September  30, 2006,  compared to a decrease of $683,000  during the nine months
ended September 30, 2005.

         Operating  activities  used  $2,030,000  of cash during the nine months
ended  September  30, 2006,  compared to using  $593,000  during the nine months
ended September 30, 2005.

         Operating  activities  for the nine months  ended  September  30, 2006,
exclusive of changes in operating  assets and  liabilities,  used  $3,610,000 of
cash,  as the  Company's  net cash used in operating  activities  of  $2,030,000
included  non-cash  charges  for  depreciation,  amortization  and  interest  of
$3,192,000,  realized  losses of  $1,437,000  and stock  based  compensation  of
$3,004,000.  For the nine months ended September 30, 2005, operating activities,
exclusive of changes in operating  assets and  liabilities,  used  $1,903,000 of
cash,  as the  Company's  net cash  used in  operating  activities  of  $593,000
included  non-cash  charges  for  depreciation  and  amortization  of  $203,000,
realized gains of $253,000 and stock based compensation of $3,709,000.

         Changes in operating assets and liabilities provided cash of $1,580,000
during the nine months ended September 30, 2006, principally due to net proceeds
received  from  marketable   securities,   decreases  in  our  receivables  from
investments  and  increases  in  the  level  of  accounts  payable  and  accrued
liabilities  which were partially  offset by decreases in the amounts due to our
broker.  The amount due to our broker is directly  attributable  to purchases of
marketable  investment securities that were purchased on margin or to securities
that were margined  subsequent to their  purchase.  During the nine months ended
September 30, 2006 and year ended  December 31, 2005,  the Company  invested its
cash  balances in the public  equity and debt  markets in an attempt to maximize
the  short-term  return on such  assets.  The amount  due to our  broker  varied
throughout the year depending upon the aggregate amount of marketable investment
securities held by us and the level of borrowing against our  available-for-sale
securities.  The actual  amount of  marketable  investment  securities  held was
influenced by several factors, including but not limited to, our expectations of
potential returns  available from what we considered to be mispriced  securities
as well as the cash needs of our operating activities. During times when we were
heavily invested in marketable  investment securities our liquidity position was
significantly  reduced.  To the extent we have a need for an excess cash balance
to meet our financial  obligations the amount of securities  purchased on margin
will either decrease or disappear  altogether.  However, if we are in a position
where we have excess cash with no immediate need for  liquidity,  and we believe
opportunities exist to maximize the short-term return on such assets then we may
purchase marketable securities on margin. During the nine months ended September
30,  2005,  changes  in  operating  assets  and  liabilities  provided  cash  of
$1,310,000 primarily due to net proceeds received from marketable securities, an
increase  in the  amounts  due to our  broker,  and an  increase in the level of
accounts  payable  and accrued  liabilities  which were  partially  offset by an
increase in our receivables from investments.

         The  principal  factor  in the  $2,040,000  of cash  used in  investing
activities  during the nine months ended  September 30, 2006 was the purchase of
land of $1,697,000,  capitalized  construction costs of $383,000 related to ASG,
and capitalized costs of $159,000 related to the ongoing development of software
related to our  Safety-Sponge(TM) System  offset  by  proceeds  from the sale of
long-term  investments  of $250,000.  The principal  factor in the


                                       29
<PAGE>

$1,084,000  of cash used in  investing  activities  during the nine months ended
September 30, 2005 was due to our investment in Surgicount of $432,000  combined
with purchases of long-term  investments of $903,000 offset by proceeds from the
repayment of a loan included in long-term  investments  of $300,000 and the sale
of real estate valued at $67,000.

         Cash  provided by  financing  activities  during the nine months  ended
September  30, 2006,  of  $4,017,000  resulted  from the net proceeds from notes
payable of  $3,767,000  and the  proceeds  from the issuance of common stock for
$250,000.  Cash  provided by  financing  activities  for the nine  months  ended
September 30, 2005, of $993,000  resulted  primarily  from the net proceeds from
notes payable of $923,000 and the proceeds from the issuance of common stock and
warrants of $100,000.

INVESTMENTS

         A summary of our investment portfolio,  which at September 30, 2006 was
valued at $1,673,000  and  represented  14.4% of our total assets,  is reflected
below.   Excluding  our  real  estate  investments,   our  investment  portfolio
represents 10.7% of our total assets.

                                     SEPTEMBER 30,
                                         2006
                                   ---------------
   Alacra Corporation              $    1,000,000
   Digicorp                               242,130
   Real Estate                            430,563
                                   ---------------
                                   $    1,672,693
                                   ===============

         ALACRA CORPORATION

         At  September  30, 2006,  we had an  investment  in Alacra  Corporation
("ALACRA"),  valued at $1,000,000, which represents 8.6% of our total assets. On
April 20, 2000,  we purchased  $1,000,000  worth of Alacra  Series F Convertible
Preferred  Stock.  Alacra has  recorded  revenue  growth in every year since the
Company's original  investment,  further,  2005 revenues of approximately  $16.5
million,  were in excess of the prior year's revenues by  approximately  45%. At
December 31, 2005,  Alacra had total assets of  approximately  $3.5 million with
total  liabilities  of  approximately  $6.0  million.  Deferred  revenue,  which
represents  subscription  revenues are amortized  over the term of the contract,
which is generally one year, and represented  approximately  $2.9 million of the
total  liabilities.  The  Company  has the  right  to have the  preferred  stock
redeemed by Alacra for face value plus accrued  dividends  beginning on December
31, 2006. In connection with this  investment,  the Company was granted observer
rights on Alacra board of directors meetings.

         Alacra,  a  privately  held  company  based  in New  York,  is a global
provider  of  business  and  financial  information.  Alacra  provides a diverse
portfolio of fast,  sophisticated  online  services  that allow users to quickly
find,  analyze,  package and present business  information.  Alacra's  customers
include more than 750 leading financial institutions, management consulting, law
and accounting  firms and other  corporations  throughout the world.  Currently,
Alacra's largest customer segment is investment and commercial banking, followed
closely by management consulting, law and multi-national corporations.

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


                                       30
<PAGE>

         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.

         DIGICORP

         At  September  30, 2006,  we had an  investment  in Digicorp  valued at
$242,130,  which  represents 2.1% of our total assets.  On December 29, 2004, we
entered into a Common Stock  Purchase  Agreement  with certain  shareholders  of
Digicorp  (the  "DIGICORP  AGREEMENT"),  to purchase an  aggregate  of 3,453,527
shares of  Digicorp  common  stock.  We  purchased  2,229,527  of such shares on
December 29, 2004  (2,128,740  shares at a price of $0.135 per share and 100,787
shares at a price of $0.145 per share).  We were also  required to purchase  the
remaining  1,224,000  shares from the selling  shareholders at a price of $0.145
per share at such time that Digicorp registers the resale of the shares with the
SEC.  During  December  2005 we amended the Digicorp  Agreement and an unrelated
third  party  assumed the  obligation  to purchase  1,000,000  of the  remaining
1,224,000 shares from the selling shareholders.  Additionally, we extended loans
of $33,000 to the  selling  shareholders  from our working  capital.  Such loans
represented the amount of the remaining obligation to purchase 224,000 shares of
Digicorp  common stock and are secured by the 224,000 shares of Digicorp  common
stock presently held by such selling  shareholders.  Digicorp's  common stock is
traded on the OTC Bulletin  Board,  which reported a closing price, at September
30, 2006, of $0.32. On July 16, 2005,  Alice M. Campbell,  one of our directors,
was appointed to the Board of Directors of Digicorp.  On July 20, 2005,  William
B. Horne, our Chief Financial Officer,  was appointed as a director and as Chief
Financial Officer of Digicorp.

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

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

         On  December  29,  2005,  Digicorp  acquired  all  of  the  issued  and
outstanding  capital stock of Rebel Crew Films,  Inc., a California  corporation
("REBEL CREW FILMS"),  in consideration for the issuance of 21,207,080 shares


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<PAGE>

of Digicorp  common stock (the "PURCHASE  PRICE") to the  shareholders  of Rebel
Crew Films. From the Purchase Price, 4,000,000 shares are held in escrow pending
satisfaction of certain performance  milestones.  In addition, from the Purchase
Price,  16,666,667  shares are subject to lock up  agreements  as  follows:  (a)
3,333,333  shares are subject to lockup  agreements  for one year; (b) 6,666,667
shares are subject to lockup agreements for two years; and (c) 6,666,667 shares,
of which the 4,000,000  escrowed  shares are a component,  are subject to lockup
agreements for three years.

         In connection with the acquisition of Rebel Crew Films, on December 29,
2005  Digicorp  entered into a  Securities  Purchase  Agreement  with one of the
shareholders  of Rebel  Crew  Films,  Rebel  Holdings,  LLC,  pursuant  to which
Digicorp  purchased a $556,000  principal  amount loan  receivable owed by Rebel
Crew Films to Rebel  Holdings,  LLC in exchange  for the  issuance of a $556,000
principal amount secured  convertible  note to Rebel Holdings,  LLC. The secured
convertible  note  accrues  simple  interest  at the  rate of 4.5%,  matures  on
December  29,  2010 and is  secured  by all of  Digicorp's  assets  now owned or
hereafter  acquired.  The secured  convertible  note is convertible into 500,000
shares of Digicorp common stock at the rate of $1.112614 per share.  Jay Rifkin,
Digicorp's  Chief  Executive  Officer  and  one of its  directors,  is the  sole
managing member of Rebel Holdings, LLC.

         Rebel  Crew  Films  was  founded  in  2001  as  a  film  licensing  and
distribution  company of Latino home  entertainment  products.  Rebel Crew Films
currently maintains approximately 300 Spanish language films and serves the some
of the nation's largest wholesale,  retail,  catalog,  and e-commerce  accounts.
Rebel Crew's titles can be found at Wal-Mart, Best Buy, Blockbuster, K-Mart, and
hundreds of independent  video outlets  across the United States and Canada.  We
believe that the  acquisition  will allow Digicorp to leverage Rebel Crew Films'
Latino content and industry relationships with the iCodemedia Assets to create a
compelling digital media and content delivery company.

         REAL ESTATE INVESTMENTS

         At September 30, 2006, we had several real estate  investments,  valued
at $431,000,  which represents 3.7% of our total assets. In the past we held our
real estate  investments  in Ault Glazer Bodnar  Capital  Properties,  LLC ("AGB
PROPERTIES"),  which was a Delaware limited liability company and a wholly owned
subsidiary.  AGB  Properties  was  closed  in  September  2006 and we are in the
process of  liquidating  our real  estate  holdings.  Our real  estate  holdings
consist  of  approximately  8.5  acres of  undeveloped  land in  Heber  Springs,
Arkansas and 0.61 acres of undeveloped land in Springfield, Tennessee. We expect
that any future gain or loss recognized on the liquidation of some or all of our
real estate holdings would be insignificant 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 real estate
holdings are located.

RESULTS OF OPERATIONS

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

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

  o     "Operating  expenses,"  which  are the  related  costs and  expenses  of
        operating our business;

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

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






                                       32
<PAGE>

  o     "Unrealized gains (losses) on marketable securities,  net," which is the
        net change in the fair value of our  marketable  securities,  net of any
        (decrease)  increase in deferred  income taxes that would become payable
        if the unrealized  appreciation  were realized through the sale or other
        disposition of the investment portfolio.

         "Realized  gains (losses) on investments,  net" and  "Unrealized  gains
(losses) on marketable securities, net" are directly related. When a security is
sold to realize a gain, the net  unrealized  gain decreases and the net realized
gain  increases.  When a security is sold to realize a loss,  the net unrealized
gain increases and the net realized gain decreases.

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

REVENUES

         We recognized  revenues of $122,000 and $30,000 during the three months
and $358,000 and $616,000  during the nine months ended  September  30, 2006 and
2005,  respectively.  Of these  revenues,  only $19,000  related to sales of our
Safety-Sponge(TM)  System.  As expected,  these initial  revenues did not have a
significant  impact on our results of operations,  however,  we expect  revenues
will  increase  during the three month period  ending  December 31, 2006 and the
revenues  from our  Safety-Sponge(TM)  System  may start to  become a  continual
source of funds to cover a portion of our operating costs.

         Of the revenue earned during the three and nine months ended  September
30,  2006,  nil and  $104,000,  respectively,  was the  result  of a  consulting
agreement,  consented  to  by  IPEX,  whereby  Wolfgang  Grabher,  the  majority
shareholder of IPEX, former President, former Chief Executive Officer and former
director of IPEX,  retained  us to serve as a business  consultant  to IPEX.  In
consideration  for the services,  during  December 2005, Mr. Grabher  personally
transferred  us  500,000  shares  of  common  stock of IPEX as a  non-refundable
consulting fee. At September 30, 2006, we held 7.8% of IPEX's outstanding shares
of common stock.

         The remaining  revenue generated during the three and nine months ended
September 30, 2006, of $104,000 and $235,000,  respectively,  was generated from
car wash services by our wholly-owned operating subsidiary,  ASG. ASG was formed
to develop and operate  automated  car wash sites under the trade name  "Bubba's
Express Wash". ASG's first site, developed in Birmingham, Alabama, had its grand
opening on March 8, 2006.

         On November 14, 2006,  Surgicount  entered into a Supply Agreement with
Cardinal Health 200, Inc., a Delaware corporation ("CARDINAL").  Pursuant to the
agreement,  Cardinal  shall act as the  exclusive  distributor  of  Surgicount's
products in the United States,  with the exception that  Surgicount may sell its
products to one other hospital  supply company,  named in the agreement,  solely
for its  sale/distribution to its hospital customers.  The term of the agreement
is 36 months,  unless earlier  terminated as set forth therein.  Otherwise,  the
agreement  automatically  renews  for  successive  12 month  periods.  We cannot
reasonably  predict or  estimate  the  financial  impact of the  agreement  with
Cardinal  but  believes  it  will  have a  material  impact  on our  results  of
operations.

EXPENSES

         Operating  expenses were $2,316,000 and $2,128,000 for the three months
and $7,852,000  and $6,377,000 for the nine months ended  September 30, 2006 and
2005, respectively.

         The increase in operating  expenses for the nine months ended September
30, 2006 when  compared to  September  30,  2005,  was  primarily  the result of
salaries and employee  benefits,  which increased by $471,000.  Our Compensation
Committee,  which is comprised of three  independent  directors  for purposes of
AMEX  rules,  determines  and  recommends  to our Board the cash and stock based
compensation to be paid to our executive officers and also reviews the amount of
salary  and  bonus  for  each of our  other  officers  and  employees.  The most
significant  component  of employee  compensation  is stock  based  compensation
expense.  For the nine months ended  September 30, 2006, we recorded  $1,297,000
relating to grants of nonqualified stock options and $1,102,000 related


                                       33
<PAGE>

to restricted stock awards to our employees and non-employee  directors.  During
the nine months ended  September  30, 2005, we recorded  $1,231,000  relating to
grants of nonqualified  stock options and $1,287,000 related to restricted stock
awards to our  employees  and  non-employee  directors.  The  issuance  of stock
options and restricted stock awards to our employees and non-employee  directors
resulted in a decrease in expenses of $119,000  for the nine month  period ended
September 30, 2006. Therefore, excluding stock based compensation,  salaries and
employee benefits increased by $590,000.  The increase in employee  compensation
of $590,000 is attributed to a combination  of factors.  During the three months
ended March 31, 2005 no salary  expense was incurred on four highly  compensated
employees.  The  absence  of salary  expense on these  four  highly  compensated
employees  resulted  in an increase  of  $130,000  during the nine months  ended
September 30, 2006. This increase reflects a non-recurring  severance package of
$180,000 that was paid to Milton "Todd" Ault III, our former  Chairman and Chief
Executive  Officer during January 2006. In July 2006,  subsequent to the payment
of Mr.  Ault's  severance  package,  Mr.  Ault  was  re-appointed  as our  Chief
Executive  Officer.  In  consideration  of Mr.  Ault's  re-appointment  as Chief
Executive  Officer,  Mr.  Ault has agreed to cash  compensation  of $1 per year.
Another  significant factor that significantly  increased employee  compensation
during the nine months ended  September 30, 2006 was the additional  salaries of
four key executives covered by employment agreements.

         At  September  30, 2006,  four of our  executives  were  covered  under
employment agreements. Our Chief Financial Officer, William B. Horne, is covered
under a two year employment agreement with annual base compensation of $150,000;
our Chief Executive Officer of Surgicount  Medical,  Inc., Bill Adams is covered
under a three  year  employment  agreement  with  annual  base  compensation  of
$300,000;  our  President of Sales and Marketing of  Surgicount  Medical,  Inc.,
Richard Bertran, is covered under a three year employment  agreement with annual
base  compensation  of $200,000 and; our Chief  Operating  Officer of Surgicount
Medical,  Inc., James Schafer, is covered under a two year employment  agreement
with annual base  compensation  of $100,000.  The  addition of these  employment
contracts  effectively  increased employee  compensation  during the nine months
ended  September  30,  2006 by  $350,000.  The  remaining  increase  in employee
compensation  is attributed to an overall  increase in benefits  associated with
the individuals that are covered under employment  contracts.  None of our other
executives our currently covered under an employment  agreement,  therefore,  we
are under no financial  obligation,  other than monthly salaries,  for our other
executive officers.  Currently,  monthly gross salaries for all of our employees
are $130,000. We believe, as with all our operating expenses,  that our existing
cash resources, together with proceeds from investments,  anticipated financings
and expected revenues from our operations, should be adequate to fund our salary
obligations.

         The second largest component of our operating  expenses is professional
fees,  which  decreased by $374,000  during the nine months ended  September 30,
2006 compared to the amount  reported during the nine months ended September 30,
2005.  This  decrease  is  primarily  comprised  of  decreases  in  stock  based
compensation to outside  consultants of $587,000  offset by an overall  increase
paid  to  consultants   used  to  generate   awareness  and  train  health  care
professionals  in the  use of our  Safety-Sponge(TM) System. As in the  case  of
employee compensation,  stock based compensation expense is the most significant
component of professional  fees. During the nine months ended September 30, 2006
and 2005,  professional  fees included stock based  compensation  related to the
issuances  of  restricted   stock  and  warrants  of  $604,000  and  $1,191,000,
respectively.  Of these amounts,  warrant  issuances  accounted for $457,000 and
$759,000,  respectively.  A significant amount of the warrants issued during the
nine months ended September 30, 2006,  relate to a consulting  agreement that we
entered into in February  2006 with Analog  Ventures,  LLC  ("ANALOG  VENTURES")
whereby Analog Ventures agreed to consult with us on matters relating  primarily
to the  divestiture of our non-core assets and assist us in our efforts to focus
our business  exclusively on the patient safety medical  products  field.  As an
incentive for entering into the agreement,  we agreed to issue Analog Ventures a
warrant to purchase  175,000  shares of our common stock at an exercise price of
$3.95,  exercisable for 3 years. We recognized an expense of $405,000 related to
these warrants. During the nine months





                                       34
<PAGE>


ended  September 30, 2005 the primary amount of the warrants issued related to a
consulting  agreement with Health West Marketing  Incorporated  ("HEALTH  WEST")
that we entered  into in April  2005.  As an  incentive  for  entering  into the
agreement, we agreed 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  $527,000  related to these  warrants.  In
addition to the stock based  compensation  that we recognized as a result of our
agreement with Health West, we issued additional warrants during the nine months
ended  September 30, 2005 valued at $231,000 to purchase  shares of common stock
to two consultants performing investor relations services.

         All of our stock based compensation  issued to employees,  non-employee
directors  and  consultants  were expensed in  accordance  with SFAS 123(R).  We
valued the  nonqualified  stock  options and  warrants  using the  Black-Scholes
valuation  model assuming  expected  dividend  yield,  risk-free  interest rate,
expected life and  volatility of 0%, 3.75%,  three to five years and 83% to 89%,
respectively.  The  restricted  stock awards were valued at the closing price on
the date the restricted shares were granted.

         The increase in  amortization  expense,  which reflected an increase of
$54,000,  of our patents was caused by the full quarter of  amortization  during
the three months ended March 31, 2006 as opposed to a partial quarter during the
three months ended March 31, 2005. The entire  capitalized costs of Surgicount's
patents, valued at $4,685,000, are being amortized over their approximate useful
life of 14.4 years. Since the Surgicount patents were not acquired until the end
of February  2005,  amortization  for the three  months ended March 31, 2005 was
only $27,000 as opposed to $81,000 during the three months ended March 31, 2006.

         In response to the financial constraints stemming from our unsuccessful
efforts to raise the necessary  capital to continue the planned build-out on the
additional car wash facilities,  coupled with our emphasis on the patient safety
markets,  we  evaluated  alternative  methods  to divest  the car wash  services
segment.  Recognizing  that revenues and cash flows would be lower than expected
from the car wash services  segment,  we determined that a triggering  event had
occurred and conducted an interim goodwill  impairment  analysis in the quarters
ended  June 30,  2006 and  September  30,  2006.  As a  result  of our  goodwill
impairment analyses, we recorded goodwill impairment charges of $971,036 and nil
during the nine months ended  September  30, 2006 and 2005,  respectively.  This
goodwill  impairment  related  to  goodwill  that  resulted  from the  Company's
acquisition of ASG. The fair value of our reporting  units were estimated  using
the expected  present  value of future cash flows and the  valuation  employed a
combination  of present value  techniques  to measure fair value and  considered
market factors.

         General and administrative expenses experienced an increase of $137,000
during the current  nine month  reporting  period  over the prior  year.  Travel
related  expenses are a large component of general and  administrative  expenses
and represented an increase of $73,000. This increase was attributed to expenses
incurred in marketing our  Safety-Sponge(TM)  System to hospitals throughout the
United  States,  attendance  at trade  shows  and  conventions  to  promote  the
Company's   Safety-Sponge(TM)   System,   and  travel   abroad  to  inspect  the
manufacturing  facilities  for  our  Safety-Sponge(TM)   System.  The  remaining
increase in general and  administrative  expenses is a combination  of a several
types of expenses, none of which are significant individually.

INTEREST, DIVIDEND INCOME AND OTHER, NET

         We had interest  income of $2,000 and $41,000 for the nine months ended
September 30, 2006 and 2005, respectively.

         The decrease in interest income for the nine months ended September 30,
2006 when compared to September 30, 2005 was primarily the result of a decreased
amount of fixed income investments held throughout the period,  primarily during
the first quarter of 2005.  At March 31, 2005, we held in marketable  securities
approximately  $2.5 million in U.S.  Treasuries as opposed to no  investments in
U.S.  Treasuries during the nine months ended September 30, 2006. Based upon our
current cash position and future cash requirements we only expect to generate an
immaterial amount of interest income during the current year.







                                       35
<PAGE>


REALIZED GAINS (LOSSES) ON INVESTMENTS, NET

         During the nine months ended September 30, 2006, we realized net losses
of $1,437,000  primarily due to our write down of 950,000  shares of IPEX common
stock with a cost bases of $1,458,000.

         During the nine months ended  September 30, 2005, we realized net gains
of $253,000 from the sale of our marketable securities.

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

INTEREST EXPENSE

         We had interest  expense of $3,285,000  and $85,000 for the nine months
ended September 30, 2006 and 2005, respectively.

     The increase in interest  expense for the nine months ended  September  30,
2006 when  compared to  September  30,  2005 is  primarily  attributable  to the
non-cash  interest charges incurred as a result of the debt discount  associated
with our short-term debt financings.  During the nine months ended September 30,
2006 we recorded $2,872,000 in non-cash interest charges. These charges resulted
from the  issuance  of debt that  either  had  conversion  prices on the date of
issuance that was below the fair market value of the underlying  common stock or
required the issuance of warrants to purchase shares of our common stock,  which
required  us to record  an  expense  based on the  estimated  fair  value of the
warrant.  The  remaining  increase in interest  expense is  attributable  to the
overall  increase in  borrowings  that  occurred  during the nine  months  ended
September 30, 2006 of $5,939,000.

UNREALIZED GAINS (LOSSES) ON MARKETABLE SECURITIES, NET

         Unrealized  appreciation of investments increased by $17,000 during the
nine months  ended  September  30,  2006,  primarily  due to the sale of 108,200
shares  of Tuxis  Corporation  common  stock,  which at  December  31,  2005 had
unrealized  depreciation  of $134,000.  When we exit an investment and realize a
loss, we make an accounting entry to reverse any unrealized  depreciation we had
previously recorded to reflect the depreciated value of the investment.

         Unrealized  appreciation of investments decreased by $81,000 during the
nine months ended September 30, 2005, primarily due to the price depreciation of
our marketable securities

ACCUMULATED OTHER COMPREHENSIVE INCOME

         Unrealized   gains   (losses)   on  our   investments   designated   as
available-for-sale  are recorded in accumulated other  comprehensive  income. At
September 30, 2006, we classified all of our restricted  holdings in Digicorp as
available-for-sale.  At  September  30,  2006,  the  unrealized  losses  on  our
restricted  holdings in Digicorp amounted to ($34,000),  whereas at December 31,
2005,  the  unrealized  gains  (losses) on our  restricted  holdings in IPEX and
Digicorp  amounted to ($328,000) and  $2,703,000,  respectively.  The cumulative
decrease in net unrealized gains amounts to $2,409,000.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Our business  activities contain elements of market risk. We consider a
principal type of market risk to be valuation risk. Investments and other assets
are valued at fair value as determined in good faith by our Board of Directors.




                                       36
<PAGE>

         We have  invested  a  substantial  portion  of our  assets  in  private
development  stage or start-up  companies.  These private  businesses tend to be
thinly  capitalized,  unproven,  small companies that lack management  depth and
have not attained profitability or have no history of operations. Because of the
speculative nature and the lack of public market for these investments, there is
significantly greater risk of loss than is the case with traditional  investment
securities.  We expect that some of our venture  capital  investments  will be a
complete loss or will be unprofitable  and that some will appear to be likely to
become successful but never realize their potential.

         Because there is no public  market for the equity  interests of some of
the small companies in which we have invested,  the valuation of such the equity
interests  is subject to the estimate of our Board of  Directors.  In making its
determination,  the Board may  consider  valuation  information  provided  by an
independent  third party or the portfolio  company  itself.  In the absence of a
readily   ascertainable   market  value,  the  estimated  value  of  our  equity
investments  may differ  significantly  from the values  that would be placed on
them if a liquid  market  for the  equity  interests  existed.  Any  changes  in
valuation  are recorded in our  consolidated  statements of operations as either
"Unrealized  losses  on  marketable  securities,  net" or  "Other  comprehensive
income."

ITEM 4.  CONTROLS AND PROCEDURES.

         As of the end of the period  covered by this  report,  we  conducted an
evaluation,  under  the  supervision  and with the  participation  of our  chief
executive  officer and chief  financial  officer of our disclosure  controls and
procedures  (as defined in Rule  13a-15(e)  and Rule  15d-15(e)  of the Exchange
Act).  Based  upon  this  evaluation,  our  chief  executive  officer  and chief
financial  officer  concluded  that our  disclosure  controls and procedures are
effective to ensure that all  information  required to be disclosed by us in the
reports that we file or submit under the  Exchange Act is: (1)  accumulated  and
communicated to our management,  including our chief executive officer and chief
financial officer,  as appropriate to allow timely decisions  regarding required
disclosure;  and (2) recorded,  processed,  summarized and reported,  within the
time periods specified in the Commission's  rules and forms. There was no change
in our internal  controls or in other  factors that could affect these  controls
during our last fiscal  quarter that has materially  affected,  or is reasonably
likely to materially affect, our internal control over financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         As of the date this  report  was  filed,  there  have been no  material
developments in the legal proceedings  previously  reported in our annual report
on Form 10-K for the fiscal year ended  December 31, 2005,  which was filed with
the Securities and Exchange Commission on April 17, 2006.

ITEM 1A.  RISK FACTORS.

         An investment in our securities  involves a high degree of risk. Before
you  invest  in our  securities  you  should  carefully  consider  the risks and
uncertainties described below and the other information in this prospectus. Each
of the following risks may materially and adversely affect our business, results
of operations and financial condition. These risks may cause the market price of
our common  stock to  decline,  which may cause you to lose all or a part of the
money  you paid to buy our  securities.  We  provide  the  following  cautionary
discussion of risks,  uncertainties and possible inaccurate assumptions relevant
to our  business and our  products.  These are factors that we think could cause
our actual results to differ materially from expected results.

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

WE HAVE JUST BEGUN TO GENERATE SALES FROM OUR  SAFETY-SPONGE(TM)  SYSTEM AND THE
REVENUES HAVE BEEN NOMINAL TO DATE. A SUBSTANTIAL  AMOUNT OF OUR REVENUE  DURING
THE NINE MONTHS ENDED  SEPTEMBER  30, 2006 IS FROM A RELATED  PARTY.  BECAUSE OF
THIS,  YOU  SHOULD  NOT  RELY ON OUR  HISTORICAL  RESULTS  OF  OPERATIONS  AS AN
INDICATION OF OUR FUTURE PERFORMANCE.




                                       37
<PAGE>

         We have not made  any  significant  amount  of sales or  generated  any
significant  amount  of  revenue  to date  from  our  Safety-Sponge(TM)  System.
Further,  of our $358,000 of revenue during the nine months ended  September 30,
2006,  $104,000 was generated from a contract to provide  management  consulting
services to one of our portfolio  companies  IPEX,  Inc.,  which is considered a
related  party.  Our future  success is  dependent on our ability to develop our
patient-safety  related  assets into a successful  business,  which depends upon
wide-spread acceptance of and commercializing our Safety-Sponge(TM) System. None
of these factors is demonstrated  by our historic  performance to date and there
is no  assurance  we will be able to  accomplish  them in order to  sustain  our
operations.  As a result,  you  should  not rely on our  historical  results  of
operations as an indication of the future performance of our business.

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.  Although we still own
certain real estate assets, we are no longer focusing on the financial  services
and real  estate  industries.  As of March  29,  2006,  our  Board of  Directors
determined  to focus our  business  exclusively  on the patient  safety  medical
products  field. We have a limited  operating  history under this new structure.
Historically,  we have not typically  invested in these industries and therefore
our historical  results of operations should not be relied upon as an indication
of our future financial performance. If we do not successfully implement our new
business  structure the value of your  investment in our business  could decline
substantially.

WITHDRAWAL  OF OUR ELECTION TO BE TREATED AS A BDC MAY INCREASE THE RISKS TO OUR
SHAREHOLDERS  SINCE WE ARE NO LONGER  SUBJECT  THE  REGULATORY  RESTRICTIONS  OR
FINANCIAL REPORTING BENEFITS OF THE 1940 ACT.

         Since we withdrew our election to be treated as a BDC, we are no longer
subject to  regulation  under the 1940 Act,  which is  designed  to protect  the
interests of investors in investment  companies.  As a non-BDC, we are no longer
subject to many of the regulatory,  financial  reporting and other  requirements
and  restrictions  imposed  by the  1940  Act  including,  but not  limited  to,
limitations on the amounts,  types and prices at which we may issue  securities,
participation  in related party  transactions,  the payment of  compensation  to
executives, and the scope of eligible investments.

         The nature of our  business  has changed  from  investing  in radio and
telecommunications  companies with the goal of achieving  gains on  appreciation
and dividend income,  to actively  operating  businesses in the medical products
and health care solutions  industries,  with the goal of generating  income from
the operations of those businesses.  No assurance can be given that our business
strategy or 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 has
resulted in a  significant  change in our method of  accounting.  BDC  financial
statement  presentation  and accounting  utilizes the value method of accounting
used by investment  companies,  which allows BDCs to recognize  income and value
their investments at market value as opposed to historical cost. As an operating
company,  the required  financial  statement  presentation  and  accounting  for
securities  held is 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 have to consolidate our financial statements with subsidiaries, thus
eliminating the portfolio company reporting benefits available to BDCs.

TOGETHER WITH OUR SUBSIDIARIES,  WE MAY HAVE TO TAKE ACTIONS THAT ARE DISRUPTIVE
TO OUR BUSINESS STRATEGY TO AVOID REGISTRATION UNDER THE 1940 ACT.

                                       38
<PAGE>

         The 1940 Act  generally  requires  public  companies  that are  engaged
primarily in the business of investing,  reinvesting, owning, holding or trading
in securities to register as investment companies. A company may be deemed to be
an investment company if it owns "investment  securities" with a value exceeding
40% of the value of its total assets (excluding  government  securities and cash
items) on an  unconsolidated  basis,  unless an exemption or exclusion  applies.
Securities  issued by  companies  other  than  majority-owned  subsidiaries  are
generally  counted as investment  securities for purposes of the 1940 Act. While
on an unconsolidated basis, our subsidiaries' assets which constitute investment
securities  have not  approached  40%, as of September  30,  2006,  20.4% of our
assets on a consolidated  basis with  subsidiaries  were comprised of investment
securities. If Patient Safety Technologies, Inc. or any of its subsidiaries were
to own investment  securities  with a value exceeding 40% of its total assets it
could  require  the  subsidiary  and/or  Patient  Safety  Technologies,  Inc. to
register  as an  investment  company  under  the 1940  Act.  Registration  as an
investment  company would subject us to restrictions  that are inconsistent with
our fundamental  business strategy of equity growth through  creating,  building
and  operating  companies  in  the  medical  products  and  healthcare  services
industries,  particularly the patient safety field. Moreover, registration under
the 1940 Act would subject us to increased  regulatory and compliance costs, and
other  restrictions  on the way we  operate.  We may also have to take  actions,
including  buying,  refraining  from buying,  selling or refraining from selling
securities,  when we would otherwise not choose to do so in order to continue to
avoid registration under the 1940 Act.

WE INTEND 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 will not be  sufficient  to meet our  growth,  operating  and/or  capital
requirements.  We believe that in order to have the financial  resources to meet
our operating  requirements for the next twelve months we will need to undertake
additional  equity or debt  financings  to allow 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.

WE HAVE RECEIVED SHAREHOLDER APPROVAL TO SELL UP TO $10 MILLION OF EQUITY AND/OR
DEBT  SECURITIES TO CERTAIN RELATED PARTIES WHICH MAY RESULT IN DILUTION TO YOUR
OWNERSHIP AND VOTING RIGHTS OR MAY RESULT IN THE INCURRENCE OF SUBSTANTIAL DEBT.

         We have  received  shareholder  approval  to sell  equity  and/or  debt
securities up to $10 million in any calendar  year to Milton  "Todd" Ault,  III,
Lynne  Silverstein,  Louis Glazer,  M.D., Ph.G., and Melanie Glazer. Mr. Ault is
our former Chairman and current Chief Executive Officer,  Ms. Silverstein is our
President and  Secretary,  Mr.  Glazer is our present  Chairman and former Chief
Executive  Officer and the Chief  Health and Science  Officer of our  subsidiary
Patient Safety  Consulting  Group, LLC, and Mrs. Glazer is the former Manager of
our closed subsidiary Ault Glazer Bodnar Capital Properties, LLC and also is Mr.
Glazer's spouse.  If we propose to sell more than $10 million of securities in a
calendar year to such persons additional shareholder approval would be required.
Although we do not currently  anticipate  selling  equity or debt  securities to
these  persons if we do sell any such  securities  it will result in dilution to
your  ownership  and  voting  rights  and/or  possibly  result in our  incurring
substantial debt. Any such equity financing would result in dilution to existing
stockholders  and may  involve  securities  that have  rights,  preferences,  or
privileges  that are senior to our common stock.  Any such debt financing may be
convertible into common stock which would result in dilution to our stockholders
and would have rights  that are senior to our common  stock.  Further,  any debt
financing  must be repaid  regardless  of whether or not we generate  profits or
cash  flows  from our  business  activities,  which  could  strain  our  capital
resources.

SHOULD  THE VALUE OF OUR  PATENTS BE LESS THAN THEIR  PURCHASE  PRICE,  WE COULD
INCUR SIGNIFICANT IMPAIRMENT CHARGES.

                                       39
<PAGE>

         At  September  30,  2006,   patents  received  in  the  acquisition  of
Surgicount  Medical,   Inc.,  net  of  accumulated   amortization,   represented
$4,170,000,  or 35.8%,  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 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 patient safety medical  products  industry.
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.

         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


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<PAGE>

could result in substantial  costs and diversion of resources and could harm our
business, operating results and financial condition regardless of the outcome of
the litigation.

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

THERE  ARE  SIGNIFICANT  POTENTIAL  CONFLICTS  OF  INTEREST  WITH OUR  OFFICERS,
DIRECTORS AND OUR AFFILIATED  ENTITIES WHICH COULD ADVERSELY  AFFECT OUR RESULTS
FROM OPERATIONS.

         Certain of our  officers,  directors  and/or their family  members have
existing   responsibilities   and,   in  the   future,   may   have   additional
responsibilities,   to  act  and/or  provide  services  as  executive  officers,
directors,  owners and/or  managers of Ault Glazer  Bodnar & Company  Investment
Management  LLC and/or some of the  companies  in which we invest.  We currently
share office space with Ault Glazer Bodnar & Company Investment  Management LLC.
Milton "Todd" Ault III, our Chief Executive  Officer,  and William B. Horne, our
Chief  Financial  Officer,  are  principals  of Ault  Glazer  Bodnar  &  Company
Investment  Management LLC. Mr. Ault and Mr. Horne devote  approximately  85% of
their time to our business,  based on a 60-hour,  6-day  workweek.  Accordingly,
certain  conflicts  of interest  may arise from time to time with our  officers,
directors and Ault Glazer Bodnar & Company Investment Management LLC.

         Certain conflicts of interest may also arise from time to time with our
officers,  directors  and the  companies in which we invest.  Of our $358,000 of
revenue during the nine months ended September 30, 2006,  $104,000 was generated
from a contract  to provide  management  consulting  services  to our  portfolio
company IPEX,  Inc. Mr. Ault is currently a director of IPEX, Inc. and he served
as interim Chief  Executive  Officer of IPEX,  Inc. from May 26, 2005 until July
13, 2005. From May 28, 2005 until approximately  December 14, 2005 Mr. Ault held
an irrevocable  proxy to vote 67% of the outstanding  shares of IPEX, Inc. owned
by the former Chief  Executive  Officer and a founder of IPEX,  Inc.  Darrell W.
Grimsley,  Jr., Chief Executive  Officer of Automotive  Services  Group,  LLC, a
subsidiary which is wholly owned by Automotive Services Group, Inc., served as a
director of IPEX,  Inc. and a member of its Audit Committee from August 30, 2005
until  January 30, 2006.  Ms.  Campbell  served as a director of IPEX,  Inc. and
Chairman of its Audit  Committee from September 23, 2005 until January 30, 2006.
Mr. Horne is currently Chief  Financial  Officer and a director of our portfolio
company  Digicorp.  From  September 30, 2005 until  December 29, 2005, Mr. Horne
also served as  Digicorp's  Chief  Executive  Officer and Chairman of Digicorp's
Board of Directors.  One of our directors and Audit  Committee  Chairman,  Alice
Campbell,  is  currently  a  director  of  Digicorp.  Mr.  Ault  served as Chief
Executive  Officer of Digicorp from April 26, 2005 until  September 30, 2005 and
Chairman of Digicorp's Board of Directors from July 16, 2005 until September 30,
2005. Ms.  Silverstein served as Secretary of Digicorp from April 26, 2005 until
December 29, 2005. Mr.  Grimsley  served as a director of Digicorp from July 16,
2005 until December 29, 2005.

         Because of these possible  conflicts of interest,  such individuals may
direct potential business and investment  opportunities to other entities rather
than to us, which may not be in the best interest of our  stockholders.  We will
attempt to resolve any such  conflicts  of  interest in our favor.  Our Board of
Directors does not believe that we have experienced any losses


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<PAGE>

due to any  conflicts  of interest  with the  business  of Ault Glazer  Bodnar &
Company  Investment   Management  LLC,  other  than  certain  of  our  officers'
responsibility  to devote their time to provide  management  and  administrative
services to Ault Glazer  Bodnar & Company  Investment  Management  LLC.  and its
clients from  time-to-time.  Similarly,  our Board of Directors does not believe
that we have  experienced  any losses due to any  conflicts of interest with the
companies in which we hold  investments  other than certain of our officers' and
directors' responsibility to devote their time to provide management services to
some of such  companies.  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.

         Although our present Chairman, Louis Glazer, M.D., Ph.G., has extensive
experience  in  the  medical  field,  he has  limited  experience  managing  and
operating a public  company.  In  addition,  prior to the change in control that
occurred in October 2004,  other members of our current senior  management  were
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 HAVE EXPERIENCED  TURNOVER IN OUR CHIEF EXECUTIVE  OFFICER POSITION IN RECENT
MONTHS  AND WE ARE  PRESENTLY  SEARCHING  FOR A NEW CHIEF  EXECUTIVE  OFFICER TO
REPLACE  MILTON  "TODD"  AULT  III.  IF WE ARE NOT ABLE TO  RETAIN  A NEW  CHIEF
EXECUTIVE OFFICER WITH SIGNIFICANT PROFESSIONAL EXPERIENCE IN THE PATIENT SAFETY
OR  MEDICAL  MARKETS  AND  PUBIC  MARKET  EXPERIENCE,  WE  MAY  HAVE  DIFFICULTY
IMPLEMENTING OUR BUSINESS STRATEGY.

         Milton  "Todd" Ault,  III resigned as our Chairman and Chief  Executive
Officer on January 9, 2006. On January 7, 2006, our Board of Directors appointed
Louis  Glazer,   M.D.,  Ph.G.  as  Chairman  and  Chief  Executive   Officer  in
anticipation  of Mr.  Ault's  resignation.  During  March 2005,  Dr.  Glazer had
indicated his intent to resign as Chairman and Chief  Executive  Officer at such
time that we retain a suitable  candidate  for the  position of Chief  Executive
Officer.  Due to health  concerns,  Dr.  Glazer  resigned  his position as Chief
Executive  Officer on July 11, 2006 and Milton "Todd" Ault, III was re-appointed
Chief  Executive  Officer and a Director of the Company.  Our future  success is
dependent on our ability to attract and retain such a candidate.  Although we do
not believe we have  experienced any losses or negative  effects from Mr. Ault's
and Dr. Glazer's  resignations and we do not expect any adverse  consequences in
the  future,  if we are not able to retain a new Chief  Executive  Officer  with
significant professional experience in the patient safety or medical markets and
public  market  experience,  we may have  difficulty  implementing  our business
strategy.

OUR CHIEF EXECUTIVE  OFFICER  CONTROLS A SIGNIFICANT  PORTION OF OUR OUTSTANDING
COMMON STOCK AND HIS OWNERSHIP INTEREST MAY CONFLICT WITH OUR OTHER STOCKHOLDERS
WHO MAY BE  UNABLE  TO  INFLUENCE  MANAGEMENT  AND  EXERCISE  CONTROL  OVER  OUR
BUSINESS.

         As of May 1,  2006,  Milton  "Todd"  Ault,  III,  our  Chief  Executive
Officer,  beneficially owned approximately 50% of our common stock. As a result,
Mr. Ault may be able to exert  significant  influence  over our  management  and
policies to:

         o  elect or defeat the election of our directors;

         o  amend or prevent  amendment of our certificate of  incorporation  or
            bylaws;

         o  effect  or  prevent a  merger,  sale of  assets  or other  corporate
            transaction; and



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<PAGE>

         o  control  the  outcome  of  any  other   matter   submitted   to  the
            shareholders for vote.

         Accordingly,   our  other  stockholders  may  be  unable  to  influence
management and exercise control over our business.

RISKS RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED BUSINESS

WE  RELY  ON  A  THIRD  PARTY  MANUFACTURER  AND  SUPPLIER  TO  MANUFACTURE  OUR
SAFETY-SPONGE(TM) SYSTEM, THE LOSS OF WHICH MAY INTERRUPT OUR OPERATIONS.

         On August 17, 2005,  Surgicount  entered  into an agreement  for A Plus
International Inc. to be the exclusive manufacturer and provider of Surgicount's
Safety-Sponge(TM) products. In the event A Plus International Inc. does not meet
the requirements of the agreement,  Surgicount may seek additional  providers of
the Safety-Sponge(TM) products. While our relationship with A Plus International
Inc. is  currently on good terms,  we cannot  assure you that we will be able to
maintain our relationship  with A Plus  International  Inc. or secure additional
suppliers and  manufacturers  on favorable terms as needed.  Although we believe
the  materials  used in the  manufacture  of the  Safety-Sponge(TM)  System  are
readily available and can be purchased and/or produced by multiple vendors,  the
loss of our agreement with A Plus  International  Inc., the deterioration of our
relationship with A Plus  International  Inc.,  changes in the specifications of
components used in our products,  or our failure to establish good relationships
with major new  suppliers  or  manufacturers  as  needed,  could have a material
adverse effect on our business, financial condition and results of operations.

THE  UNPREDICTABLE  PRODUCT CYCLES OF THE MEDICAL DEVICE AND  HEALTHCARE-RELATED
INDUSTRIES  AND  UNCERTAIN  DEMAND FOR  PRODUCTS  COULD  CAUSE OUR  REVENUES  TO
FLUCTUATE.

         Our target  customer base includes  hospitals,  physicians,  nurses and
clinics.  The medical  device and  healthcare-related  industries are subject to
rapid  technological  changes,  short product life cycles,  frequent new product
introductions  and evolving industry  standards,  as well as economic cycles. If
the market for our products does not grow as rapidly as our management  expects,
our revenues could be less than expected.  We also face the risk that changes in
the medical device  industry,  for example,  cost-cutting  measures,  changes to
manufacturing techniques or production standards, could cause our manufacturing,
design and engineering capabilities to lose widespread market acceptance. If our
products do not gain market acceptance or suffer because of competing  products,
unfavorable regulatory actions,  alternative treatment methods or cures, product
recalls or liability claims,  they will no longer have the need for our products
and we may  experience  a  decline  in  revenues.  Adverse  economic  conditions
affecting the medical device and healthcare-related  industries,  in general, or
the market for our products in  particular,  could result in  diminished  sales,
reduced profit margins and a disruption in our business.

WE ARE SUBJECT TO CHANGES IN THE  REGULATORY  AND  ECONOMIC  ENVIRONMENT  IN THE
HEALTHCARE INDUSTRY, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

         The  healthcare  industry in the United States  continues to experience
change. In recent years, the United States Congress and state  legislatures have
introduced and debated various healthcare reform proposals.  Federal,  state and
local government representatives will, in all likelihood, continue to review and
assess alternative  healthcare delivery systems and payment  methodologies,  and
ongoing public debate of these issues is expected. Cost containment initiatives,
market  pressures and proposed  changes in applicable  laws and  regulations may
have a dramatic effect on pricing or potential demand for medical  devices,  the
relative costs associated with doing business and the amount of reimbursement by
both government and third-party payors 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


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<PAGE>

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 consisting only
of 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.

         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


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<PAGE>

solutions  companies or marketing  of our products and  solutions.  If we cannot
compete effectively against our competitors,  our business,  financial condition
and results of operations may be materially adversely affected.

WE MAY BE SUBJECT  TO  PRODUCT  LIABILITY  CLAIMS  AND IF OUR  INSURANCE  IS NOT
SUFFICIENT  TO  COVER  PRODUCT  LIABILITY  CLAIMS  OUR  BUSINESS  AND  FINANCIAL
CONDITION WILL BE MATERIALLY ADVERSELY AFFECTED.

         The nature of our business  exposes us to potential  product  liability
risks,  which  are  inherent  in  the  distribution  of  medical  equipment  and
healthcare  products.  We may not be able to avoid product  liability  exposure,
since third parties  develop and  manufacture  our equipment and products.  If a
product  liability claim is  successfully  brought against us or any third party
manufacturer then we would experience adverse consequences to our reputation, we
might be required to pay damages, our insurance,  legal and other expenses would
increase,  we might  lose  customers  and/or  suppliers  and  there may be other
adverse results.

         Through  our  subsidiary  Surgicount  Medical,  Inc.  we  have  general
liability insurance to cover claims up to $1,000,000.  This insurance covers the
clinical  trial/time  study relating to the bar coding of surgical sponges only.
In  addition,  A Plus  International,  Inc.,  the  manufacturer  of our surgical
sponges,  maintains general liability insurance for claims up to $4,000,000 that
covers product liability claims against Surgicount Medical, Inc. There can be no
assurance that one or more liability  claims will not exceed the coverage limits
of any of such  policies.  If we or our  manufacturer  are  subjected to product
liability  claims,  the result of such claims could harm our reputation and lead
to less  acceptance  of our  products  in the  healthcare  products  market.  In
addition, if our insurance or our manufacturer's  insurance is not sufficient to
cover product  liability  claims,  our business and financial  condition will be
materially adversely affected.

RISKS RELATED TO OUR INVESTMENTS

WE MAY EXPERIENCE  FLUCTUATIONS IN OUR QUARTERLY RESULTS DUE TO THE SUCCESS RATE
OF INVESTMENTS WE HOLD.

         We may experience  fluctuations in our quarterly  operating results due
to a number of factors,  including the success rate of our current  investments,
variations in and the timing of the recognition of realized and unrealized gains
or  losses,  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.

WE HAVE INVESTED IN NON-MARKETABLE INVESTMENT SECURITIES WHICH MAY SUBJECT US TO
SIGNIFICANT IMPAIRMENT CHARGES.

         We have invested in illiquid equity  securities  acquired directly from
issuers in private transactions. At September 30, 2006, 10.7% of our assets on a
consolidated basis with subsidiaries was 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 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  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 company in which we
hold  investments  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 only recognized a $50,000
impairment  charge  for  the  fiscal  year  ended  December  31,  2005,  since a
significant  amount of our assets are  comprised  of  non-marketable  investment
securities,  any future impairment charges from the write down in value of these
securities  will most likely  have a material  adverse  affect


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<PAGE>

on our financial condition.

ECONOMIC RECESSIONS OR DOWNTURNS COULD IMPAIR INVESTMENTS AND HARM OUR OPERATING
RESULTS.

         Many  of the  companies  in  which  we  have  made  investments  may be
susceptible to economic slowdowns or recessions. An economic slowdown may affect
the  ability  of a  company  to  engage  in a  liquidity  event  such as a sale,
recapitalization,  or initial  public  offering.  Our  nonperforming  assets are
likely to increase and the value of our investments is likely to decrease during
these  periods.   These  conditions  could  lead  to  financial  losses  in  our
investments  and a  decrease  in our  revenues,  net  income,  and  assets.  Our
investments  also may be  affected  by  current  and future  market  conditions.
Significant  changes  in  the  capital  markets  could  have  an  effect  on the
valuations  of private  companies  and on the  potential  for  liquidity  events
involving  such  companies.  This could affect the amount and timing of gains or
losses realized on our investments.

INVESTING IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK.

         Our assets  include an investment in a private  company,  a 1.6% equity
interest in Alacra Corporation. 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  this  investment,  there  is
significantly greater risk of loss than is the case with traditional  investment
securities.  We expect that some of our  investments  will be a complete loss or
will be unprofitable and that some will appear to be likely to become successful
but never realize their  potential.  During the year ended December 31, 2005, we
wrote off our  investment in the private  company China Nurse LLC. The amount of
the loss was $50,000.  We have in the past relied,  and we continue to rely to a
large extent,  upon proceeds from sales of  investments  rather than  investment
income or revenue  generated from  operating  activities to defray a significant
portion of our operating expenses.

THE LACK OF LIQUIDITY IN OUR INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.

         A portion of our investments  consist of securities  acquired  directly
from the issuer in private  transactions.  Some of these investments are subject
to  restrictions  on resale and/or  otherwise are illiquid.  While most of these
investments  are in  publicly  traded  companies,  the  trading  volume  in such
companies'  securities  is low which  reduces the  liquidity of the  investment.
Additionally,  many of such  securities  are not eligible for sale to the public
without  registration  under the Securities Act of 1933,  which could prevent or
delay any sale by us of such  investments  or reduce the amount of proceeds that
might otherwise be realized therefrom. Restricted securities generally sell at a
price lower than similar  securities not subject to restrictions on resale.  The
illiquidity of our  investments  may adversely  affect our ability to dispose of
debt and equity securities at times when it may be otherwise advantageous for us
to liquidate  such  investments.  In addition,  if we were forced to immediately
liquidate some or all of our  investments,  the proceeds of such liquidation may
be significantly less than the value at which we acquired those investments.

WE MAY NOT REALIZE GAINS FROM OUR EQUITY INVESTMENTS.

         Our investments are primarily in equity  securities of other companies.
These equity  interests may not appreciate in value and, in fact, may decline in
value.  Accordingly,  we may  not be able  to  realize  gains  from  our  equity
interests,  and any gains that we do realize  on the  disposition  of any equity
interests may not be sufficient to offset any other losses we experience.

THERE  IS  UNCERTAINTY  REGARDING  THE  VALUE  OF OUR  INVESTMENTS  THAT ARE NOT
PUBLICLY TRADES  SECURITIES,  WHICH COULD ADVERSELY AFFECT THE  DETERMINATION OF
OUR ASSET VALUE.

         The fair value of investments  that are not publicly traded  securities
is not readily determinable.  Therefore, we value these securities at fair value
as determined in good faith by our Board of Directors. The types of factors that
our Board of Directors takes into account include,  as relevant,  the nature and
value of any collateral,  the portfolio  company's  ability to make payments and
its earnings, the markets in which the portfolio company does


                                       46
<PAGE>

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.

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.

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 HEBER SPRINGS, ARKANSAS AND
SPRINGFIELD,  TENNESSEE.  ADVERSE CIRCUMSTANCES  AFFECTING THESE AREAS GENERALLY
COULD ADVERSELY AFFECT OUR BUSINESS.

         A significant  proportion of our real estate  investments  are in Heber
Springs,  Arkansas and  Springfield,  Tennessee 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.




                                       47
<PAGE>

RISKS RELATED TO OUR CAR WASH BUSINESS

IF A COMPETING CAR WASH FACILITY IS OPENED WITHIN THE SERVICE AREA OF ONE OF OUR
EXPRESS CAR WASH SITES OUR CAR WASH BUSINESS MAY LOSE REVENUE.

         Our indirect wholly owned  subsidiary  Automotive  Services Group,  LLC
("ASG") is in the business of operating express car wash facilities. ASG's first
express car wash site,  developed in Birmingham,  Alabama, had its grand opening
on March 8, 2006. ASG chooses  locations for its express car wash sites based on
the  locations'  high  visibility  and  proximity  to high  automobile  traffic.
Competitors may develop facilities  offering similar services within the service
area of ASG's  express  car wash  facilities,  which  could cause ASG's car wash
facilities to lose  revenue.  ASG will attempt to mitigate this risk during site
due diligence, conducting discussions with local permitting and zoning personnel
to determine if competing  facilities have been planned or requested  within the
relevant service area. However, such due diligence, no matter how extensive, may
not always reveal any planned competing businesses in a particular service area.
In  addition,  a  competing  car wash site may be  developed  after  ASG  begins
operating a car wash in a particular  service area. If competing  facilities are
developed  in the same  service  area as one or more of ASG's  express  car wash
sites,  it could  cause  ASG to lose a  significant  amount of  revenue  and may
require ASG to close one or more express car wash sites.

ADVERSE  WEATHER  CONDITIONS  MAY  CAUSE  ASG'S  EXPRESS  CAR WAS  SITES TO LOSE
REVENUE.

         Automobile  owners  generally do not wash their vehicles during extreme
weather conditions. During rainy periods automobile owners do not generally wash
their vehicles  because rain and mud causes the vehicles to quickly become dirty
again. During periods of severe drought automobile owners may not desire to wash
their vehicles because they do not want to endure extreme outdoor  temperatures.
Further  during  severe  drought  conditions  local  governments  tend to impose
restrictions  on when and in what  amounts  residents  can use  water.  Any such
adverse weather conditions may cause  unpredictable  business cycles for ASG and
may cause ASG's express car wash sites to lose a significant amount of revenue.

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 subsequent  interim  quarterly
periods,  the market  price for our common  stock has ranged from $0.30 to $7.33
(as adjusted to reflect a 3:1 forward stock split effective April 5, 2005).  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").  As of December 15, 2006, the average daily
trading volume of our common stock over the past three months was  approximately
39,000  shares.  The last reported  sales price for our common stock on December
15, 2006, was $1.96 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 September 24, 2004, we received a letter from AMEX inquiring as to
our ability to remain listed. Specifically, AMEX indicated that our common stock
was subject to delisting  under sections


                                       48
<PAGE>

1003(a)(i) and  1003(a)(ii)  of AMEX's  Company Guide because our  stockholders'
equity was below the level required by AMEX's continued listing  standards.  Our
stockholders'  equity fell below the required standard due to years of continued
losses.  On  September  15,  2004,  AMEX  notified us that it had  accepted  our
proposed plan to comply with AMEX's  continued  listing  standards.  Significant
events which increased our  stockholders'  equity in excess of AMEX's  continued
listing  standards  were the  completion of an  approximately  $4 million equity
financing  combined with the acquisition of Surgicount  Medical,  Inc. which was
done primarily through the issuance of common stock. AMEX will normally consider
suspending dealings in, or removing from the listing of, securities of a company
under Section  1003(a)(i)  for a company that has  stockholders'  equity of less
than $2,000,000 if such company has sustained losses from continuing  operations
and/or net losses in two of its three most recent fiscal years; or under Section
1003(a)(ii) for a company that has stockholders'  equity of less than $4,000,000
if such  company has  sustained  losses from  continuing  operations  and/or net
losses in three of its four most recent fiscal years.  As of September 30, 2005,
our second consecutive  quarter in which our stockholders'  equity was in excess
of $4,000,000,  we believe we have re-gained  compliance  with AMEX's  continued
listing  requirements.  However,  as of September  30, 2006,  our  stockholders'
equity was below that  required  under  Section  1003(a)(ii)  of AMEX's  Company
Guide.  If  we  fail  to  become   compliant  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 SEC 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:

             o  that  a  broker  or  dealer  approve  a  person's   account  for
                transactions in penny stocks; and

             o  the  broker  or  dealer  receive  from the  investor  a  written
                agreement  to the  transaction,  setting  forth the identity and
                quantity of the penny stock to be purchased.

         In order to  approve  a  person's  account  for  transactions  in penny
stocks, the broker or dealer must:

             o  obtain   financial   information   and   investment   experience
                objectives of the person; and

             o  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:

             o  sets  forth  the basis on which  the  broker or dealer  made the
                suitability  determination;  and

             o  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.



                                       49
<PAGE>

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

         On January 12, 2006,  ASG entered into a Secured  Promissory  Note with
Steven  J.  Caspi  in  the  principal   amount  of  $1,000,000.   As  additional
consideration for entering into the secured  promissory note, Mr. Caspi received
warrants to purchase 30,000 shares of the Company's  common stock.  The warrants
are  exercisable  for a period of five years and have an exercise price of $4.50
per share.  The  issuance  of the above  warrants  to Mr.  Caspi was exempt from
registration  requirements  pursuant to Section  4(2) of the  Securities  Act of
1933, as amended, and Rule 506 promulgated thereunder. No advertising or general
solicitation  was employed in offering the securities and Mr. Caspi  represented
that he is an accredited  investor and that he is able to bear the economic risk
of his investment.

         On February 8, 2006, we entered into a Secured Promissory Note with AGB
Acquisition  Fund in the  principal  amount of $687,000.  As an  inducement  for
entering into the secured promissory note AGB Acquisition Fund received warrants
to purchase  20,608  shares of the  Company's  common  stock.  The  warrants are
exercisable  for a period of five  years  and have an  exercise  price  equal to
$3.86.  The issuance of the above  warrants to AGB  Acquisition  Fund was exempt
from registration requirements pursuant to Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 promulgated thereunder. No advertising or general
solicitation  was employed in offering the securities and Mr. Caspi  represented
that he is an accredited  investor and that he is able to bear the economic risk
of his investment.

         On February 13, 2006, the Company  issued 175,000  warrants to purchase
shares of common stock at $3.95 per share to a consultant.  The warrants  vested
immediately and have a three-year life. The warrants were valued at $405,000 and
were  expensed  during the three months ended March 31, 2006.  These  securities
will be issued  pursuant  to  Section  4(2) of the  Securities  Act of 1933,  as
amended.  These warrants were issued in reliance upon the exemption  provided by
Section 4(2) of the Securities Act. No advertising or general  solicitation  was
employed in offering the securities,  the sales were made to a limited number of
persons,  and transfer of the  securities is  restricted in accordance  with the
requirements of the Securities Act.

         On May 19, 2006, the Company issued 32,120  warrants to purchase shares
of  common  stock at  $3.50  per  share to a  consultant.  The  warrants  vested
immediately and have a one-year life. The warrants were valued at  approximately
$31,000 and are being expensed over the warrant term.  These  securities will be
issued pursuant to Section 4(2) of the Securities Act of 1933, as amended. These
warrants were issued in reliance upon the exemption  provided by Section 4(2) of
the  Securities  Act. No  advertising  or general  solicitation  was employed in
offering the securities, the sales were made to a limited number of persons, and
transfer of the securities is restricted in accordance with the  requirements of
the Securities Act.

         On June 6, 2006 we entered into a Secured  Convertible  Promissory Note
with Alan Morelli in the principal  amount of  $1,100,000.  As an inducement for
entering into the secured  convertible  promissory  note, Mr.  Morelli  received
warrants to purchase  401,460 shares of our common stock. On August 17, 2006, we
sold  shares  of  our  common  stock  at  $1.25  per  share  thereby   requiring
modifications to Mr. Morelli's secured convertible  promissory note and warrant.
These  modifications  resulted in an adjustment to the  conversion  price of the
Morelli Note from $2.74 to $1.25 per share,  an adjustment to the exercise price
of the Morelli Warrant,  and an increase in the number of shares of common stock
available  to purchase  upon  exercise of the Morelli  Warrant  from  401,460 to
976,351.  The  warrants are  exercisable  for a period of five years and have an
adjusted  exercise price equal to $1.25. The issuance of these securities to Mr.
Morelli was exempt from  registration  requirements  pursuant to Section 4(2) of
the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.  No
advertising or general  solicitation was employed in offering the securities and
Mr. Caspi  represented that he is an accredited  investor and that he is able to
bear the economic risk of his investment.

         On July 12, 2006 we entered  into a  Convertible  Promissory  Note with
Charles J. Kalina, III in the principal amount of $250,000. As an inducement for
entering  into the secured  promissory  note,  Mr. Kalina  received  warrants to
purchase  85,000  shares  of  the  Company's  common  stock.  The  warrants  are
exercisable for a period of five years


                                       50
<PAGE>

and have an exercise price equal to $2.69.  The issuance of these  securities to
Mr. Kalina was exempt from registration requirements pursuant to Section 4(2) of
the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.  No
advertising or general  solicitation was employed in offering the securities and
Mr. Caspi  represented that he is an accredited  investor and that he is able to
bear the economic risk of his investment.

         In  August  2006,  we  entered  into   subscription   agreements   (the
"Agreement") with two unaffiliated  accredited  investors,  pursuant to which we
sold 200,000 shares of the Company's common stock, $0.33 par value per share, at
a price of $1.25 per share. We received gross proceeds of approximately $250,000
from the sale of our common stock to the accredited  investors.  Pursuant to the
Agreement, we granted the accredited investors piggy back registration rights to
register  the  resale  of the  shares of  common  stock.  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 September 8, 2006 we entered into a Convertible Promissory Note with
Steven J. Caspi in the principal  amount of  $1,495,000.  As an  inducement  for
entering  into the secured  promissory  note,  Mr.  Caspi  received  warrants to
purchase  250,000  shares  of the  Company's  common  stock.  The  warrants  are
exercisable  for a period of five  years  and have an  exercise  price  equal to
$1.25.   The  issuance  of  these  securities  to  Mr.  Caspi  was  exempt  from
registration  requirements  pursuant to Section  4(2) of the  Securities  Act of
1933, as amended, and Rule 506 promulgated thereunder. No advertising or general
solicitation  was employed in offering the securities and Mr. Caspi  represented
that he is an accredited  investor and that he is able to bear the economic risk
of his investment.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

         On January  12, 2006 ASG entered  into a secured  promissory  note with
Steven J. Caspi in the principal  amount of $1,000,000  (the "CASPI NOTE").  The
Caspi Note was due to be repaid on July 13, 2006.  The Company is in the process
of amending the Caspi Note to extend the due date.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         None.

ITEM 5.  OTHER INFORMATION.

         None.

ITEM 6.  EXHIBITS.

   EXHIBIT
   NUMBER                             DESCRIPTION
--------------- ----------------------------------------------------------------

   10.1         Employment  Agreement  entered  into as of July 27,  2006 by and
                between  Patient  Safety  Technologies,  Inc. and Milton  "Todd"
                Ault, III  (Incorporated  by reference to the Company's  current
                report  on Form 8-K  filed  with  the  Securities  and  Exchange
                Commission on August 25, 2006)

   10.2         Subscription  Agreement  dated August 30, 2006  between  Patient
                Safety Technologies,  Inc. and Nobu Ventures Inc.  (Incorporated
                by reference to the Company's  current  report on Form 8-K filed
                with the  Securities  and  Exchange  Commission  on September 6,
                2006)

   10.3         Letter  Agreement  entered into  November 1, 2006 by and between
                Trinity River  Advisors,  LLC and Patient  Safety  Technologies,
                Inc.  (Incorporated by reference to the Company's current report
                on Form 8-K filed with the Securities and Exchange Commission on
                November 7, 2006)

   10.4         Supply  Agreement  entered into November 14, 2006 by and between
                Surgicount   Medical,   Inc.  and  Cardinal   Health  200,  Inc.
                (redacted)  (Incorporated by reference to the Company's  current
                report  on Form 8-K  filed  with  the  Securities  and  Exchange
                Commission on November 20, 2006)


                                       51
<PAGE>

   16.1         Letter  from  Rothstein,   Kass  &  Company,   P.C  to  the  SEC
                (Incorporated  by reference to the Company's  current  report on
                Form 8-K filed with the  Securities  and Exchange  Commission on
                October 12, 2006)

   16.2         Letter from Peterson & Co., LLP to the SEC,  dated  December 14,
                2006  (Incorporated by reference to the Company's current report
                on Form 8-K filed with the Securities and Exchange Commission on
                December 14, 2006)

   31.1*        Certification  of  Chief  Executive  Officer  required  by  Rule
                13a-14(a) or Rule 15d-14(a)

   31.2*        Certification  of  Chief  Financial  Officer  required  by  Rule
                13a-14(a) or Rule 15d-14(a)

   32.1*        Certification  of  Chief  Executive  Officer  required  by  Rule
                13a-14(b)  or Rule  15d-14(b)  and Section 1350 of Chapter 63 of
                Title 18 of the United States Code

   32.2*        Certification  of  Chief  Executive  Officer  required  by  Rule
                13a-14(b)  or Rule  15d-14(b)  and Section 1350 of Chapter 63 of
                Title 18 of the United States Code

------------------------
   * Filed herewith.














                                       52
<PAGE>

                                   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: December 19, 2006           By: /s/ MILTON "TODD" AULT III
                                                ------------------------------
                                                   Milton "Todd" Ault III
                                                   Chief Executive Officer

           Date: December 19, 2006           By: /s/ WILLIAM B. HORNE
                                                 -----------------------------
                                                   William B. Horne
                                                   Chief Financial Officer











                                       53