**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 MARCH 31, 2008




**OR**





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





FOR
      THE
      TRANSITION PERIOD
      FROM                TO




COMMISSION
      FILE NUMBER   001-09727





**PATIENT
      SAFETY TECHNOLOGIES, INC.**


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





**Delaware**
            
            **13-3419202****(State
                or other jurisdiction of incorporation or
                organization)**
            
            **(I.R.S.
                Employer Identification
                Number)**





**43460
      Ridge Park Drive, Suite 140, Temecula, CA 92590**


**(Address
      of principal executive offices) (Zip Code)**





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





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





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




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





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





There
      were 12,159,602 shares of the registrant's common stock outstanding as of May
      15, 2008.





**PATIENT
      SAFETY TECHNOLOGIES, INC.**





**FORM
      10-Q FOR THE QUARTER**


**ENDED
      MARCH 31, 2008**





**TABLE
      OF CONTENTS**





**Page****PART
                I – FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements
            1Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            14Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                4T.
            Controls
                and Procedures
            22**PART
                II – OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            23Item
                1A.
            Risk
                Factors
            23Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            23Item
                3.
            Defaults
                Upon Senior Securities
            23Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            24Item
                5.
            Other
                Information
            24Item
                6.
            Exhibits
            24**SIGNATURES**
            25





**"SAFE
      HARBOR" STATEMENT UNDER**


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





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





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





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





**PART
      I – FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





**PATIENT
      SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY**





**Consolidated
      Balance Sheets (Unaudited)**





**March 31,**
            
            **December 31,****2008**
            
            **2007****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            155,828
            
            $
            405,413Accounts
                receivable
            
            
            149,592
            
            
            71,840Prepaid
                expenses
            
            
            71,481
            
            
            104,723**TOTAL
                CURRENT ASSETS**
            
            
            376,901
            
            
            581,976Restricted
                certificate of deposit
            
            
            87,500
            
            
            87,500Notes
                receivable
            
            
            153,545
            
            
            153,545Property
                and equipment, net
            
            
            695,540
            
            
            663,391Assets
                held for sale, net
            
            
            90,000
            
            
            405,986Goodwill
            
            
            1,832,027
            
            
            1,832,027Patents,
                net
            
            
            3,682,673
            
            
            3,763,908Long-term
                investment
            
            
            666,667
            
            
            666,667Other assets
            
            
            19,174
            
            
            19,174**TOTAL
                ASSETS**
            
            $
            7,604,027
            
            $
            8,174,174**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES**Notes
                payable, current portion
            
            $
            1,571,082
            
            $
            1,172,380Accounts
                payable
            
            
            1,022,620
            
            
            708,593Accrued
                liabilities
            
            
            622,612
            
            
            520,749**TOTAL
                CURRENT LIABILITIES**
            
            
            3,216,314
            
            
            2,401,722Notes
                payable, less current portion
            
            
            2,530,558
            
            
            2,530,558Deferred
                tax liabilities
            
            
            1,466,969
            
            
            1,499,329**COMMITMENTS
                AND CONTINGENCIES (Note 13)****STOCKHOLDERS'
                EQUITY**Convertible
                preferred stock, $1.00 par value, cumulative 7% dividend: 1,000,000
                shares
                authorized; 10,950 issued and outstanding at March 31, 2008 and December
                31, 2007 (Liquidation preference of $1,229,138 at March 31, 2008
                and
                December 31, 2007
            
            
            10,950
            
            
            10,950Common
                stock, $0.33 par value: 25,000,000 shares authorized; 12,079,602
                shares
                issued and outstanding at March 31, 2008; 12,054,602 shares issued
                and
                outstanding at December 31, 2007
            
            
            3,986,269
            
            
            3,978,019Additional
                paid-in capital
            
            
            34,547,139
            
            
            34,320,134Accumulated
                deficit
            
            
            (38,154,172
            )
            
            (36,566,538
            )**TOTAL
                STOCKHOLDERS' EQUITY**
            
            
            390,186
            
            
            1,742,565**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            7,604,027
            
            $
            8,174,174





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


1


**PATIENT
      SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY**








**Consolidated
      Statements of Operations (Unaudited)**





**For The Three Months Ended March 31,****2008**
            
            **2007****REVENUES**
            
            $
            500,159
            
            $
            307,158**COST
                OF SALES**
            
            
            393,291
            
            
            214,210**Gross
                margin**
            
            
            106,868
            
            
            92,948**OPERATING
                EXPENSES**Salaries
                and employee benefits
            
            
            649,016
            
            
            524,339Professional
                fees
            
            
            333,235
            
            
            312,640Rent
            
            
            19,262
            
            
            38,582Insurance
            
            
            21,464
            
            
            16,712Taxes
                other than income taxes
            
            
            102
            
            
            27,158Amortization
                of patents
            
            
            81,235
            
            
            81,235General
                and administrative
            
            
            426,261
            
            
            194,516**Total
                operating expenses**
            
            
            1,530,575
            
            
            1,195,182**Operating
                loss**
            
            
            (1,423,707
            )
            
            (1,102,234
            )**OTHER
                INCOME (EXPENSES)**Interest,
                dividend income and other
            
            
            —
            
            
            4,287Realized
                loss on assets held for sale, net
            
            
            (24,578
            )
            
            —Interest
                expense
            
            
            (87,086
            )
            
            (267,584
            )Unrealized
                loss on assets held for sale, net
            
            
            (65,460
            )
            
            —**Loss
                from continuing operations before income taxes**
            
            
            (1,600,831
            )
            
            (1,365,531
            )**Income
                tax benefit**
            
            
            32,360
            
            
            29,245**Loss
                from continuing operations**
            
            
            (1,568,471
            )
            
            (1,336,286
            )**Loss
                from discontinued operations**
            
            
            —
            
            
            (88,767
            )**Net
                loss**
            
            
            (1,568,471
            )
            
            (1,425,053
            )**Preferred
                dividends**
            
            
            (19,163
            )
            
            (19,163
            )**Loss
                applicable to common shareholders**
            
            $
            (1,587,634
            )
            $
            (1,444,216
            )**Basic
                and diluted net loss per common share****Continuing
                operations**
            
            $
            (0.13
            )
            $
            (0.18
            )**Discontinued
                operations**
            
            $
            —
            
            $
            (0.01
            )**Net
                loss**
            
            $
            (0.13
            )
            $
            (0.19
            )**Weighted
                average common shares outstanding - basic and
                diluted**
            
            
            12,079,602
            
            
            7,789,581





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


2


**PATIENT
      SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY**





**Consolidated
      Statements of Cash Flows (Unaudited)**





**For The Three Months Ended March 31,****2008**
            
            **2007**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,568,471
            )
            $
            (1,425,053
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            76,379
            
            
            31,911Amortization
                of patents
            
            
            81,235
            
            
            81,235Non-cash
                interest
            
            
            —
            
            
            169,427Realized
                loss on assets held for sale, net
            
            
            24,578
            
            
            —Realized
                loss on sale of property and equipment
            
            
            526
            
            
            —Unrealized
                loss on assets held for sale, net
            
            
            65,460
            
            
            —Stock-based
                compensation to employees and directors
            
            
            200,505
            
            
            249,900Stock-based
                compensation to consultants
            
            
            —
            
            
            61,703Income
                tax expense (benefit)
            
            
            (32,360
            )
            
            (29,245
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (77,752
            )
            
            (132,715
            )Prepaid
                expenses
            
            
            33,242
            
            
            141,194Other
                current assets
            
            
            —
            
            
            (3,495
            )Assets
                held for sale, net
            
            
            —
            
            
            10,909Accounts
                payable
            
            
            314,027
            
            
            (212,309
            )Accrued
                liabilities
            
            
            136,613
            
            
            85,345Net
                cash used in operating activities
            
            
            (746,018
            )
            
            (971,193
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (109,054
            )
            
            (79,017
            )Proceeds
                from sale of assets held for sale, net
            
            
            225,948
            
            
            —Net
                cash provided by (used in) investing activities
            
            
            116,894
            
            
            (79,017
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock and warrants
            
            
            —
            
            
            2,897,140Proceeds
                from notes payable
            
            
            500,000
            
            
            10,000Payments
                and decrease on notes payable
            
            
            (101,298
            )
            
            (450,000
            )Payments
                of preferred dividends
            
            
            (19,163
            )
            
            —Net
                cash provided by financing activities
            
            
            379,539
            
            
            2,457,140Net
                (decrease) increase in cash and cash equivalents
            
            
            (249,585
            )
            
            1,406,930Cash
                and cash equivalents at beginning of period
            
            
            405,413
            
            
            3,775Cash
                and cash equivalents at end of period
            
            $
            155,828
            
            $
            1,410,705Supplemental
                disclosures of cash flow information:Cash
                paid during the period for interest
            
            $
            19,872
            
            $
            963Non
                cash investing and financing activities:Issuance
                of common stock in payment of accrued liabilities
            
            $
            34,750
            
            $
            —Dividends
                accrued
            
            $
            —
            
            $
            19,163





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


3


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements –
Unaudited**


**March
      31, 2008**





**1.
      DESCRIPTION OF BUSINESS**





Patient
      Safety Technologies, Inc. ( ***"PST"*** or the ***"Company"*** )
      is a
      Delaware corporation. The Company’s operations are conducted at its wholly-owned
      operating subsidiary, SurgiCount Medical, Inc. ( ***“SurgiCount”*** ),
      a
      California corporation.





The
      Company’s primary focus is development, manufacturing and distribution of
      products and services focused primarily in the health care and medical products
      field, particularly the patient safety markets. SurgiCount is a developer and
      manufacturer of patient safety products and services. The SurgiCount
      Safety-Sponge  System
      is
      a patented turn-key array of modified surgical sponges, line-of-sight scanning
      SurgiCounters, and printPAD printers integrated together to form a comprehensive
      counting and documentation system.





Until
      June 29, 2007, the Company also operated a car wash through Automotive Services
      Group, Inc. ( ***“Automotive
      Services Group”*** ),
      which
      held the Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
      its
      wholly-owned subsidiary. As discussed in Note 4, during 2007 the Company
      completed the sale of the assets held in ASG. In addition, the Company holds
      other unrelated investments including an investment in real estate and in a
      financial services company, which it is in the process of liquidating as part
      of
      a strategic plan adopted during 2006 to dispose of all of the Company’s non
      patient safety related assets.





**2.
      LIQUIDITY AND GOING CONCERN**





The
      accompanying unaudited consolidated interim financial statements have been
      prepared assuming that the Company will continue as a going concern. At March
      31, 2008, the Company has an accumulated deficit of approximately $38.2 million
      and a working capital deficit of approximately $2.8 million. For the three
      months ended March 31, 2008, the Company incurred a loss of approximately $1.6
      million and has used approximately $746,000 in cash in its operations. Further,
      as of March 31, 2008 the Company has just begun to generate a material amount
      of
      revenues from sales of the Company’s patient safety products. These conditions
      raise substantial doubt about the Company’s ability to continue as a going
      concern. The Company has relied on liquidating investments and short-term debt
      financings to fund a large portion of its operations. In order to ensure the
      continued viability of the Company, equity financing must be obtained and
      profitable operations must be achieved in order to repay the existing short-term
      debt and to provide a sufficient source of operating capital. Although the
      Company has received equity financing during the year ended December 31, 2007,
      the Company is currently seeking additional financing and believes that it
      will
      be successful. However, no assurances can be made that it will be successful
      obtaining a sufficient amount of equity financing to continue to fund its
      operations or that the Company will achieve profitable operations and positive
      cash flow from its patient safety products. The consolidated interim financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





**3.
      BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation**





The
      accompanying unaudited consolidated interim financial statements have been
      prepared in accordance with the instructions to Form 10-Q and Article 8-03
      of
      Regulation S-X and do not include all the information and disclosures required
      by accounting principles generally accepted in the United States of America.
      The
      consolidated interim financial information is unaudited but reflects all normal
      adjustments that are, in the opinion of management, necessary to provide a
      fair
      statement of results for the interim periods presented. The consolidated interim
      balance sheet as of December 31, 2007 was derived from the Company’s audited
      financial statements. The consolidated interim financial statements should
      be
      read in conjunction with the consolidated financial statements in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2007. Results of
      the
      three months ended March 31, 2008 are not necessarily indicative of the results
      to be expected for the full year ending December 31, 2008. All intercompany
      transactions have been eliminated in consolidation.


4


**Patient
      Safety Technologies, Inc. and Subsidiaries**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





**Revenue
      Recognition**




The
      Company complies with SEC Staff Accounting Bulletin ( ***“SAB”*** )
      101, *Revenue
      Recognition in Financial Statements* ,
      amended
      by SAB 104, *Revenue
      Recognition* .
      Revenues from sales of the Safety-Sponge TM System
      are recorded upon shipment.





**Goodwill
      and Intangible Assets**





In
      accordance with SFAS No. 142, *Goodwill
      and Intangible Assets* ,
      goodwill is tested for impairment at the reporting unit level (operating segment
      or one level below an operating segment) on an annual basis in the Company’s
      fourth fiscal quarter or more frequently if indicators of impairment
      exist.  The performance of the test involves a two-step process.  The
      first step of the impairment test involves comparing the fair value of the
      Company’s reporting units with each respective reporting unit’s carrying amount,
      including goodwill.  The fair value of reporting units is generally
      determined using the income approach.  If the carrying amount of a
      reporting unit exceeds the reporting unit’s fair value, the second step of the goodwill impairmenttest is
      performed to determine the amount of any impairment loss.  The second step
      of the goodwill impairmenttest
      involves comparing the implied fair value of the reporting unit’s goodwill with
      the carrying amount of that goodwill.





**Long-Lived
      Assets**





The
      Company evaluates long-lived assets for impairment in accordance with SFAS
      No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets,* which
      requires impairment evaluation on long-lived assets used in operations when
      indicators of impairment are present.  Reviews are performed to determine
      whether the carrying value of an asset is impaired, based on a comparison to
      undiscounted expected future cash flows.  If this comparison indicates that
      there is impairment, the impaired asset is written down to fair value, which
      is
      typically calculated using discounted expected future cash flows and a discount
      rate based upon the Company’s weighted average cost of capital adjusted for
      risks associated with the related operations.  Impairment is based on the
      excess of the carrying amount over the fair value of those assets.





**Stock-Based
      Compensation**





The
      Company adopted SFAS No. 123(R), *Share-Based
      Payment* ,
      as of
      January 1, 2005 using the modified retrospective application method as provided
      by SFAS 123(R). During the three months ended March 31, 2008, the Company had
      stock-based compensation expense of $235,000, related to issuances to the
      Company’s employees and directors, included in reported net loss. The total
      amount of stock-based compensation for the three months ended March 31, 2008
      of
      $201,000 included expenses related to restricted stock grants valued at $36,000
      and stock options valued at $199,000. During the three months ended March 31,
      2007, the Company had stock-based compensation expense, from issuances to the
      Company’s employees and directors, included in reported net loss of $250,000.
      The total amount of stock-based compensation for the three months ended March
      31, 2007, of $250,000, included restricted stock grants valued at $192,000
      and
      stock options valued at $58,000.





During
      the three months ended March 31, 2008 and 2007, 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 nil and $62,000,
      respectively.


5


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





A
      summary
      of stock option activity for the three months ended March 31, 2008 is presented
      below:





**Outstanding Options****Shares**
              **Available for**
              **Grant**
            
            **Number of**
              **Shares**
            
            **Weighted**
              **Average**
              **Exercise Price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life (years)**
            
            **Aggregate**
              **Intrinsic**
              **Value****December
                31, 2007**
            
            
            **990**
            
            
            **1,650,000**
            
            **$**
            **3.49**
            
            
            **8.43****March
                31, 2008**
            
            
            **990**
            
            
            **1,650,000**
            
            **$**
            **3.49**
            
            
            **8.18**
            
            **$**
            **—**Options
                exercisable at:December
                31, 2007
            
            
            
            
            
            782,500
            
            $
            4.40
            
            
            7.83
            
            $
            —March
                31, 2008
            
            
            
            
            
            847,500
            
            $
            4.36
            
            
            7.59
            
            $
            —





The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (i.e., the difference between our closing stock price on March
      31, 2008 and the exercise price, times the number of shares) that would have
      been received by the option holders had all option holders exercised their
      options on March 31, 2008. There have not been any options exercised during
      the
      three months ended March 31, 2008 or year ended December 31, 2007.





The
      Company did not grant any options during the three months ended March 31, 2008.
      All options that the Company granted during the three months ended March 31,
      2007 were granted at the per share fair market value on the grant date. Vesting
      of options differs based on the terms of each option. The Company utilized
      the
      Black-Scholes option pricing model and the assumptions used for each period
      are
      as follows:





**Three Months ended March 31,****2008**
            
            **2007**Weighted
                average risk free interest rate
            
            
            **—**
            %
            
            4.50
            %Weighted
                average life (in years)
            
            
            **—**
            
            
            5.00Volatility
            
            
            **—**
            %
            
            100
            %Expected
                dividend yield
            
            
            **—**
            %
            
            0
            %Weighted
                average grant-date fair value per share of options granted
            
            $
            **—**
            
            $
            1.22





A
      summary
      of the changes in the Company’s nonvested options during the three months ended
      March 31, 2008 is as follows:





**Nonvested Shares**
            
            **Shares**
            
            **Weighted**
              **Average**
              **Grant Date**
              **Fair Value**Nonvested at December 31,
                2007
            
            
            867,500
            
            $
            1.75Granted
            
            
            **—**
            
            $
            **—**Vested
            
            
            (65,000
            )
            $
            2.27Cancelled
                and forfeited
            
            
            **—**
            
            $
            **—**Nonvested
                at March 31, 2008
            
            
            802,500
            
            $
            1.71


6


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





During
      the three months ended March 31, 2008, the Company recorded compensation costs
      related to stock options of $199,000. As of March 31, 2008, total unrecognized
      compensation cost related to unvested stock options was $700,000. The cost
      is
      expected to be recognized over a weighted average period of 1.38 years.





**Beneficial
      Conversion Feature of Convertible Notes Payable**





The
      convertible feature of certain notes payable provides for a rate of conversion
      that is below market value. Such feature is normally characterized as a
      Beneficial Conversion Feature ( ***“BCF”*** ).
      Pursuant to EITF Issue No. 98-5, *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratio,* EITF No.
      00-27, *Application
      of EITF Issue No. 98-5 To Certain Convertible Instruments* and APB
      14, *Accounting
      for Convertible Debt and Debt Issued with Stock Purchase
      Warrants* ,
      the
      estimated fair value of the BCF is recorded in the consolidated financial
      statements as a discount from the face amount of the notes. Such discounts
      are
      amortized to accretion of convertible debt discount over the term of the notes
      (or conversion of the notes, if sooner).





**Loss
      per Common Share**





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





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





The
      following sets forth the number of shares of common stock underlying outstanding
      options, warrants, convertible preferred stock and convertible debt as of March
      31, 2008 and 2007:





**March 31,**
              **2008**
            
            **March 31,**
              **2007**Warrants
            
            
            6,114,521
            
            
            4,589,641Stock
                options
            
            
            1,650,000
            
            
            1,590,000Convertible
                promissory notes
            
            
            1,389,091
            
            
            1,781,091Convertible
                preferred stock
            
            
            246,375
            
            
            246,3759,399,987
            
            
            8,207,107





**Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the amounts reported in the financial
      statements and accompanying notes. The actual results may differ from
      management’s estimates.





**Reclassifications**





Certain
      prior year amounts have been reclassified to conform to the 2008
      presentation. These
      reclassifications had no effect on previously reported results of operations
      or
      accumulated deficit.


7


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





**Recent
      Accounting Pronouncements**





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





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment to FASB Statement No. 115* ( ***“SFAS
      159”*** ).
      This
      statement permits companies to choose to measure many financial instruments
      and
      other items at fair value. The objective is to improve financial reporting
      by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. This statement is expected
      to expand the use of fair value measurement of accounting for financial
      instruments. The fair value option established by this statement permits all
      entities to measure eligible items at fair value at specified election dates
      with the resulting unrealized gains and losses, if any, reported in earnings.
      T he
      Company adopted SFAS 159 on January 1, 2008 and i n
      connection with its adoption, there was no impact on the Company’s consolidated
      financial statements.





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





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





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





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


8


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





**4.
      DISCONTINUED OPERATIONS**





As
      part
      of a strategic plan to dispose of all the Company’s non-patient safety related
      assets, during the fourth quarter of 2006 the Company began marketing for
      sale the assets of ASG, located
      in Alabama. The Company completed the sale of one operating car wash on June
      29,
      2007 and the remaining two parcels of undeveloped land during the three months
      ended September 30, 2007. The assets of ASG met the
“held for sale” and “discontinued operations” criteria in accordance with SFAS
      144.




The
      following sets forth the discontinued operations for the three months ended
      March 31, 2008 and 2007 related to the held for sale assets of
      Automotive Services Group :





**Three Months Ended March 31,****2008**
            
            **2007**Operating
                revenues
            
            $
            —
            
            $
            159,864Operating
                expenses
            
            
            —
            
            
            134,929Depreciation
                and amortization
            
            
            —
            
            
            10,909Interest
                expense
            
            
            —
            
            
            102,793Loss
                from discontinued operations
            
            $
            —
            
            $
            (88,767
            )





**5.
      PATENTS**





Patents,
      net, as of March 31, 2008 and December 31, 2007 are composed of patents:





**March 31, 2008**
            
            **December 31,**
              **2007**Patents
            
            $
            4,684,576
            
            $
            4,684,576Accumulated
                amortization
            
            
            (1,001,903
            )
            
            (920,668
            )$
            3,682,673
            
            $
            3,763,908





**6.
      LONG-TERM INVESTMENTS**





Long-term
      investments at March 31, 2008 and December 31, 2007 are comprised of the
      Company’s investment in Alacra Corporation ( ***“Alacra”*** ).
      The
      investment represents 221,484 shares of Series F convertible preferred stock
      of
      Alacra Corporation, recorded at its cost of $666,667, and classified as an
      available-for-sale investment. The Company has the right, to the extent that
      Alacra has sufficient available capital, to have the Series F convertible
      preferred stock redeemed by Alacra for face value plus accrued dividends
      beginning on December 31, 2006. During the year ended December 31, 2007, Alacra
      redeemed one-third of the Series F convertible preferred stock. Alacra, based
      in
      New York, is a global provider of business and financial
      information.


9


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





**7.
      OTHER ASSETS**





At
      March
      31, 2008 and December 31, 2007, the Company had other assets of approximately
      $19,000 consisting primarily of security deposits.





**8.
      NOTES PAYABLE**





Notes
      payable at March 31, 2008 and December 31, 2007 are comprised of the
      following:





**March 31,**
              **2008**
            
            **December 31,**
              **2007**Notes
                payable to Ault Glazer Capital Partners, LLC (a)
            
            $
            2,530,558
            
            $
            2,530,558Notes
                payable to Herb Langsam (b)
            
            
            600,000
            
            
            600,000Note
                payable to Charles Kalina III (c)
            
            
            400,000
            
            
            400,000Note
                payable to Catalysis Offshore, Ltd (d)
            
            
            250,000
            
            
            —Note
                payable to Catalysis Partners, LLC (d)
            
            
            250,000
            
            
            —Other
                notes payable (e)
            
            
            71,082
            
            
            172,380Total
                notes payable
            
            
            4,101,640
            
            
            3,702,938Less:
                current portion
            
            
            (1,571,082
            )
            
            (1,172,380
            )Notes
                payable – long-term portion
            
            $
            2,530,558
            
            $
            2,530,558





Aggregate
      future required principal payments on these notes during the twelve month period
      subsequent to March 31, 2008 are as follows:





2007
            
            $
            1,571,0822008
            
            
            —2009
            
            
            —2010
            
            
            2,530,558$
            4,101,640





(a)
            Effective
                June 1, 2007, the entire unpaid principal and interest due under
                note
                payable agreements previously entered into with Ault Glazer Capital
                Partners, LLC (formerly AGB Acquisition Fund) (the***“Fund”***)
                a
                related party, were restructured into a new Convertible Secured Promissory
                Note (the***"AG
                Partners Convertible Note"***)in
                the principal amount of $2,530,558. The Fund is controlled by Milton
                “Todd” Ault III, a former director of the Company and its former Chairman
                and Chief Executive Officer and Louis Glazer, a director of the Company,
                both of whom currently have a significant beneficial ownership interest
                in
                the Company’s common and preferred stock.The
                AG Partners Convertible Note bears interest at the rate of 7% per
                annum
                and is due on the earlier of December 31, 2010, or the occurrence
                of an
                event of default. In the event that the average closing price of
                the
                Company’s common stock is in excess of $5.00 per share for thirty (30)
                consecutive trading days, the Company will have the right to redeem
                the
                promissory note in shares or in cash. In the event of redemption
                in
                shares, the principal is convertible into shares of the Company’s common
                stock at a conversion price of $2.50. The promissory note is secured
                by
                all of the Company’s assets. Should the Company raise up to $2,000,000 in
                a new credit facility, including any replacement credit facilities,
                the
                Fund is required to subordinate its security interest in favor of
                the new
                credit facility. During the three months ended March 31, 2008, the
                Company
                incurred interest expense of $44,000 on the AG Partners Convertible
                Note.
                During the three months ended March 31, 2007, the Company incurred
                interest expense of $58,000 related to the notes previously entered
                into
                with the Fund that were replaced by the AG Partners Convertible
                Note.





(b)
            On
                May 1, 2006, Herbert Langsam, a Class II Director of the Company,
                loaned
                the Company $500,000. The loan is documented by a $500,000 Secured
                Promissory Note (the***“Langsam
                Note”***)
                payable to the Herbert Langsam Irrevocable Trust. The Langsam Note
                accrues
                interest at the rate of 12% per annum and had a maturity date of
                November
                1, 2006. This note was not repaid by the scheduled maturity and to
                date
                has not been extended, therefore the Langsam Note is recorded in
                current
                liabilities. Accordingly, the note is currently in default and therefore
                accruing interest at the rate of 16% per annum. Pursuant to the terms
                of a
                Security Agreement dated May 1, 2006, the Company granted the Herbert
                Langsam Revocable Trust a security interest in all of the Company’s assets
                as collateral for the satisfaction and performance of the Company’s
                obligations pursuant to the Langsam
                Note.


10


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





On
      November 13, 2006, Mr. Langsam, loaned the Company an additional $100,000.
      The
      loan is documented by a $100,000 Secured Promissory Note (the ***“Second
      Langsam Note”*** )
      payable
      to the Herbert Langsam Irrevocable Trust. The Second Langsam Note accrues
      interest at the rate of 12% per annum and had a maturity date of May 13, 2007.
      The Company is in the process of restructuring the debt that is owed to Mr.
      Herbert Langsam. Mr. Langsam received warrants to purchase 50,000 shares of
      the
      Company’s common stock at an exercise price of $1.25 per share as additional
      consideration for entering into the loan agreement. The Company recorded debt
      discount in the amount of $17,000 as the estimated value of the warrants. The
      debt discount was amortized as non-cash interest expense over the term of the
      debt using the effective interest method. During the three months ended March
      31, 2008 and 2007, interest expense of nil and $7,000, respectively, was
      recorded from the debt discount amortization. Pursuant to the terms of a
      Security Agreement dated November 13, 2006, the Company granted the Herbert
      Langsam Revocable Trust a security interest in all of the Company’s assets as
      collateral for the satisfaction and performance of the Company’s obligations
      pursuant to the Second Langsam Note.





During
      the three months ended March 31, 2008 and 2007, the Company incurred interest
      expense, excluding amortization of debt discount, of $24,000 and $8,000,
      respectively, on the Langsam Notes. At March 31, 2008 and December 31, 2007
      accrued interest on the Langsam Notes totaled $162,000 and $138,000,
      respectively.





(c)
            On
                July 12, 2006 the Company, executed a Convertible Promissory Note
                in the
                principal amount of $250,000 in favor of Charles J. Kalina, III,
                an
                existing shareholder of the Company. On November 3, 2006 the balance
                due
                under the $250,000 Convertible Promissory Note was added to a new
                Convertible Promissory Note in the principal amount of $400,000 (the***“Kalina
                Note”***),
                pursuant to which the Company received proceeds of approximately
                $150,000.
                The Second Kalina Note bears interest at the rate of 12% per annum
                and was
                due on January 31, 2008. The Company is in the process of restructuring
                the debt that is owed to Mr. Kalina through the issuance of the Company’s
                common stock. Mr. Kalina 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
                three months ended March 31, 2008 and 2007, the Company incurred
                interest
                expense, excluding amortization of debt discount of $12,000 and $12,000,
                respectively, on the Second Kalina Note. At March 31, 2008 and December
                31, 2007 accrued interest on the Second Kalina Note totaled $20,000
                and
                $8,000, respectively.





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 recorded
      debt discount in the amount of $77,000 based on the intrinsic value of the
      beneficial conversion feature of the note.





The
      warrant issued to Mr. Kalina in conjunction with the Second Kalina Note will
      expire after November 3, 2011. The Company recorded debt discount in the amount
      of $29,000 based on the estimated fair value of the warrants. The debt discount
      as a result of the beneficial conversion feature of the note and the estimated
      fair value of the warrants was amortized as non-cash interest expense using
      the
      effective interest method. During the three months ended March 31, 2008 and
      2007, interest expense of nil and $23,000, respectively, has been recorded
      from
      the debt discount amortization.





(d)
            Between
                February 28, 2008 and March 20, 2008, Catalysis Offshore, Ltd. and
                Catalysis Partners, LLC (collectively***“Catalysis”***),
                related parties, each loaned $250,000 to the Company. As consideration
                for
                the loans, the Company issued Catalysis promissory notes in the aggregate
                principal amount of $500,000 (the***“Catalysis
                Notes”***).
                The Catalysis Notes accrue interest at the rate of 8% per annum and
                have
                maturity dates of May 31, 2008. The managing partner of Catalysis
                is
                Francis Capital Management, LLC (***“Francis
                Capital”***),
                an investment management firm. John Francis, a director of the Company
                and
                President of Francis Capital, has voting and investment control over
                the
                securities held by Catalysis. Francis Capital, including shares directly
                held by Catalysis, beneficially owns 1,272,000 shares of the Company’s
                common stock and warrants for purchase of 763,200 shares of the Company’s
                common stock.


11


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





(e)
            On
                November 1, 2006 we entered into a Convertible Promissory Note with
                Michael G. Sedlak in the principal amount of $71,000 (the***“Sedlak
                Note”***).
                The Sedlak Note, which was not paid by its scheduled maturity date,
                January 31, 2008, accrues interest at the rate of 12% per
                annum.





**9.
      ACCRUED LIABILITIES**





*Accrued
      liabilities at March 31 and December 31, 2007 are comprised of the
      following:*





**March 31, 2008**
            
            **December 31,**
              **2007**Accrued interest
            
            $
            235,663
            
            $
            168,449Accrued dividends
                on preferred stock
            
            
            134,138
            
            
            134,138Accrued
                salaries
            
            
            230,252
            
            
            212,000Other
            
            
            22,559
            
            
            6,162$
            622,612
            
            $
            520,749





**10.
      WARRANTS**





As
      of
      March 31, 2008 and December 31, 2007, a total of 6,114,521 warrants, at exercise
      prices ranging from $1.25 to $6.05 remain outstanding. 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% - 97%, respectively.





**11.
      RELATED PARTY TRANSACTIONS**





*Rent*





During
      the three months ended March 31, 2007 the Company paid approximately $26,000
      of
      the base rent on the corporate offices and The Ault Glazer Group, Inc.
      ( ***"Ault
      Glazer"*** )
      paid
      the remaining base rent based upon their respective usage of the facilities.
      Together, Milton “Todd” Ault III, our former Chairman and Chief Executive
      Officer of the Company, and Louis Glazer, a Class I Director of the Company,
      and
      Melanie Glazer, the former Manager of our real estate segment, (together, the ***“Glazers”*** )
      own a
      controlling interest in the outstanding capital stock of Ault Glazer. As of
      March 31, 2008 and December 31, 2007, Ault Glazer, Mr. Ault and the Glazers
      had
      a significant beneficial ownership interest in the outstanding common and
      preferred stock of the Company.





*Notes
      Payable*





As
      of
      March 31, 2008 and December 31, 2007, the Company has notes payable agreements
      issued to related parties with aggregate outstanding principal balances of
      $3,030,558 and $2,530,558, respectively (See Note 8).





*ASG*





During
      the period from June 29, 2007 to August 13, 2007, Automotive Services Group
      sold
      its express car wash and underlying
      real estate and a parcel of undeveloped land located in Birmingham, Alabama
      to Charles
      H. Dellaccio and Darrell Grimsley. Mr. Grimsley was the Chairman of the Board
      and Chief Executive Officer of Automotive Services Group.





*A
      Plus International, Inc.*





During
      the three months ended March 31, 2008 and 2007, the Company recognized cost
      of
      goods sold of $276,000 and $94,000, respectively, in connection with surgical
      sponges provided by A Plus. Wenchen Lin, a director and significant beneficial
      owner of the Company is a founder and significant owner of A
      Plus.


12


**Patient
      Safety Technologies, Inc. and Subsidiary**


**Notes
      to Consolidated Interim Financial Statements – Unaudited
      (continued)**





**12.
      COMMITMENTS AND CONTINGENCIES**





*Legal
      Proceedings*





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





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





13


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





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





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





**Overview**





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





The
      Company, including SurgiCount, is engaged in the acquisition of controlling
      interests in companies and research and development of products and services
      focused primarily in the health care and medical products field, particularly
      the patient safety markets. SurgiCount is a developer and manufacturer of
      patient safety products and services. In addition, the Company holds various
      other unrelated investments which it is in the process of liquidating. The
      unrelated investments are recorded on the Company’s balance sheet in “long-term
      investments” and “assets held for sale, net”.





The
      Company was incorporated on March 31, 1987, under the laws of the state of
      Delaware. Beginning in July 1987 until March 31, 2005 we operated as an
      investment company registered pursuant to the Investment Company Act of 1940,
      as
      amended (the ***“1940
      Act”*** ).
      In or
      about August 1997 our Board of Directors determined it would be in the best
      interest of the Company and our stockholders to elect to become a registered
      business development company (a ***“BDC”*** )
      under
      the 1940 Act. On September 9, 1997 our shareholders approved the proposal to
      be
      regulated as a BDC and on November 18, 1997 we filed a notification of election
      to become a BDC with the U.S. Securities and Exchange Commission ( ***“SEC”*** ).





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 March 31, 2008, 8.8%
      of
      our assets, consisting of our investment in Alacra Corporation, on a
      consolidated basis were comprised of investment securities within the meaning
      of
      the 1940 Act ( ***“Investment
      Securities”*** ).
      We
      continue to evaluate ways in which we can dispose of these Investment
      Securities.


14


Our
      operations currently focus on the research and development of products and
      services in the health care and medical products field, particularly the patient
      safety markets, and the acquisition of controlling interests in companies in
      the
      medical products field. 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 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 established a special committee in January 2007 to evaluate
      potential divestiture transactions for ASG and our other real estate assets.
      The
      divestiture of ASG was completed on August 13, 2007.




SurgiCount,
      developer of the Safety-SpongeTM System, a wholly-owned operating subsidiary, was
      acquired to enhance our ability to focus our efforts in the health care and
      medical products field, particularly the patient safety markets. Currently,
      we
      are evaluating ways in which to monetize our few remaining non-patient safety
      related assets (the “ *non-core
      assets* ”).





**SurgiCount**





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





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





**Critical
      accounting policies and estimates**





The
      below
      discussion and analysis of our financial condition and results of operations
      is
      based upon the accompanying financial statements. The preparation of financial
      statements in conformity with accounting principles generally accepted in the
      United States of America requires management to make estimates and assumptions
      that affect the amounts reported in the financial statements. Critical
      accounting policies are those that are both important to the presentation of
      our
      financial condition and results of operations and require management's most
      difficult, complex, or subjective judgments, often as a result of the need
      to
      make estimates of matters that are inherently uncertain. Our most critical
      accounting policy relates to the valuation of our intangible assets and stock
      based compensation.





**Valuation
      of Intangible Assets**





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


15


**Stock-Based
      Compensation**





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





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





**New
      Accounting Pronouncements**





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




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





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


16


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





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





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





**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      and cash equivalents balance was $156,000 at March 31, 2008, versus $405,000
      at
      December 31, 2007. Total current liabilities were $3,216,000 at March 31, 2008,
      versus $2,402,000 at December 31, 2007. As of March 31, 2008 we had a working
      capital deficit of approximately $2,839,000. Since we continue to have recurring
      losses, we have relied upon private placements of equity and debt securities.
      Our existing cash and cash equivalents balance is not sufficient to meet our
      anticipated funding requirements during 2008, and the Company is currently
      seeking additional financing.





**2007
      private placements**





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





Between
      January 29, 2007 and June 8, 2007, we entered into various subscription
      agreements with accredited investors in private placements exempt from the
      registration requirements of the Securities Act. We issued and sold to these
      accredited investors an aggregate of 2,952,000 shares of our common stock and
      warrants to purchase an additional 1,376,000 shares of our common stock. The
      warrants are exercisable for a period of three to five years with an exercise
      price equal to $2.00. These issuances resulted in aggregate gross proceeds
      to us
      of $3,690,000, of which $3,190,000 was in cash and $500,000 was in product
      which
      we will receive over the course of a twelve (12) month period. We used the
      net
      proceeds from these private placement transactions primarily for general
      corporate purposes and repayment of existing liabilities


17


On
      October 17, 2007, we entered into a securities purchase agreement with Francis
      Capital Management, LLC ( ***“Francis
      Capital”*** ),
      an
      accredited investor, in a private placement exempt from the registration
      requirements of the Securities Act. We issued and sold to Francis Capital an
      aggregate of 1,270,000 shares of our common stock and warrants to purchase
      an
      additional 763,000 shares of our common stock. The warrants are exercisable
      for
      a period of five years at an exercise price equal to $1.40 per share. These
      issuances resulted in aggregate gross proceeds to us of $1,500,000 in cash
      and
      the extinguishment of $90,000 in existing debt owed to Francis Capital by us.
      Pursuant to the terms of the securities purchase agreement, the Company may
      sell
      up to an aggregate of $3,000,000 in common stock and warrants under the
      securities purchase agreement by no later than November 16, 2007. We used the
      net proceeds from this private placement transaction primarily for general
      corporate purposes and repayment of existing liabilities.





**Promissory
      notes**





In
      addition to our private placements, we have also received a significant amount
      of funding from Ault Glazer Capital Partners, LLC (the ***“Fund”*** ).
      AG
      Management is the managing member of the Fund. The managing member of AG
      Management is The Ault Glazer Group, Inc. ( ***“The
      AG Group”*** ).
      The
      Company’s former Chairman and former Chief Executive Officer, Milton “Todd”
Ault, III, is Chairman, Chief Executive Officer and President of The AG Group.
      At March 31, 2008 the outstanding principal balance of the loan that we entered
      into with the Fund was $2,531,000.





At
      March
      31, 2008 we also had outstanding promissory notes in the aggregate principal
      amount of $1,571,000. Between February 28, 2008 and March 20, 2008, Catalysis
      Offshore, Ltd. and Catalysis Partners, LLC (collectively ***“Catalysis”*** ),
      related parties, loaned us an aggregate of $500,000. As consideration for the
      loans, we issued Catalysis promissory notes in the aggregate principal amount
      of
      $500,000 (the ***“Catalysis
      Notes”*** ).
      The
      Catalysis Notes accrue interest at the rate of 8% per annum and have maturity
      dates of May 31, 2008. The other outstanding promissory notes were entered
      into
      during 2006.





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





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 March 31, 2008. 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
      March 31, 2008, other than our office lease and employment agreements with
      key
      executive officers, we had no commitments as liabilities not reflected in our
      consolidated financial statements.





Cash
      decreased by $250,000 to $156,000 during the three months ended March 31, 2008,
      compared to an increase of $1,407,000 during the three months ended March 31,
      2007.




Operating
      activities used $746,000 of cash during the three months ended March 31, 2008,
      compared to $971,000 during the three months ended March 31, 2007.




Operating
      activities for the three months ended March 31, 2008, exclusive of changes
      in
      operating assets and liabilities, used $1,152,000 of cash, as the Company's
      net
      cash used in operating activities of $746,000 included non-cash charges for
      depreciation and amortization of $158,000 and stock based compensation of
      $201,000. For the three months ended March 31, 2007, operating activities,
      exclusive of changes in operating assets and liabilities, used $860,000 of
      cash,
      as the Company's net cash used in operating activities of $971,000 included
      non-cash charges for depreciation and amortization of $113,000, debt discount
      of
      $169,000 and stock based compensation of $312,000.


18


Changes
      in operating assets and liabilities provided cash of $406,000 during the three
      months ended March 31, 2008, principally due to increases in the level of
      accounts payable and accrued liabilities which was partially offset by an
      increase in accounts receivable. Changes in operating assets and liabilities
      used cash of $111,000 during the three months ended March 31, 2007, principally
      due to decreases in the level of accounts payable and an increase in accounts
      receivable which were partially offset by a decrease in accrued liabilities
      and
      prepaid expenses





The
      principal factor in the $117,000 of cash provided by investing activities during
      the three months ended March 31, 2008 was the
      sale
      of our undeveloped land in Alabama for $226,000. This was
      partially offset by capitalized costs of $128,000 related to the ongoing
      development of purchased software related to our Safety-Sponge  System.
      The principal factor in the $79,000 of cash used in investing activities during
      the three months ended March 31, 2007 was the capitalized costs of $73,000
      related to the ongoing development of software related to our
      Safety-Sponge  System.





Cash
      provided by financing activities during the three months ended March 31, 2008
      of
      $380,000 resulted from net proceeds from short-term debt financings of $500,000
      offset by the repayment of a promissory note of $101,000 and the payment of
      preferred dividends of $19,000. Cash provided by financing activities during
      the
      three months ended March 31, 2007, of $2,457,000 resulted primarily from net
      proceeds from the issuance of common stock and warrants of $2,897,000 offset
      by
      the repayment of the Winstar Note of $450,000





**Investments**





Our
      financial condition is partially dependent on the success of our existing
      investments. On March 29, 2006 our Board of Directors directed us to liquidate
      all of our investments and other assets that do not relate to the patient safety
      medical products business. Some of our investments are subject to restrictions
      on resale under federal securities laws and otherwise are illiquid, which will
      make it difficult to dispose of the securities quickly. Since we will be forced
      to liquidate some or all of the investments on an accelerated timeline, the
      proceeds of such liquidation may be significantly less than the value at which
      we acquired the investments. The following is a discussion of our most
      significant investments at March 31, 2008.





Our
      long-term investment, also referred to as our non-core assets, is valued at
      $667,000. At March 31, 2008, our long-term investment included our investment
      in
      Alacra Corporation, our only significant investment security. Our non-core
      assets also consisted of certain real property located in Tennessee. The real
      property meets the “held for sale” criteria and is classified as
      such.





*Alacra
      Corporation*





At
      March
      31, 2008, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued
      at $667,000, which represents 8.8% of our total assets. On April 20, 2000,
      we
      purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
      We
      have the right, subject to Alacra having the available cash, to have the
      preferred stock redeemed by Alacra over a period of three years for face value
      plus accrued dividends beginning on December 31, 2006. Pursuant to this right,
      in December 2006 we informed management of Alacra that we were exercising our
      right to put back one-third of our preferred stock. Alacra had a sufficient
      amount of cash to redeem our preferred stock and in December 2007 completed
      the
      initial redemption of one-third of our preferred stock. We received proceeds
      of
      $333,000 which accounted for the entire amount of the decrease in value of
      our
      Alacra investment. We continue to maintain our right to put back our remaining
      preferred stock to Alacra.




*Real
      Estate Investments*





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


19


**Results
      of Operations**





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





§
            "Revenues,"
                which is the amount we receive from sales of our
                products;§
            “Operating
                expenses,” which are the related costs and expenses of operating our
                business;§
            “Interest,
                dividend income and other, net,” which is the amount we receive from
                interest and dividends from our short term investments and money
                market
                accounts;§
            “Realized
                gains (losses) on investments, net,” which is the difference between the
                proceeds received from dispositions of investments and their stated
                cost;
                and§
            “Unrealized
                gains (losses) on marketable securities, net,” which is the net change in
                the fair value of our marketable securities, net of any (decrease)
                increase in deferred income taxes that would become payable if the
                unrealized appreciation were realized through the sale or other
                disposition of the investment
                portfolio.





**Revenues**





We
      recognized revenues of $500,000 and $307,000 during the three months ended
      March
      31, 2008 and 2007, respectively. Revenues during the three months ended March
      31, 2008 consisted of sales from the Safety-Sponge of $413,000 and sales from
      hardware and supplies of $87,000, whereas, revenues during the three months
      ended March 31, 2007 consisted of sales from the Safety-Sponge of $201,000
      and
      sales from hardware and supplies of $106,000. Although hardware sales are not
      considered a recurring item, we expect that once an institution adopts our
      system, they will be committed to its use and therefore provide a recurring
      source of revenues for sales of the safety sponge.





We
      attribute a significant amount of the increase in sales generated by our
      Safety-Sponge  System
      to
      increased product awareness and demand. The Safety-Sponge  System
      is
      currently being evaluated by more than 10 medical institutions, the adoption
      by
      any one of which would have a material impact on our revenues. We expect that
      small medical institutions which adopt the Safety-Sponge System will represent
      approximately $100,000 in annual revenue whereas the larger institutions could
      represent annual recurring revenues of $600,000 or more. We expect that current
      demand will begin to accelerate.





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


20


**Expenses**





Operating
      expenses were $1,531,000 and $1,195,000 for the three months ended March 31,
      2008 and 2007, respectively.





The
      increase in operating expenses of $335,000, for the three months ended March
      31,
      2008 when compared to the three months ended March 31, 2007, was primarily
      the
      result of salaries and employee benefits, which increased by $125,000. Our
      Compensation Committee, currently comprised of two independent directors,
      determines and recommends to our Board the cash and stock based compensation
      to
      be paid to our executive officers and also reviews the amount of salary and
      bonus for each of our other officers and employees.





For
      the
      three months ended March 31, 2008, we recorded $199,000 related to grants of
      nonqualified stock options and $2,000 related to restricted stock awards to
      our
      employees and non-employee directors. During the three months ended March 31,
      2007, we recorded $58,000 related to grants of nonqualified stock options and
      $192,000 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 stock based
      compensation expense of $49,000 for the three months ended March 31, 2008
      compared to the three months ended March 31, 2007. Therefore, excluding stock
      based compensation, salaries and employee benefits increased by $174,000.





At
      March
      31, 2008, three of our executives were covered under employment agreements.
      Our
      Chief Executive Officer, William B. Horne, was covered under a two year
      employment agreement with annual base compensation of $250,000; our Chief
      Executive Officer of SurgiCount Medical, Inc., Bill Adams, was covered under
      a
      three year employment agreement with annual base compensation of $300,000 and;
      our President of Sales and Marketing of SurgiCount Medical, Inc., Richard
      Bertran, was covered under a three year employment agreement with annual base
      compensation of $250,000. None of our other executives are currently covered
      under an employment agreement, therefore, we are under no financial obligation,
      other than monthly salaries, for our other executive officers. Currently,
      monthly gross salaries for all of our employees are $156,000. Conversely, during
      the three months ended March 31, 2007 we significantly increased our sales
      and
      administrative staff thereby increasing the amount of our monthly gross salaries
      to $135,000 at March 31, 2007. We believe, as with all our operating expenses,
      that our existing cash resources, together with proceeds from investments,
      anticipated financings and expected revenues from our operations, should be
      adequate to fund our salary obligations





The
      increase in cost of sales of $179,000 reflects an increase in sales of our
      Safety-Sponge TM System.
      During the three months ended March 31, 2008, our gross margin percentage
      decreased as compared to the three months ended March 31, 2007 primarily as
      a
      result of discounts provided in connection with hardware sales.





General
      and administrative expenses experienced an increase of $232,000 during the
      three
      months ended March 31, 2008 over the three months ended March 31, 2007. During
      the three months ended March 31, 2008, we invested a significant amount of
      capital in our advertising and marketing activities, which resulted in an
      increase of $106,000. The only other significant increase in general and
      administrative expenses is depreciation expense which reflected an increase
      of
      $45,000 and is due to the larger amount of fixed assets being depreciated.
      The
      remaining increase in general and administrative expenses are comprised of
      a
      combination of several types of expenses, none of which are significant
      individually.





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





During
      the three months ended March 31, 2008 we realized a net loss of $25,000 compared
      to a loss of nil during the three months ended March 31, 2007. Realized loss
      during the three months ended March 31, 2008 reflects the sale of certain
      non-operating assets, specifically, the sale of approximately 8.5 acres of
      undeveloped land in Heber Springs, Arkansas.





**Interest
      expense**





We
      had
      interest expense of $87,000 and $268,000 for the three months ended March 31,
      2008 and 2007, respectively.


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The
      decrease in interest expense for the three months ended March 31, 2008 when
      compared to March 31, 2007 is primarily attributable to the non-cash interest
      charges incurred as a result of the debt discount amortization associated with
      our short-term debt financings. During the three months ended March 31, 2008
      and
      2007, we recorded nil and $169,000, respectively, in non-cash interest charges.
      These charges resulted from the issuance of debt that either had conversion
      prices on the date of issuance that 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.





**Loss
      from discontinued car wash segment**





During
      the three months ended March 31, 2007, we recorded a loss from our discontinued
      car wash segment of $89,000. Consistent
      with our decision to focus our business exclusively on the patient safety
      medical products field, we completed the divestiture of ASG in August 2007.
      Thus, we did not incur a loss from the discontinued car wash segment during
      the
      three months ended March 31, 2008.




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





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





We
      have
      invested a portion of our assets in a private, development stage, company.
      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 types of investments, there is significantly greater risk of loss than
      is
      the case with traditional investment securities. Our private investment may
      result in a complete loss or will be unprofitable despite appearing to be likely
      to become successful.





Because
      there is no public market for the equity interests in the small company 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
      4T. Controls and Procedures.**





**Limitations
      on the Effectiveness of Controls**





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


22


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





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





**Changes
      in Internal Control over Financial Reporting**





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





**PART
      II – OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





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





**Item
      1A. Risk Factors.**





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





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





None





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





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





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





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





On
      November 3, 2006, the Company entered into a secured promissory note with
      Charles J. Kalina, III in the principal amount of $400,000 (the ***“Kalina
      Note”*** ).
      The
      Kalina Note was due to be repaid on January 31, 2008. The
      Company is in the process of restructuring the debt that is owed to Mr. Kalina
      through the issuance of the Company’s common stock.


23


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





None.





**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





**Exhibit**
              **Number**
            
            **Description**31.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(a) or Rule
                15d-14(a)31.2*
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(a) or Rule
                15d-14(a)32.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
                and Section 1350 of Chapter 63 of Title 18 of the United States
                Code32.2*
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b)
                and Section 1350 of Chapter 63 of Title 18 of the United States
                Code





*
      Filed
      herewith.


24


**SIGNATURES**





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.








PATIENT
                SAFETY TECHNOLOGIES, INC.Date:
                May 20, 2008
            By:
            /s/
                William AdamsWilliam
                AdamsChief
                Executive OfficerDate:
                May 20, 2008
            By:
            /s/
                William B. HorneWilliam
                B. HorneChief
                Financial Officer and
              Principal
                Accounting Officer


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