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, 2009





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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes o                                      No  o





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 company x





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





There
were 17,197,872 shares of the registrant's common stock outstanding as of May
15, 2009.





PATIENT
SAFETY TECHNOLOGIES, INC.





FORM
10-Q FOR THE QUARTER


ENDED
MARCH 31, 2009





TABLE
OF CONTENTS





PagePART
      I – FINANCIAL INFORMATIONItem
      1.
                Financial
      Statements
                1Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                17Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                26Item
      4T.
                Controls
      and Procedures
                26PART
      II – OTHER INFORMATIONItem
      1.
                Legal
      Proceedings
                28Item
      1A.
                Risk
      Factors
                28Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                28Item
      3.
                Defaults
      Upon Senior Securities
                28Item
      4.
                Submission
      of Matters to a Vote of Security Holders
                28Item
      5.
                Other
      Information
                29Item
      6.
                Exhibits
                29SIGNATURES
                31







"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 within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange
Act”), and is subject to the safe harbor provisions created by that
statute.    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 described in Part I, Item 1A of annual report on Form 10-K for the year
ended December 31, 2008 filed with the SEC on April 15, 2009, as amended on
April 30, 2009 (the “Form
10-K”), including without limitation the following:





·
            The
      early stage of adoption of our Safety-Sponge System and the
      unpredictability of our sales cycle




·
            Our
      need for additional financing to support our
  business




·
            Any
      failure of our new management team to operate
  effectively




·
            Our
      reliance on third-party manufacturers, some of whom are sole-source
      suppliers




·
            Any
      inability to successfully defend our intellectual property
      portfolio




·
            The
      significant deficiencies in our reporting controls and procedures, as
      further discussed in this report




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
 Condensed
Consolidated Balance Sheets (Unaudited)
 (In
thousands, except par value)
 
 March
      31,
                                
                                
                                December
      31,2009
                                
                                
                                2008AssetsCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                923
                                
                                
                                $
                                296Accounts
      receivable
                                
                                
                                236
                                
                                
                                
                                418Inventories
                                
                                
                                34
                                
                                
                                
                                200Prepaid
      expenses
                                
                                
                                177
                                
                                
                                
                                188Total
      current assets
                                
                                
                                1,370
                                
                                
                                
                                1,102Restricted
      certificate of deposit
                                
                                
                                94
                                
                                
                                
                                94Notes
      receivable
                                
                                
                                121
                                
                                
                                
                                121Property
      and equipment, net
                                
                                
                                560
                                
                                
                                
                                622Goodwill
                                
                                
                                1,832
                                
                                
                                
                                1,832Patents,
      net
                                
                                
                                3,357
                                
                                
                                
                                3,439Long-term
      investment
                                
                                
                                667
                                
                                
                                
                                667Other
      assets
                                
                                
                                29
                                
                                
                                
                                37Total
      assets
                                
                                $
                                8,030
                                
                                
                                $
                                7,914Liabilities
      and Stockholders' (Deficit) EquityCurrent
      liabilitiesAccounts
      payable
                                
                                $
                                559
                                
                                
                                $
                                909Current
      portion of convertible debentures
                                
                                
                                1,425
                                
                                
                                
                                1,425Current
      portion of notes payable
                                
                                
                                600
                                
                                
                                
                                1,100Accrued
      liabilities
                                
                                
                                7,702
                                
                                
                                
                                3,358Total
      current liabilities
                                
                                
                                10,286
                                
                                
                                
                                6,792Long-term
      convertible debentures, less current portion
                                
                                
                                52
                                
                                
                                
                                51Long-term
      notes payable, less current portion
                                
                                
                                1,356Deferred
      tax liabilities
                                
                                
                                1,010
                                
                                
                                
                                1,042Total
      liabilities
                                
                                
                                12,704
                                
                                
                                
                                7,885Stockholders'
      (deficit) equity:Convertible
      preferred stock, $1.00 par value, cumulative 7% dividend:1,000
      shares authorized; 11 issued and outstanding at March 31, 2009 and
      December 31, 2008(Liquidation
      preference of $1.2 million at March 31, 2009 and December 31,
      2008
                                
                                
                                11
                                
                                
                                
                                11Common
      stock, $0.33 par value: 25,000 shares authorized; 17,198 shares issued andoutstanding
      at March 31, 2009 and December 31, 2008
                                
                                
                                5,675
                                
                                
                                
                                5,675Additional
      paid-in capital
                                
                                
                                34,877
                                
                                
                                
                                36,034Accumulated
      deficit
                                
                                
                                (45,237
                                )
                                
                                
                                (41,691
                                )Total
      stockholders' (deficit) equity
                                
                                
                                (4,674
                                )
                                
                                
                                29Total
      liabilities and stockholders' (deficit) equity
                                
                                $
                                8,030
                                
                                
                                $
                                7,914
 
 The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
  1
  PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
 Condensed
Consolidated Statements of Operations (Unaudited)
 (In
thousands, except per share data)
 
 For
      the three months ending March31,2009
                                
                                
                                2008Revenues
                                
                                $
                                936
                                
                                
                                $
                                500Cost
      of revenue
                                
                                
                                549
                                
                                
                                
                                393Gross
      profit
                                
                                
                                387
                                
                                
                                
                                107Operating
      expenses:Research
      and development
                                
                                
                                113
                                
                                
                                
                                44Sales
      and marketing
                                
                                
                                649
                                
                                
                                
                                452General
      and administrative
                                
                                
                                2,551
                                
                                
                                
                                1,034Total
      operating expenses
                                
                                
                                3,313
                                
                                
                                
                                1,530Operating
      loss
                                
                                
                                (2,926
                                )
                                
                                
                                (1,423
                                )Other
      expenses:Interest
      expense
                                
                                
                                (220
                                )
                                
                                
                                (87
                                )Change
      in fair value of warrant liability
                                
                                
                                (414
                                )
                                
                                
                                -Realized
      loss assets held for sale, net
                                
                                
                                -
                                
                                
                                
                                (25
                                )Unrealized
      loss on assets held for sale, net
                                
                                
                                -
                                
                                
                                
                                (65
                                )Total
      other expense
                                
                                
                                (634
                                )
                                
                                
                                (177
                                )Loss
      from operations before income taxes
                                
                                
                                (3,560
                                )
                                
                                
                                (1,600
                                )Income
      tax provision
                                
                                
                                33
                                
                                
                                
                                32Net
      loss
                                
                                
                                (3,527
                                )
                                
                                
                                (1,568
                                )Preferred
      dividends
                                
                                
                                (19
                                )
                                
                                
                                (19
                                )Net
      loss applicable to common shareholders
                                
                                $
                                (3,546
                                )
                                
                                $
                                (1,587
                                )Net
      loss per common share - basic and diluted
                                
                                $
                                (0.21
                                )
                                
                                $
                                (0.13
                                )Stockholders'
      (deficit) equity:Basic
      and diluted
                                
                                
                                17,198
                                
                                
                                
                                12,080
 
 The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
  2
  PATIENT
SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY
 Condensed
Consolidated Statements of Cash Flows (Unaudited)
 (In
thousands)
 
 For
      the three months ending March 31,2009
                            
                            
                            2008Operating
      activities:Net
      loss
                            
                            $
                            (3,527
                            )
                            
                            $
                            (1,568
                            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                            
                            
                            85
                            
                            
                            
                            76Amortization
      of patents
                            
                            
                            82
                            
                            
                            
                            81Amortization
      of debt discount
                            
                            
                            118
                            
                            
                            
                            -Stock-based
      compensation
                            
                            
                            225
                            
                            
                            
                            200Non
      cash expense related to issuance of additional warrants
                            
                            
                            1,297
                            
                            
                            
                            -Loss
      on change in fair value of warrant derivative liability
                            
                            
                            414
                            
                            
                            
                            -Loss
      on sale of property
                            
                            
                            -
                            
                            
                            
                            91Income
      tax benefit
                            
                            
                            (33
                            )
                            
                            
                            (32
                            )Changes
      in operating assets and liabilities:Accounts
      receivable
                            
                            
                            183
                            
                            
                            
                            (78
                            )Inventories
                            
                            
                            165
                            
                            
                            
                            -Prepaid
      expenses
                            
                            
                            11
                            
                            
                            
                            33Other
      assets
                            
                            
                            8
                            
                            
                            
                            -Accounts
      payable
                            
                            
                            (350
                            )
                            
                            
                            314Accrued
      liabilities
                            
                            
                            (10
                            )
                            
                            
                            137Net
      cash used in operating activities
                            
                            
                            (1,332
                            )
                            
                            
                            (746
                            )Investing
      activities:Purchase
      of property and equipment
                            
                            
                            (22
                            )
                            
                            
                            (109
                            )Proceeds
      from sale of assets held for sale, net
                            
                            
                            -
                            
                            
                            
                            226Net
      cash provided by investing activities
                            
                            
                            (22
                            )
                            
                            
                            117Stockholders'
      (deficit) equity:Financing
      activities:Proceeds
      from issuance of common stock and warrantsProceeds
      from notes payable
                            
                            
                            2,000
                            
                            
                            
                            500Payments
      and decrease on notes payable
                            
                            
                            -
                            
                            
                            
                            (101
                            )Payments
      of preferred dividends
                            
                            
                            (19
                            )
                            
                            
                            (19
                            )Net
      cash provided by financing activities
                            
                            
                            1,981
                            
                            
                            
                            380Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            627
                            
                            
                            
                            (249
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            296
                            
                            
                            
                            405Cash
      and cash equivalents at end of period
                            
                            $
                            923
                            
                            
                            $
                            156Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
                            
                            $
                            17
                            
                            
                            $
                            1Cash
      paid during the period for taxes
                            
                            $
                            -
                            
                            
                            $
                            -Non
      cash investing and financing activities:Dividends
      accrued
                            
                            $
                            19
                            
                            
                            $
                            19Reclassification
      of accrued interest to notes payable
                            
                            $
                            50
                            
                            
                            $
                            -Debt
      discount associated with issuance of notes payable
                            
                            $
                            1,311
                            
                            
                            $
                            -Reclassification
      of warrants from equity to accrued liabilities
                            
                            $
                            3,990
                            
                            
                            $
                            -Issuance
      of common stock in payment of accrued liabilities
                            
                            $
                            -
                            
                            
                            $
                            35
 
 The
accompanying notes are an integral part of these condensed consolidated interim
financial statements.
  3


Patient
Safety Technologies, Inc. and Subsidiary
 Notes
to Consolidated Interim Financial Statements – Unaudited
 March
31, 2009
 
 1.
DESCRIPTION OF BUSINESS
 
 Patient
Safety Technologies, Inc. ("PST" or
the "Company")
is a Delaware corporation. The Company’s operations are conducted through its
wholly-owned operating subsidiary, SurgiCount Medical, Inc. (“SurgiCount”),
a California corporation.
 
 The
Company’s operating focus is the development, marketing and sales of products
and services focused in the medical patient safety markets.  The
SurgiCount Safety-SpongeTMSystem
is a patented turn-key system of bar-coded surgical sponges, SurgiCounterTM
scanners and software applications which integrate together to form a
comprehensive accounting and documentation system to avoid unintentionally
leaving sponges in patients during surgical procedures.
 
 2.
LIQUIDITY AND GOING CONCERN
 
 The
accompanying unaudited condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. At March
31, 2009, the Company has an accumulated deficit of approximately $45.2 million
and a working capital deficit of approximately $8.9 million, of which $6.2
million represents the estimated fair value of warrant derivative liabilities
(see Note 10).
For the three months ended March 31, 2009, the Company incurred a loss of
approximately $3.5 million and used approximately $1.3 million in cash to fund
it operating activities.
 
 We
believe that existing cash resources, combined with projected cash flow from
operations, will not be sufficient to fund our working capital requirement for
the next twelve months, and that in order to continue to operate as a going
concern it will be necessary to raise additional capital.
 
 The
Company expects to be able to raise sufficient additional capital to meet its
currently projected requirements.  However, we cannot be certain that
additional capital will be available when needed, or that it will be offered on
terms acceptable to the Company.  We also cannot be certain when and
if the Company will achieve profitable operations and positive cash
flow.  The consolidated interim financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
 
 3.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
 Basis
of Presentation
 
 The
accompanying unaudited condensed 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 condensed consolidated interim financial information is
unaudited but reflects all normal adjustments that are, in the opinion of
management, necessary to make the financial statements not
misleading.  The condensed 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,
2008.  Results of the three months ended March 31, 2009 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2009.
 
 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 2009 presentation.
These reclassifications had no effect on previously reported results of
operations or accumulated deficit.
  4
 
 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”). This statement defines fair value, establishes a framework for
measuring fair value in U.S. GAAP, and expands disclosures about fair value
measurements.  This statement applies in those instances where other
accounting pronouncements require or permit fair value measurements and the
board of directors has previous concluded in those accounting pronouncements
that fair value is the relevant measurement attribute.  Accordingly,
this statement does not require any new fair value
measurements.  However for some entities, the application of this
Statement will change the current practice.  In February 2008, the
FASB issued FSP FAS 157-2 which defers the effective date of SFAS 157 for all
non-financial assets and liabilities, except those items recognized or disclosed
at fair value on an annual or more frequent recurring basis until years
beginning after November 15, 2008.   Our adoption of SFAS 157 for
its financial assets and liabilities on January 1, 2008 and FSP FAS 157-2 for
its non-financial assets and liabilities on January 1, 2009 did not have a
material impact on the Company’s consolidated financial statements.
 
 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.  Our adoption of SFAS No. 141(R) on January 1, 2009 did
not have a material impact on the Company’s consolidated
statements.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160; Noncontrolling Interests
in Consolidated Financial Statementsan amendment of ARB5 (“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. Our
adoption of SFAS No. 160 on January 1, 2009 did not have a material impact on
our consolidated financial statements.
 
 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 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.  Our adoption of SFAS
No. 161 on January 1, 2009 did not have a material impact on our
consolidated financial statements.
 
 In April
2008, the FASB issued FSP FAS 142-3, Determination of Useful Life of
Intangible Assets (“FSP FAS 142-3”).  FSP FAS 142-3 amends the
factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FAS 142, “Goodwill and Other Intangible Assets.”  FSP FAS 142-3
also requires expanded disclosure related to the determination of intangible
asset useful lives.  FSP FAS 142-3 is effective for fiscal years
beginning after December 15, 2008.  Earlier adoption is not
permitted.  FSP FAS 142-3 on January 1, 2009 did not have a material
impact on our consolidated financial statements.
 
 In May
2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSP APB 14-1”)  FSP APB 14-1 requires recognition
of both the liability and equity components of convertible debt instruments with
cash settlement features.  The debt component is required to be
recognized at the fair value of a similar instrument that does not have an
associated equity component.  The equity component is recognized as
the difference between the proceeds from the issuance of the note and the fair
value of the liability.  FSP APB 14-1 also requires an accretion of
the resulting debt discount over the expected life of the
debt.  Retrospective application to all periods presented is required
and a cumulative-effect adjustment is recognized as of the beginning of the
first period presented.  This standard is effective for fiscal years
beginning after December 15, 2008.  Our adoption of FSP APB 14-1 on
January 1, 2009 did not have a material impact on our consolidated financial
statements.
 
 5
 
 In June
2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
which requires entities to apply the two-class method of computing basic and
diluted earnings per share for participating securities that include awards that
accrue cash dividends (whether paid or unpaid) any time common shareholders
received dividends and those dividends do not need to be returned to the entity
if the employee forfeits the award.  FSP EITF 03-6-1 will be effective
for the Company on January 1, 2009 and will require retroactive
disclosure.  The adoption of EITF 03-6-1 did not have a material
impact on our consolidated financial statements.
 
 In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity’s own Stock”(“EITF
07-5).  EITF 07-5 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years.   Early application is not
permitted.  Paragraph 11(a) of SFAS No. 133 – specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be consider a derivative
financial instrument.  EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133
paragraph 11(a) scope exception.  The Company’s adoption of EITF 07-05
effective January 1, 2009, resulted in the identification of certain warrants
that were determined to be ineligible for equity classification because of
certain provisions that may result in an adjustment to their exercise
price.  Accordingly, these warrants were reclassified as liabilities
upon the effective date of EITF 07-05 and re-measured at fair value as of March
31, 2009 with changes in the fair value recognized in other expense for the
quarter ended March 31, 2009 (See Note 10).
 
 4.
CONCENTRATION OF CREDIT RISK
 
 From time
to time, the Company maintains its cash balances at a financial institution that
exceeds the Federal Deposit Insurance Corporation coverage of $250
thousand.  The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk related to its
cash and cash equivalents.
 
 At March
31, 2009 and 2008, due to our distribution agreement with Cardinal Health, we
had one individual customer whose receivable balance outstanding represented 70%
of the gross account receivable balance.
 
 We rely
primarily on A Plus International to supply our sponge products, but also rely
on a number of third parties to manufacture certain of our products. If any of
our third-party manufacturers cannot, or will not, manufacture our products in
the required volumes, on a cost-effective basis, in a timely manner, or at all,
we will have to secure additional manufacturing capacity. Any interruption or
delay in manufacturing could have a material adverse effect on our business and
operating results.
 
 5.  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) and accordingly, financial statement amounts for the prior
periods in which the Company granted employee stock options have been restated
to reflect the fair value method of expensing prescribed by SFAS 123(R). During
the three months ended March 31, 2009 and 2008, the Company had stock-based
compensation expense of  $225 thousand and $201 thousand,
respectively.  The total amount of stock-based compensation for the
three months ended March 31, 2009, included warrants valued at $91 thousand and
stock options valued at $134 thousand.  The total amount of
stock-based compensation for the three months ended March 31, 2008, included
restricted stock grants valued at $36 thousand and stock options valued at $199
thousand.
 
 In
September 2005, the Board of Directors of the Company approved the Amended and
Restated 2005 Stock Option and Restricted Stock Plan (the “2005
SOP”) and the Company’s stockholders approved the Plan in November 2005.
The Plan reserves 2.5 million shares of common stock for grants of incentive
stock options, nonqualified stock options, warrants and restricted stock awards
to employees, non–employee directors and consultants performing services for the
Company. Options granted under the Plan have an exercise price equal to or
greater than the fair market value of the underlying common stock at the date of
grant and become exercisable based on a vesting schedule determined at the
date of grant. The options expire 10 years from the date of grant.
Restricted stock awards granted under the Plan are subject to a vesting period
determined at the date of grant.
 
 In
addition, on January 2, 2009 the Company granted 2.8 million, nonqualified stock
options to executives under the terms of their employment
agreements.
 
 6
 
 A summary
of stock option activity for the three months ended March 31, 2009 is presented
below (in thousands, except
per share data):
  Outstanding OptionsWeighted
      AverageWeighted
                
                
                RemainingNumber
      of
                
                
                Average
                
                
                Contractual
      LifeShares
                
                
                Exercise Price
                
                
                (years)31-Dec-08
                
                
                1,627
                
                
                $
                3.49
                
                
                
                X.43Granted
      during the period
                
                
                2,750
                
                
                
                S 0.75
                
                
                
                9.7631-Mar-09
                
                
                4,377
                
                
                $
                2.58
                
                
                
                8.56Options
      exercisable at:31-Dec-08
                
                
                1,171
                
                
                $
                2.62
                
                
                
                8.531-Mar-09
                
                
                1,205
                
                
                
                2.58
                
                
                
                8.6
  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, 2009 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, 2009. There have not been any options exercised during the
three months ended March 31, 2009 or year ended December 31, 2008.
 
 All
options that the Company granted during the three months ended March 31, 2009
and 2008 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
31,2009
                    
                    
                    2008Weighted
      average risk free interest rate
                    
                    
                    2.07
                    
                    
                    
                    
                    %
                    
                    
                    –
                    
                    
                    
                    
                    %Weighted
      average life (in years)
                    
                    
                    6.02
                    
                    
                    years
                    
                    
                    
                    –
                    
                    
                    yearsVolatility
                    
                    
                    114.127
                    
                    
                    
                    
                    %
                    
                    
                    –
                    
                    
                    
                    
                    %Expected
      dividend yield
                    
                    
                    –
                    
                    
                    
                    
                    
                    
                    
                    –
                    
                    
                    
                    
                    %weighted
      average grant-date fair value per share or options granted
                    
                    $
                    0.75
                    
                    
                    
                    
                    
                    
                    $
                    –
  A summary
of the changes in the Company’s nonvested options during the three months ended
March 31, 2009 is as follows:
  7
 
 Weighted
      AverageGrant
      Date FairNonvested Shares
                  
                  Shares
                  
                  
                  ValueNonvested
      at December 31, 2008
                  
                  
                  1,166
                  
                  
                  $
                  1.75Granted
                  
                  
                  2,750
                  
                  
                  
                  2,62Vested
                  
                  
                  (710
                  )
                  
                  
                  2.28Cancelled
      and forfeited
                  
                  
                  (15
                  )
                  
                  
                  5.48Nonvested
      at March 31, 2009
                  
                  
                  3,191
                  
                  
                  
                  2,62
  As
of  March 30, 2009, total unrecognized compensation costs related to
unvested stock options was $134 thousand. Which is expected to be recognized
over a weighted average period of 2.58 years.
 
 6.  NET
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 attributable 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, 2009 and 2008,
(in thousands):
 
 March
      31,
              
              
              March
      31,2009
              
              
              2008Warrants
              
              
              14,521
              
              
              
              6,115Stock
      options
              
              
              4,377
              
              
              
              1,650Convertible
      promissory notes
              
              
              543
              
              
              
              1,389Convertible
      preferred stock
              
              
              246
              
              
              
              246Total
              
              
              19,687
              
              
              
              9,400
  8
 
 7.
CONVERTIBLE DEBENTURES & NOTES PAYABLE
 
 Convertible
Debentures
 
 Convertible
debentures at March 31, 2009 and December 31, 2008 are comprised of the
following (in
thousands):
 
 March 31, 2009
                            
                            
                            December 31, 2008Ault
      Glazer Capital Partners, LLC (a) *
                            
                            $
                            1,425
                            
                            
                            $
                            1,425David
      Spiegel (b)
                            
                            
                            65
                            
                            
                            
                            65Total
      convertible debentures
                            
                            
                            1,490
                            
                            
                            
                            1,490Less:  unamortized
      discount
                            
                            
                            (13
                            )
                            
                            
                            (14
                            )1,477
                            
                            
                            
                            1,476Less:  current
      portion
                            
                            
                            (1,425
                            )
                            
                            
                            (1,425
                            )Convertible
      debentures - long term portion
                            
                            $
                            52
                            
                            
                            $
                            51
 
 Aggregate
future required principal payments on these convertible debentures during the
twelve month period subsequent to March 31, 2009 are $1.4 million, convertible
into 500,000 shares of our common stock.
 
 (a)
                As
      of December 31, 2006, Ault Glazer Capital Partners, LLC loaned $1.5
      million to ASG in addition to the Ault Glazer Capital Partners
      (“ASG”)
      Note.  The loans were advanced to ASG, pursuant to the terms of
      a Real Estate Note dated July 27, 2005, as amended (the "Real
      Estate Note"). The Real Estate Note had an interest rate of 3%
      above the Prime Rate as published in the Wall Street Journal. All unpaid
      principal, interest and charges under the Real Estate Note were due in
      full on July 31, 2010.  The Real Estate Note was collateralized
      by a mortgage on certain real estate owned by ASG pursuant to the terms of
      a Future Advance Mortgage Assignment of Rents and Leases and Security
      Agreement dated July 27, 2005 between ASG and the
  Fund.
 
 On March
7, 2006, the Company entered into a line of credit agreement with Ault Glazer
Capital Partners pursuant to a Revolving Line of Credit Agreement (the “Revolving Line
of Credit”). The Revolving Line of Credit allowed the Company to request
advances of up to $500 thousand. Each advance under the Revolving Line of Credit
was evidenced by a secured promissory note and a security agreement. The secured
promissory notes issued pursuant to the Revolving Line of Credit required
repayment with interest at the Prime Rate plus 1% within 60 days from issuance.
The outstanding principal balance of $394 thousand and accrued interest of $28
thousand, which was in default, was converted into 337 thousand shares of the
Company’s common stock at a conversion price of $1.25 per share on May 31,
2007.
 
 Effective
June 1, 2007, the entire unpaid principal and interest under the ASG Note and
Real Estate Note were restructured into a new Convertible Secured Promissory
Note (the "AG Capital
Partners Convertible Note") in the principal amount of $2.5 million with
an effective date of June 1, 2007.  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.
 
 On
September 5, 2008, the Company entered into an Amendment and Early Conversion of
the Secured Convertible Promissory Note (the “Amendment”).  The
Amendment allowed for the conversion, prior to the maturity date, of the
outstanding principal balance of the Note into 1,300,000 shares of Patient
Safety common stock and $450,000 in cash prepayments.  According to
the Amendment, after the prepayments were made, the Note could be converted into
1,300,000 shares of common stock upon Ault Glazer’s satisfaction of certain
conditions.
 
 On
September 12, 2008, the parties executed an Agreement for the Advancement of
Common Stock Prior to close of the Amendment and Early Conversion of Secured
Convertible Promissory Note, dated September 5, 2008 (“Amendment”).
  9
 
 Ault
Glazer failed to satisfy the conditions by the deadline stated in the Amendment,
dated September 5, 2008.  Although the conditions remained
unsatisfied, the Company made two additional issuances of shares to Ault Glazer
pursuant to the Amendment.  The Company issued another 250,000 shares
on October 10, 2008 and another 250,000 shares on November 6,
2008.   As of this date, there remain 500,000 shares issuable to
Ault Glazer upon Ault Glazer meeting the conditions of the
Amendment.
 
 (b)
                On
      October 27, 2008 we entered into a Discount Convertible Debenture with
      David Spiegel in the principal amount of $65 thousand (the“Spiegel
      Note”) with a 9% original issue discount of $15
      thousand.  The Note is convertible at any time, in whole or in
      part, into common stock of the Company at a conversion price of $1.50 per
      common share at the option of the holder.  During the three
      months ended March 31, 2009, the Company incurred interest expense and
      amortization of the debt discount of $1 thousand on the Spiegel
      Note.
 
 Notes
Payable
 
 Notes
payable at March 31, 2009 and December 31, 2008 are comprised of the following
(in
thousands):
 
 March
      31,
              
              
              December
      31,2009
              
              
              2008Herbert
      Langsam (a)*
              
              $
              600
              
              
              $
              600Catalysis
      Offshore (b)*
              
              
              275
              
              
              
              250Catalysis
      Partners (b)*
              
              
              575
              
              
              
              250Apehelion
      Medical Fund, LP (c)
              
              
              300
              
              
              
              -Arizona
      Bay Technology Ventures, LP (c)
              
              
              200
              
              
              
              -JMR
      Capital Limited (c)
              
              
              200
              
              
              
              -William
      Hitchcock (c)
              
              
              1,000
              
              
              
              -Total
      notes payable
              
              
              3,150
              
              
              
              1,100Less:
      unamortized discount
              
              
              (1,194
              )
              
              
              -Less:
      current portion
              
              
              (600
              )
              
              
              (1,100
              )Notes
      payable - long term portion
              
              $
              1,356
              
              
              $
              -
 * Related
party (see Note 12)
 
 (a)
                On
      May 1, 2006, Herbert Langsam, a Class II Director of the Company, loaned
      the Company $500 thousand. The loan is documented by a $500 thousand
      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. 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.
 
 On
November 13, 2006, Mr. Langsam loaned the Company an additional $100 thousand.
The loan is documented by a $100 thousand 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 thousand 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 thousand as the estimated
value of the warrants. The debt discount was amortized as non-cash interest
expense over the original term of the debt using the effective interest
method.  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.
  10


On
December 29, 2008 Mr. Langsam received 25 thousand shares of the Company’s
common stock to extend the maturity dates of both loans to June 30,
2009.
 
 During
the three months ended March 31, 2009 and 2008, the Company incurred interest
expense, excluding amortization of debt discount, of $18 thousand and $24
thousand, respectively, on the Langsam Notes.  At March 31, 2009 and
December 31, 2008, accrued interest on the Langsam Notes totaled $185
thousand.
 
 (b)
                Between
      February 28, 2008 and March 20, 2008, Catalysis Offshore, Ltd. and
      Catalysis Partners, LLC (collectively“Catalysis”),
      related parties, each loaned $250 thousand to the Company.  As
      consideration for the loans, the Company issued Catalysis promissory notes
      in the aggregate principal amount of $500 thousand (the “Catalysis
      Notes”). The Catalysis Notes accrue interest at the rate of 8% per
      annum and had maturity dates of May 31, 2008. The managing partner of
      Catalysis is Francis Capital Management, LLC (“Francis
      Capital”), an investment management firm. John Francis, a director
      of the Company and President of Francis Capital, has voting and investment
      control over the securities held by Catalysis. Francis Capital, including
      shares directly held by Catalysis, beneficially owns 1.3 million shares of
      the Company’s common stock and warrants for purchase of 808 thousand
      shares of the Company’s common stock.  On January 29, 2009 the
      Catalysis Notes were converted into new notes as  part of the
      Senior Secured Note and Warrant Purchase Agreement described
      below.
 
 (c)
                On
      January 29, 2009, the Company entered into a Senior Secured Note and
      Warrant Purchase Agreement, pursuant to which, the Company sold Senior
      Secured Promissory Notes (the “Notes”) in the principal amount of $2.6
      million and warrants to purchase 1.5 million shares of the Company’s
      common stock (the “Warrant”), to several accredited investors (the
      “Investors”).  The Investors paid $2.0 million in cash and
      converted $550 thousand of existing debt and accrued interest into the new
      Notes.   The Notes accrue interest, quarterly in arrears,
      at 10% per annum, throughout the term of the notes, and unless earlier
      converted into a Financing Round, have a maturity date of January 29,
      2011.  The Warrants have an exercise price of $1.00 and expire
      on January 29, 2014.  For the three months ended March 31, 2009
      the Company recognized $118 thousand in debt discount
      amortization.
 
 The Note
Holders have the option to participate in the next issuance of Securities issued
by the Company for cash or the exchange of debt, taking place after the Closing
and prior to the Note’s maturity date.  The Company has the right to
prepay the unpaid principal and interest due on the Notes without any prepayment
penalty.  The Notes are secured by essentially all of the Company’s
assets including but not limited to the Company’s interest in their primary
operating subsidiary, SurgiCount Medical Technologies, Inc.
 
 8.  ACCRUED
LIABILITIES
 
 Accrued
liabilities at March 31, 2009 and December 31, 2008 are comprised of the
following (in
thousands):
 
 March
      31,
              
              
              December 31,2009
              
              
              2008Accrued
      interest
              
              $
              239
              
              
              $
              237Accrued
      lease liability
              
              
              38
              
              
              
              56Warrant derivative
      liability
              
              
              6,166
              
              
              
              1,762Accrued
      dividends on preferred stock
              
              
              134
              
              
              
              134Accrued
      salaries
              
              
              12
              
              
              
              17Accrued
      officer severance
              
              
              147
              
              
              
              268Accrued
      director's fees
              
              
              188
              
              
              
              145Contingent
      tax liability
              
              
              708
              
              
              
              701Deferred
      revenue
              
              11
              
              
              
              -Other
              
              
              59
              
              
              
              38$
              7,702
              
              
              $
              3,358
  11
 
 9.
EQUITY TRANSACTIONS
 
 Common
Stock
 On May
27, 2008 the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act.  The Company issued and sold to
these accredited investors an aggregate of 2.1 million shares of its common
stock and warrants to purchase an additional 1.3 million shares of its common
stock.  The warrants are exercisable for a period of five years, have
an exercise price equal to $1.40.  These issuances resulted in
aggregate gross proceeds to the Company of $2.2 million and the extinguishment
of $426 thousand in existing debt.  We used the net proceeds from this
private placement transaction primarily for general corporate purposes and
repayment of existing liabilities.
 
 Between
April 2008 and June 2008, the Company issued 1.7 million warrants to officers,
directors and consultants of the Company.  The warrants were issued in
place of prior issuances of stock options with exercise prices well above market
price that were cancelled.  The exercise prices of the warrants were
$1.25 and $1.75 and vested over four years.  During this same time
period, 263 thousand warrants were issued to directors and consultants with an
exercise price of $1.25 and $1.75 that vested upon grant.
 
 On July
31, 2008, the Company issued 153 thousand shares of its common stock to Ault
Glazer Capital Partners, LLC.  The shares were issued in satisfaction
of unpaid accrued interest of $103 thousand due on the senior secured promissory
note held by Ault Glazer Capital Partners and prepaid interest of $128
thousand.  The accrued interest paid, which was in default, was
converted into shares of the Company’s common stock at a conversion price of
$1.50 per share.
 
 On August
1, 2008 the Company entered into a subscription agreement with several
accredited investors in a private placement exempt from the registration
requirements of the Securities Act.  The Company issued and sold to
these accredited investors an aggregate of 2.0 million shares of its common
stock and warrants to purchase an additional 1.2 million shares of its common
stock.  The warrants are exercisable for a period of five years and
have an exercise price equal to $1.40.  These issuances resulted in
aggregate gross proceeds to the Company of $2.4 million and $83 thousand in debt
extinguishment, which included $50 thousand, paid in common stock and $37
thousand was forgiven.  We used the net proceeds from this private
placement transaction primarily for general corporate purposes and repayment of
existing liabilities.
 
 Between
September 12, 2008 and November 6, 2008 the Company issued 800 thousand shares
of common stock to Ault Glazer Capital Partners, LLC.  The shares were
issued in partial satisfaction of the senior secured promissory note held by
Ault Glazer Capital Partners.    The issuance of the
Company’s common stock reduced the principal balance.
 
 On
December 29, 2008, we issued 25 thousand shares of common stock to Herbert
Langsam, currently a director of the Company.  The shares were issued,
in return for a maturity date extension to June 30, 2009, on two loans held by
Mr. Langsam.  Prior to December 29, 2008 the loans had been in
default.
 
 10.
WARRANTS AND WARRANT DERIVATIVE LIABILITY
 
 The
following table summarizes warrants to purchase common stock activity for the
three months ended March 31, 2009:
 
 Amount
                        
                        
                        Range
      of Exercise
                          PriceWarrants
      outstanding December 31, 2008
                        
                        
                        10,719,896
                        
                        
                        
                        $1.25 - $6.05Issued
                        
                        
                        4,064,886
                        
                        
                        
                        $0.75
      - $1.00Cancelled/Expired
                        
                        
                        (263,624
                        )
                        
                        
                        $3.26 - $5.95Warrants
      outstanding March 31, 2009
                        
                        
                        14,521,158
                        
                        
                        
                        $0.75 - $6.05
  The
warrants issued during the three months ended March 31, 2009 include 1.5 million
warrants, with an estimated fair value of $1.3 million, issued in
connection with the debt agreements entered into by the Company and 2.5 million
warrants, with an estimated fair value of $1.3 million, issued as a result of
adjustments required by anti-dilution provisions of other outstanding warrant
agreements. The warrants outstanding as of March 31, 2009 have exercise terms of
3-5 years from the date of issuance and exercise dates ranging from June 2009
through September 2014.
  12
 
 As of
December 31, 2008, a total of 5.3 million outstanding warrants, with an
estimated fair value of $1.77 million were recorded as a warrant derivative
liability based on our evaluation of criteria under FASB Emerging Issues Task
Force Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.  In addition, during the quarter ended March 31, 2009,
5.3 million additional warrants, with an estimated fair value of $3.3 million,
were reclassified from equity to derivative liability based on the evaluation
under EITF 00-19.
 
 Effective
January 1, 2009, upon the adoption of EITF 07-05, the Company reclassified a
total of 1.2 million outstanding warrants that were previously classified as
equity to a derivative liability.  This reclassification was necessary
as the Company determined that certain terms included in these warrant
agreements provided for a possible future adjustment to the warrant exercise
price, and accordingly, under the provisions of EITF 07-05, these warrants did
not meet the criteria for being considered to be indexed to the Company’s
stock.  As such, these warrants no longer qualified for the exception
to derivative liability treatment provided for in paragraph 11(a) of SFAS No.
133.  The estimated fair value of the warrants reclassified at January
1, 2009 pursuant to EITF 07-05 was determined to be $707 thousand.  At
March 31, 2009, a total of 11.9 million warrants, with an estimated fair value
of $6.2 million, are included in accrued liabilities in the accompanying balance
sheet.  Based on the change in fair value of the warrant derivative
liability, the Company recorded a non-cash loss of $414 thousand for the three
months ended March 31, 2009.
 
 The
following weighted average assumptions were used to estimate the fair value
information presented, with respect to warrants utilizing the Black-Scholes
option pricing model:
 
 Risk-free
      interest rate
                        
                        1.67%Average
      expected life (years)
                        
                        2.42
      – 4.38Expected
      volatility
                        
                        104.93%Expected
      dividends
                        
                        None
 
 11.
FAIR VALUE MEASUREMENTS
 
 We
adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities
measured on a recurring basis.  SFAS 157 defines fair value,
establishes a framework for measuring fair value and generally accepted
accounting principles and expands disclosures about fair value
measurements.  This standard applies in situations where other
accounting pronouncements either permit or require fair value
measurements.  SFAS 157 does not require any new fair value
measurements.
 
 Fair
value is defined in SFAS 157 as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.  Fair value measurements are to
be considered from the perspective of a market participant that holds the assets
or owes the liability.  SFAS 157 also establishes a fair value
hierarchy, which required an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
 
 The
standard describes three levels of inputs that may be used to measure fair
value:
 
 Level 1:
Quoted prices in active markets for identical or similar assets and
liabilities.
 
 Level
2:  Quoted prices for identical or similar assets and liabilities in
markets that are not active or observable inputs other than quoted prices in
active markets for identical or similar assets and liabilities.
 
 Level
3:  Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
 
 At March
31, 2009 the Company had outstanding warrants to purchase common shares of our
stock that are classified as warrant derivative liabilities with a fair value of
$6.2 million.  The warrants are valued using Level 3 inputs because
there are significant unobservable inputs associated with them.
  13
 
 The table
below sets forth a summary of changes in the fair value of the Company’s
Level 3 assets and liabilities for the three months ended March 31,
2009.
  December 31,
                      2008
                    
                    
                    Transfers into
                      Level 3
                    
                    
                    Net realized
                      losses included
                      in earnings
                    
                    
                    March 31, 2009Warrant
      derivative liability
                    
                    $
                    (1,762
                    )
                    
                    $
                    (3,990
                    )
                    
                    $
                    (414
                    )
                    
                    $
                    (6,166
                    )
 
 Losses
included in earnings for the three months ended March 31, 2009, are reported in
other income/expense in the amount of $414 thousand.
 
 12.
RELATED PARTY TRANSACTIONS
 
 Due
from Related Parties
 
 During
the three months ended March 31, 2007 and year ended December 31, 2006, the
Company paid approximately 25% 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. The office equipment leases and 25% of the security deposit
securing the office lease are in the Company’s name.  As part of the
Ault Glazer Capital Partners LLC (“AG Capital Partners”)
Secured Promissory Note Amendment, these leases and the security deposit were to
be taken out of the Company’s name and put into AG Capital Partners
name.  This has not happened and the equipment leases are currently in
default and are shown on our balance sheet as a current
liability.  The total outstanding balance on the equipment leases as
of March 31, 2009 is $38 thousand.
 
 Together,
Milton “Todd” Ault III, former Chairman and Chief Executive Officer of the
Company, and Louis Glazer, a Director of the Company, and Melanie Glazer,
(together, the “Glazers”)
own a controlling interest in the outstanding capital stock of Ault Glazer
Capital Partners, LLC.  As of March 31, 2009 and December 31, 2008,
the Glazers beneficially own approximately 98% of the outstanding preferred
stock of the Company.
 
 Loans
 
 During
the year ended December 31, 2007, the Company received loans from Ault Glazer
Capital Partners, LLC (“AG Capital Partners”).  Ault Glazer &
Company Investment Management, LLC is the managing member of AG
Capital.  The managing member of Ault Glazer & Company Investment
Management, LLC is Ault Glazer.  Mr. Ault is Chairman, Chief Executive
Officer and President of Ault Glazer.
 
 Convertible
Debentures and Notes Payable
 
 As of
March 31, 2009 and December 31, 2008, the Company had convertible debentures and
notes payable agreements issued to related parties with aggregate outstanding
principal balances of $2.9 million and $2.5 million, respectively (See Note
7).
 
 A
Plus International, Inc.
 
 During
the three months ended March 31, 2009 and 2008, the Company recognized cost of
goods sold of $343 thousand and $276 thousand, 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.
 
 Health
West Marketing Inc.
 
 During
the three months ended March 31, 2009 and 2008 Health West Marketing
Incorporated received payments for consulting services, of $60 thousand and $60
thousand, respectively, from A Plus International, Inc.  William Adams
the Company’s former Chief Executive Officer is the Chief Executive Officer and
President of Health West Marketing Inc. and has a consulting agreement with the
Company.  The consulting arrangement between A Plus and Health West
has been an ongoing agreement between the respective parties.  The
Company does not recognize any income or expense on their financial statements
relating to the agreement between Health West Marketing Incorporated and A Plus
International, Inc.
  14
 
 13.  COMMITMENTS
AND CONTINGENCIES
 
 Contingent
Tax Liability
 
 In the
process of preparing our federal tax returns for prior years, the Company’s
management found there had been errors in reporting income related to stock
grants made to certain employees and consultants to the recipients and the
respective taxing authorities.   In addition, the Company
determined that required tax withholding relating to these stock grants had not
been made or remitted, as required in fiscal years 2006 and 2007.
 
 Due to
the Company’s failure to properly report this income and withhold/remit required
amounts, the Company is liable for the amounts that should have been withheld
plus related penalties and interest.   The Company has estimated
its contingent liability based on the estimated required federal and state
withholding amounts, the employee and employer portion of social security taxes
as well as the possible penalties and interest associated with the
error.
  Although
the Company’s liability may ultimately be reduced if it can prove that the taxes
due on this income were paid on a timely basis by the recipient, the estimated
liability accrued by the Company is based on the assumption that it will be
liable for the entire amounts due to the uncertainty with respect to whether or
not the recipient made such payments.
  As the
Company determined that it is probable that it will be held liable for the
amounts owed, and as the amount could be reasonably estimated, an accrual for
the estimated liability was included in accrued liabilities as of December 31,
2008.  As of March 31, 2009 and December 31, 2008 the estimated
liability is $708 thousand and $701 thousand, respectively.
 
 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 that were dismissed on the merits from the underlying action in which
plaintiffs obtained their default judgment. An unfavorable outcome in the
lawsuit may have a material adverse effect on the Company's business, financial
condition and results of operations.  The Company believes the lawsuit
is without merit and intends to vigorously defend itself.  These
condensed consolidated interim financial statements do not include any
adjustments for the possible outcome of this uncertainty.  On January
29, 2009 the Superior Court of California issued a preliminary ruling in the
Company’s favor.
  15
 
 14.
SUBSEQUENT EVENTS
 
 Departure and
Election of Officers and Directors
 
 Effective
May 7, 2009, David Bruce, resigned as the President and Chief Executive Officer
of Patient Safety Technologies, Inc. (the “Company”).  Mr. Bruce also
resigned from the Board of Directors, effective immediately.  In
connection with Mr. Bruce’s resignation, Mr. Bruce’s option to purchase 2.0
million shares of our Common Stock expired.
 
 On May 7,
2009, the Company’s Board of Directors appointed Steven Kane as its President
and Chief Executive Officer, effective immediately.  Mr. Kane
currently serves as Chairman of the Company’s Board of Directors.  In
connection with this appointment, on May 7, 2009 the Company entered into an
employment agreement with Mr. Kane (the “Agreement”).
 
 The
Agreement includes the following terms:  Mr. Kane will receive an
initial annual base salary of $325,000 and he is eligible to receive an
incentive bonus each fiscal year in the amount of not less than 25% of his
annual base salary for such year, with the payment of such bonus based on Mr.
Kane’s achievement of performance objectives established by the Company’s Board
of Directors each fiscal year.  The Agreement also provides for
certain severance arrangements for Mr. Kane.  In the event that Mr.
Kane’s employment is terminated without cause the Company is required to pay Mr.
Kane (1) severance payments based on his annual base salary for a period of
twelve months; (2) a pro-rated bonus for the year in which termination occurred;
and (3) payment of, or reimbursement for, the continuation of his health and
welfare benefits coverage pursuant to COBRA for a twelve-month period following
such termination date.
 
 Pursuant
to the Agreement, the Company also granted Mr. Kane a stock option to purchase
2,000,000 shares of the Company’s Common Stock.  The exercise price of
the option  is the average trading price of the Common Stock for the
one day ending on the date of grant, or $0.75.  Upon the six-month
anniversary of the effective date of the Agreement, 250,000 Shares subject to
the option will vest and become exercisable and thereafter, the remaining shares
will vest over a forty-two month period at the rate of 1/48th of the
total shares per month.  In addition, upon a change of control of the
Company that occurs during his employment, (1) any unvested shares subject to
the option will become fully vested and (2) Mr. Kane will receive a cash payment
of two times his then-current base salary.
  16




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 and the
description of our business appearing in our Form 10-K.  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, the
risk factors set forth in Part I, Item 1A.of our Form 10-K 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.("PST"or the"Company", “we”,
“us,and“our”)is a
Delaware corporation. The Company’s operations are conducted through its
wholly-owned operating subsidiary, SurgiCount Medical, Inc. (“SurgiCount”),a California
corporation.





The
Company’s operating focus is the development, marketing and sales of products
and services focused in the medical patient safety markets.


SurgiCount’s
Safety-SpongeTM System
is designed to reduce the number of retained sponges and towels unintentionally
left in patients during surgical procedures by allowing faster and more accurate
counting of surgical sponges. The SurgiCount Safety-SpongeTMSystem
is a patented turn-key line of modified surgical sponges, SurgiCounterTM
scanners, and software file and database elements integrated to form a
comprehensive counting and documentation system.  Our business model
consists of selling our unique surgical sponge products and selling or renting
the scanners and software to hospitals.  We use an exclusive supplier
to manufacture our sponge products and we sell mainly through a direct sales
force for initial hospital conversions and through distributor organizations for
the ongoing supply of sponge products to customers.





The
Safety-SpongeTMSystem
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 scanner to scan and record the sponges at the
initial and final counts during a surgical procedure. 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 stores a documented electronic record of all sponges used
and removed and can output records to a hospital electronic records system. The
Safety-SpongeTMSystem
is the first computer assisted sponge counting system to receive a Section
510(k) clearance from the US Food & Drug Administration.





Our
principal executive offices are located at 43460 Ridge Park Drive, Suite 140,
Temecula, CA 92590. Our telephone number is (951) 587-6201.





Revenue
and Expense Components





The
following is a description of the primary components of our revenues and
expenses:


17


Revenues.  We
derive our revenue primarily from the sale of our Safety-SpongeTM sponges and the
related hardware and software.  Our revenues are generated by our
direct sales force and independent distributors.  Our products are
typically ordered directly by the hospitals through our distributors who ship
and bill directly. 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 Safety-SpongeTM supplies.




·
            Surgical Sponge
      Revenues:Revenues related to the sale of sponges are
      recognized in accordance with SAB 104.  Generally revenues from
      the sale of sponges are recognized upon shipment, as most sponge sales are
      sold FOB shipping point.  In the event that terms of the sale
      are FOB customer, revenue is recognized at the time delivery to the
      customer has been completed.





·
            Hardware, Software and
      Maintenance Agreement Revenues: For the hardware and software
      elements, revenues are recognized on delivery, considered to be at the
      time of shipment where terms are FOB shipping point, and upon receipt by
      the customer when terms of the sale are FOB destination.  As the
      software included in our scanners is not incidental to the product being
      sold, the sale of the software falls within the scope of SOP
      97-2.  The scanner is considered to be a software-related
      element, as defined in SOP 97-2, since the software is essential to the
      functionality of the scanner, and the maintenance agreement, which
      provides for product support including unspecified product upgrades and
      enhancements developed by the Company during the period covered by the
      agreement is considered to be post-contract customer support (“PCS”) as
      defined in SOP 97-2.  These items are considered to be separate
      deliverables within a multiple-element arrangement, and accordingly, the
      total price of this arrangement is allocated to each respective
      deliverable, and recognized as revenue as each element is delivered.
      Delivery with respect to our initial one-year maintenance agreements is
      considered to occur on a monthly basis over the term of the one-year
      period, and revenues related to this element are recognized on a pro-rata
      basis during this period.




SurgiCount
sells its products primarily through a Supply Agreement with Cardinal Health
200, Inc.  Pursuant to the agreement, Cardinal acts s 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 sale and distribution to its hospital
customers.   Either we or Cardinal Health may terminate the
existing agreement in November 2009.  A termination of our
relationship with Cardinal could adversely impact our results of
operations.  SurgiCount employs a direct sales force to secure initial
customer commitments from hospitals.





Cost of
revenues.  Cost of revenues consists of direct product costs
billed from our contract manufacturers.





Research and
development.  Research and development expense consists of
costs associated with the design, development, testing and enhancement of our
products.  Research and development costs also include salaries and
related employee benefits, research-related overhead expenses and fees paid to
external service providers.





Sales and
marketing.  Our sales and marketing expense consists primarily
of salaries and related employee benefits, sales commissions and support cost,
professional service fees, travel, education, trade show and marketing
costs.





General and
administrative.  Our general and administrative expense
consists primarily of salaries and related employee benefits, professional
service fees, legal costs, expenses related to being a public entity,
depreciation and amortization expense.





Other income
(expense).  Total other income (expense) includes interest
income, interest expense, change in fair value of warrant liability, realized
gain (loss) on assets held for sale and unrealized loss on assets held for
sale.


18


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 policies relate to
revenue recognition, valuation of warrant derivative liability, valuation of our
intangible assets and stock based compensation and accounting for income
taxes.  For additional information relating to these and other
accounting policies, see note [4] to our consolidated interim financial
statements appearing elsewhere in this quarterly report on Form
10-Q.





Warrant
Derivative Liability





The
Company accounts for warrants issued in connection with financing arrangements
in accordance with EITF Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“EITF
00-19”) and pursuant to EITF Issue No 07-05, Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity’s own Stock (“EITF
07-05”).  Pursuant to EIFT 00-19, an evaluation of specifically
identified conditions is made to determine whether warrants issued are required
to be classified as either equity or a liability.  If the
classification required under EITF 00-19 changes as a result of events during a
reporting period, the instrument is reclassified as of the date of the event
that caused the reclassification.  In the event that this evaluation
results in a partial reclassification, our policy is to first reclassify
warrants with the latest date of issuance.  Pursuant to EITF 07-05, a
two-step model is applied in determining whether a financial instrument or an
embedded feature is indexed to an issuer’s own stock and is thus able to qualify
for an exemption from derivative liability classification provided for under the
scope exception in SFAS No. 133.  The estimated fair value of warrants
classified as derivative liabilities is determined using the Black-Scholes
option pricing model.  The fair value of warrants classified as
derivative liabilities is adjusted for changes in fair value at each reporting
period, and the corresponding non-cash gain or loss is recorded in current
period earnings.  There is no limit on the number of times a contract
may be reclassified.





Valuation
of Intangible Assets





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





Stock-Based
Compensation





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


19


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.





Impairment
of Long-Lived Assets and Intangibles





In
accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we test long-lived assets with finite
lives for impairment whenever events or changes in circumstances indicate that
their carrying value may not be recoverable.  A significant decrease
in the fair value of a long-lived asset, an adverse change in the extent or
manner in which a long-lived asset is being used or in its physical condition or
an expectation that a long-lived asset will be sold or disposed of significantly
before the end of its previously estimated life are among several of the factors
that could result in an impairment charge.





We
measure recoverability of assets to be held and used in operations by a
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the assets.  If such assets are considered
to be impaired, we measure the impairment to be recognized by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets.  Assets to be disposed of are reported at the lower of the
carrying amount or fair value less selling costs.





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”). This statement defines fair value, establishes a framework for
measuring fair value in U.S. GAAP, and expands disclosures about fair value
measurements.  This statement applies in those instances where other
accounting pronouncements require or permit fair value measurements and the
board of directors has previous concluded in those accounting pronouncements
that fair value is the relevant measurement attribute.  Accordingly,
this statement does not require any new fair value
measurements.  However for some entities, the application of this
Statement will change the current practice.  In February 2008, the
FASB issued FSP FAS 157-2 which defers the effective date of SFAS 157 for all
non-financial assets and liabilities, except those items recognized or disclosed
at fair value on an annual or more frequent recurring basis until years
beginning after November 15, 2008.   Our adoption of SFAS 157 for
its financial assets and liabilities on January 1, 2008 and FSP FAS 157-2 for
its non-financial assets and liabilities on January 1, 2009 did not have a
material impact on the Company’s consolidated financial statements.





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.  Our adoption of SFAS No. 141(R) on January 1, 2009 did
not have a material impact on the Company’s consolidated
statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160; Noncontrolling Interests
in Consolidated Financial Statementsan amendment of ARB5 (“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. Our
adoption of SFAS No. 160 on January 1, 2009 did not have a material impact on
our consolidated financial statements.


20


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 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.  Our adoption of SFAS
No. 161 on January 1, 2009 did not have a material impact on our
consolidated financial statements.





In April
2008, the FASB issued FSP FAS 142-3, Determination of Useful Life of
Intangible Assets (“FSP FAS 142-3”).  FSP FAS 142-3 amends the
factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FAS 142, “Goodwill and Other Intangible Assets.”  FSP FAS 142-3
also requires expanded disclosure related to the determination of intangible
asset useful lives.  FSP FAS 142-3 is effective for fiscal years
beginning after December 15, 2008.  Earlier adoption is not
permitted.  FSP FAS 142-3 on January 1, 2009 did not have a material
impact on our consolidated financial statements.





In May
2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (“FSP APB 14-1”)  FSP APB 14-1 requires recognition
of both the liability and equity components of convertible debt instruments with
cash settlement features.  The debt component is required to be
recognized at the fair value of a similar instrument that does not have an
associated equity component.  The equity component is recognized as
the difference between the proceeds from the issuance of the note and the fair
value of the liability.  FSP APB 14-1 also requires an accretion of
the resulting debt discount over the expected life of the
debt.  Retrospective application to all periods presented is required
and a cumulative-effect adjustment is recognized as of the beginning of the
first period presented.  This standard is effective for fiscal years
beginning after December 15, 2008.  Our adoption of FSP APB 14-1 on
January 1, 2009 did not have a material impact on our consolidated financial
statements.





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





In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining whether an Instrument
(or Embedded Feature) is indexed to an Entity’s own Stock”(“EITF
07-5).  EITF 07-5 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years.   Early application is not
permitted.  Paragraph 11(a) of SFAS No. 133 – specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company’s own stock and (b) classified in stockholders’
equity in the statement of financial position would not be consider a derivative
financial instrument.  EITF 07-5 provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer’s own stock and thus able to qualify for the SFAS No. 133
paragraph 11(a) scope exception.  The Company’s adoption of EITF 07-05
effective January 1, 2009, resulted in the identification of certain warrants
that were determined to be ineligible for equity classification because of
certain provisions that may result in an adjustment to their exercise
price.  Accordingly, these warrants were reclassified as liabilities
upon the effective date of EITF 07-05 and re-measured at fair value as of March
31, 2009 with changes in the fair value recognized in other income for the
quarter ended March 31, 2009.


21


Results
of Operations





Revenues





We
recognized revenues of $936 thousand and $500 thousand for the three months
ended March 31, 2009 and 2008, respectively.  Revenues during the
three months ended March 31, 2009 consisted of Safety-SpongeTM of $732
thousand and sales of hardware and supplies of $204
thousand.  Revenues during the three months ended March 31, 2008
consisted of sales from the Safety-SpongeTM sales
of $424 thousand and sales of hardware and supplies of $87
thousand.





We
attribute a significant amount of the increase in sales generated by our
Safety-SpongeTM System
to increased product awareness and demand.  We have had several major
institutions adopt the Safety-SpongeTM System
and expect this trend to continue. The Safety-SpongeTM System
is currently being evaluated by additional large number of medical institutions,
the adoption by any one of which would have a material impact on our
revenues.  We expect that each of the smaller sized medical
institutions, which adopt the Safety-SpongeTM System,
could produce approximately $100 thousand in annual revenue whereas each of the
larger institutions could produce annual recurring revenues of $400 thousand or
more.





Cost
of revenues





Cost of
revenues increased $156 thousand, or 40% to $549 thousand for the three months
ended March 31, 2009 from $393 thousand for the same period in
2008.  This reflects an increase in sales of our Safety-SpongeTM
System.





Gross
profit





During
the three months ended March 31, 2009, our gross profit increased $280 thousand
or 262%, to $387 thousand from $107 thousand for the same period in
2008.  Our gross margin percentage was 41% for the three months ended
March 31, 2009 compared to 21% for the same period in 2008.  The
increase in gross margin percentage was primarily a result of our normal gross
margin percentage for the three months ended March 31, 2009 compared to the same
period in 2008 which had a write off for obsolete inventory and discounts
provided in connection with hardware sales.





Research
and development





Research
and development expenses were $113 thousand and $44 thousand, for the three
months ended March 31, 2009 and 2008, respectively.  The increase is
primarily due to an increase in software development costs associated with our
system hardware.





Sales
and marketing





Sales and
marketing expenses were $649 thousand and $452 thousand for the three
months ended March 31, 2009 and 2008, respectively.  The increase is
primarily due to the addition of sales and clinical representatives in the field
and the associated salary, commission, benefits and travel
expenses.





General
and administrative





General
and administrative expenses were $2.6 million and $1.0 million for the three
months ended March 31, 2009 and 2008, respectively.  The increase is
primarily due to non-cash expenses recorded in connection with the issuance
of additional warrants pursuant to anti-dilution provisions and an
increase in costs associated with being a public company.





Total
other income (expense), net





Total
other expense increased to $634 thousand from $177 thousand for the three months
ended March 31, 2009 and 2008 respectively.  This increase was mainly
due to an increase in the fair market value of our warranty derivative liability
resulting in a loss of $414 thousand and warrant expense of $1.3 million for the
three months ended March 31, 2009.


22


Interest
expense





We had
interest expense of $220 thousand and $87 thousand for the three months ended
March 31, 2009 and 2008, respectively.  The increase in interest
expense for the three months ended March 31, 2009 when compared to March 31,
2008 is primarily attributable to the increase in debt discount amortization
relating to our long term debt.





Realized
gains (losses) on investments, net





During
the three months ended March 31, 2008 we realized a net loss of $25 thousand
that relates to the sale of approximately 8.5 acres of undeveloped land in Heber
Springs, Arkansas.





Financial
Condition, Liquidity and Capital Resources





Our cash
and cash equivalents balance was $923 thousand at March 31, 2009, versus $296
thousand at December 31, 2008. Total current liabilities were $10.2 million at
March 31, 2009, versus $6.8 million at December 31, 2008. As of March 31, 2009
we had a working capital deficit of approximately $8.9 million, of which $6.1
million is associated with our warrant derivative liability.  Since we
continue to have recurring losses, we have relied upon private placements of
equity and debt securities. Our existing cash and cash equivalents balance,
combined with the proceeds received from a January 2009 debt financing
(described below), are not expected to be sufficient to meet our anticipated
funding requirements during the next twelve months.





In order
to ensure the continued viability of the Company, additional 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.  We cannot be certain that sufficient financing will be
available when needed on terms acceptable to the Company, or at
all.





As of
March 31, 2009, other than our office lease and employment agreements with key
executive officers, we had no commitments other than the liabilities reflected
in our consolidated financial statements.





Cash
increased by $627 thousand to $923 thousand during the three months ended March
31, 2009, compared to a decrease of $250 thousand to $156 thousand, during the
three months ended March 31, 2008, primarily as a result of financing activities
during 2009 as described below.





Operating
activities





Operating
activities used $1.3 million of cash during the three months ended March 31,
2009, compared to $746 thousand during the three months ended March 31,
2008.  During the three months ended March 31, 2009 net cash used in
operating activities resulted from a net loss of $3.5 million including a
decrease in accounts payable of $350 thousand and a decrease in accrued
liabilities of $10 thousand, offset by a $1.7 million non-cash, unrealized loss
on our warrant derivative liability caused by the increase in the market value
of our common stock, amortization of debt discount of $118 thousand, stock based
compensation of $225 thousand, a decrease of $165 thousand in inventory and a
decrease of $183 thousand in accounts receivable.





During
the three months ended March 31, 2008, net cash used in operating activities
resulted from a net loss of $1.6 million, including an increase in inventory of
$78 thousand, offset by $201 thousand non-cash stock based compensation, an
increase in accounts payable of $314 thousand and an increase in accrued
liabilities.





Investing
activities





Investing
activities for the three months ended March 31, 2009 used $22 thousand for the
purchase of computer hardware and related software.


23


We
generated net cash of $117 thousand from investing activities during the three
months ended March 31, 2008 primarily from the sale of our undeveloped land in
Alabama for $226 thousand.  This was partially offset by capitalized
costs of $109 thousand related to the purchase of property and equipment
including the ongoing development of purchased software related to our
Safety-SpongeTMSystem.





Financing
activities





Cash
provided by financing activities during the three months ended March 31, 2009 of
$2.0 million, resulting primarily from net proceeds from the issuance of debt
and warrants of $2.6 million, offset by repayments of notes payable of $550
thousand and preferred stock dividends of $19 thousand.





Cash
provided by financing activities during the three months ended March 31, 2008,
of $380 thousand resulted primarily from net proceeds from short-term debt
financings of $500 thousand offset by the repayment of a promissory note of $101
thousand and preferred stock dividends of $19 thousand.





2008
Private Placements





During
the period May 20, 2008 to August 29, 2008, we sold to accredited investors in
our private placements, as reflected below, $5.1 million in equity
securities.





Between
May 20, 2008 and June 19, 2008, the Company entered into a securities purchase
agreement with several accredited investors, in a private placement exempt from
the registration requirements of the Securities Act. The Company issued and sold
to these investors an aggregate of 2.1 million shares of its common stock and
warrants to purchase an additional 1.2 million shares of its common
stock.





Between
August 1, 2008 and August 29, 2008, the Company entered into a securities
purchase agreement with several accredited investors, in a private placement
exempt from the registration requirements of the Securities Act. The Company
issued and sold to these investors an aggregate of 2.0 million shares of its
common stock and warrants to purchase an additional 1.3 million shares of its
common stock.





2009
Promissory Notes





On
January 29, 2009, the Company entered into a Senior Secured Note and Warrant
Purchase Agreement, pursuant to which, the Company sold Senior Secured
Promissory Notes (the “Notes”) in the principal
amount of $2.6 million and warrants to purchase 1.5 million shares of the
Company’s common stock (the “Warrants”), to several
accredited investors (the “Investors”).  The Investors paid $2.0
million in cash and converted $550 thousand of existing debt and accrued
interest into the new Notes.   The Notes accrue interest at 10%
per annum, throughout the term of the notes, and unless earlier converted into a
equity, have a maturity date of January 29, 2011.  The Warrants have
an exercise price of $1.00 and expire on January 29, 2014.





At March
31, 2009 we had additional outstanding promissory notes in the aggregate
principal amount of $600 thousand and convertible debt instruments in the amount
of $1.5 million as detailed below:




On May 1,
2006, Herbert Langsam, a Class II Director of the Company, loaned the Company
$500 thousand. The loan is documented by a $500 thousand 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. 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.




24


On
November 13, 2006, Mr. Langsam loaned the Company an additional $100 thousand.
The loan is documented by a $100 thousand 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 thousand 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 thousand as the estimated
value of the warrants. The debt discount was amortized as non-cash interest
expense over the original term of the debt using the effective interest
method.  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.





On
December 29, 2008 Mr. Langsam received 25 thousand shares of the Company’s
common stock to extend the maturity dates of both loans to June 30,
2009.





On
September 5, 2008, the Company entered into an Amendment and Early Conversion of
the Secured Convertible Promissory Note (the “Amendment”).  The
Amendment allowed for the conversion, prior to the maturity date, of the
outstanding principal balance of the Note into 1,300,000 shares of Patient
Safety common stock and $450,000 in cash prepayments.  According to
the Amendment, after the prepayments were made, the Note could be converted into
1,300,000 shares of common stock upon Ault Glazer’s satisfaction of certain
conditions.





On
September 12, 2008, the parties executed an Agreement for the Advancement of
Common Stock Prior to close of the Amendment and Early Conversion of Secured
Convertible Promissory Note, dated September 5, 2008 (“Amendment”).





Ault
Glazer failed to satisfy the conditions by the deadline stated in the Amendment,
dated September 5, 2008.  Although the conditions remained
unsatisfied, the Company made two additional issuances of shares to Ault Glazer
pursuant to the Amendment.  The Company issued another 250,000 shares
on October 10, 2008 and another 250,000 shares on November 6,
2008.   As of this date, there remain 500,000 shares issuable to
Ault Glazer upon Ault Glazer meeting the conditions of the
Amendment.





On
October 27, 2008 we entered into a Discount Convertible Debenture with David
Spiegel in the principal amount of $65 thousand (the “Spiegel
Note”) with a 9% original issue discount of $15 thousand.  The
Note is convertible at any time, in whole or in part, into common stock of the
Company at a conversion price of $1.50 per common share at the option of the
holder.





Investments





At March
31, 2009, we had an investment in Alacra Corporation, valued at $667 thousand,
which represents 8.3% of our total assets. On April 20, 2000, we purchased $1.0
million 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
thousand, which accounted for the entire amount of the decrease in value of our
Alacra investment. We continue to maintain our right to put back our remaining
preferred stock to Alacra and expect an additional redemption of one-third of
our preferred stock in fiscal year 2009.


25


Our
investment in Alacra is illiquid, which will make it difficult to dispose of the
securities quickly. Should we 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
investment.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk.





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





Item
4T.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and
interim chief financial officer of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.





Based on
this evaluation, our chief executive officer and interim chief financial officer
have concluded that our disclosure controls and procedures were not effective as
of March 31, 2009 at the reasonable assurance level for the reasons discussed
below related to identified material weaknesses in our internal controls over
financial reporting.





To
address the material weakness, we performed additional analysis and other
post-closing procedures in an effort to ensure our consolidated financial
statement included in this annual report have been prepared in accordance with
accounting principles generally accepted in the United States of
America.  Accordingly, management believes that the financial
statements included in this report fairly present all material respects of our
financial condition, results of operations and cash flows for the periods
presented.





We
recognize the importance of internal controls and management is making an effort
to mitigate this material weakness to the fullest extent possible.  At
any time, if it appears that any control can be implemented to continue to
mitigate such weakness, it will be immediately implemented.





Management’s
Report on Internal Control Over Financial Reporting





Evaluation
of Disclosure Controls and Procedures





As of the
end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and
interim chief financial officer of the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.


26


Based on
this evaluation, our chief executive officer and interim chief financial officer
have concluded that our disclosure controls and procedures were not effective as
of March 31, 2009 at the reasonable assurance level for the reasons discussed
below related to material weaknesses in our internal controls over financial
reporting identified in connection with management’s assessment of internal
control over financial reporting as of December 31, 2008, as disclosed in our
Form 10-K for the year ended December 31, 2008, which have not been fully
remediated as of March 31, 2009.





Previously
identified material weaknesses not fully remediated as of March 31,
2009:





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be presented or detected on a timely basis.





The
following previously identified material weaknesses have not been fully
remediated as of March 31, 2009:





1.
            We
      have concluded that the Company’s General Control Environment was
      ineffective due to the following identified
  weaknesses:





a.
            We
      had not established an adequate tone at the top by management and the
      board of directors concerning the importance of, and commitment to,
      internal controls and generally accepted business
    practices.


b.
            We
      had not designed and implemented policies and procedures to ensure
      effective oversight by the Company’s board of directors and consistent
      operation by the board of directors in accordance with committee
      charters.


c.
            We
      had not designed and implemented policies and procedures to ensure
      effective monitoring by management of financial and operational activities
      and to measure actual results against expected results and planned
      objectives.





2.
            We
      had not designed and implemented policies and procedures to ensure
      effective risk assessment processes by management and the board of
      directors designed to identify and mitigate internal and external risks
      that could impact the Company’s ability to achieve its
      objectives.  To correct this weakness, the Company has engaged
      an internal control specialist to design and help to implement effective
      risk assessment processes.





3.
            We
      had not designed and implemented effective internal control policies
      and procedures relating to equity transactions and share-based
      payments.  To correct these deficiencies the Company has
      implemented policies and procedures to formalize procedures relating to
      transactions of this nature and ensure that such transactions are entered
      into and issued in accordance with board of director
      approvals.  Further, the Company has implemented a software
      program specifically designed to track and account for share-based
      payments.





4.
            We
      had not designed and implemented effective internal control policies
      and procedures to ensure the proper reporting of income and accounting for
      payroll taxes related to certain stock grants to employees and
      consultants. This weakness resulted in the need for a restatement of
      previously issued financial statements due to the correction of an error
      for the cumulative effect of the understatement of payroll taxes and the
      related accrued liability for stock awards issued in 2005 and 2006, as of
      the beginning of the year ended December 31, 2007, and for the effect of
      the understatement in these accounts for the year ended December 31,
      2007.  To correct these deficiencies the Company plans to design
      and implement policies and procedures to ensure that all reporting
      obligations and required withholdings related to stock grants to employees
      and consultants are processed and reported on a timely
    basis.





5.
            We
      had not designed and implemented effective internal control policies
      and procedures to provide reasonable assurance regarding the accuracy and
      integrity of spreadsheets and other “off system” work papers used in the
      financial reporting process.


27


Changes
in Internal Control over Financial Reporting





We made
no changes during our most recently completed fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act.





PART
II – OTHER INFORMATION





Item
1.  Legal Proceedings.





As of the
date this report was filed, there has been no material developments in the legal
proceedings previously reported in our Form 10-K.





Item
1A.  Risk Factors.





There
have been no material changes from risk factors previously disclosed in
Item 1A included in our Form 10-K.




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





On
January 29, 2009, the Company entered into a Senior Secured Note and Warrant
Purchase Agreement, pursuant to which, the Company sold Senior Secured
Promissory Notes (the “Notes”) in the principal
amount of $2.6 million and warrants to purchase 1.5 million shares of the
Company’s common stock (the “Warrants”) to several
accredited investors (the “Investors”).  The
Investors paid $2.0 million in cash and converted $550 thousand of existing debt
and accrued interest into the new Notes.   The Notes accrue
interest at 10% per annum, throughout the term of the notes, unless earlier
converted into a equity.  The Notes, have a maturity date of January
29, 2011.  The Warrants have an exercise price of $1.00 and expire on
January 29, 2014.We
intend to use the net proceeds from this transaction primarily for general
corporate purposes and repayment of existing liabilities. These securities were
sold in reliance upon the exemption provided by Section 4(2) of the Securities
Act and the safe harbor of Rule 506 under Regulation D promulgated under the
Securities Act.  No advertising or general solicitation was employed
in offering the securities, the sales were made to a limited number of persons,
all of whom represented to the Company that they are accredited investors, and
transfer of the securities is restricted in accordance with the requirements of
the Securities Act.





Pursuant
to the employment agreement entered into with David Bruce on January 5, 2009,
the Company granted stock options to purchase 2,000,000 shares of the Company’
common stock.  The exercise price of the options is the average
selling price of the Company’s common stock on the date of grant, which was
$0.75.  Upon the six-month anniversary of the effective date of the
Agreement, 250,000 Shares subject to the Option shall vest and become
exercisable and thereafter, the remaining shares will vest over a forty-two
month period at the rate of 1/48th of the
total shares per month.  Mr. Bruce resigned from the Company effective
May 6, 2007 and all shares of stock options granted, expired.





The board
of directors also granted stock options to purchase 750,000 shares of the
Company’s common stock to Brian Stewart on January 2, 2009, relating to his
employment with the Company, which began January 5, 2009.  The
exercise price of the options is the average selling price of the Company’s
common stock on the date of grant, which was $0.75.  The Shares
subject to the option shall vest monthly over 48 months.





Item
3.  Defaults Upon Senior Securities.





None.





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





None.


28


Item
5.  Other Information.





None.





Item
6.  Exhibits.





Exhibit
                  Number
                
                Description4.01
                
                Form
      of Securities Purchase Agreement entered into May 20, 2008 between Patient
      Safety Technologies, Inc. and several accredited investors (Incorporated
      by reference to the Company’s current report on Form 8-K filed with the
      Securities and Exchange Commission on June 2, 2008)4.02
                
                Form
      of Registration Rights Agreement entered into May 20, 2008 between Patient
      Safety Technologies, Inc. and several accredited investors (Incorporated
      by reference to the Company’s current report on Form 8-K filed with the
      Securities and Exchange Commission on June 2, 2008)4.03
                
                Form
      of Warrant Agreement entered into May 20, 2008 between Patient Safety
      Technologies, Inc. and several accredited investors (Incorporated by
      reference to the Company’s current report on Form 8-K filed with the
      Securities and Exchange Commission on June 2, 2008)4.04
                
                Form
      of Securities Purchase Agreement entered into August 1, 2008 between
      Patient Safety Technologies, Inc. and several accredited investors
      (Incorporated by reference to the Company’s current report on Form 8-K
      filed with the Securities and Exchange Commission on August 14,
      2008)4.05
                
                Form
      of Registration Rights Agreement entered into August 1, 2008 between
      Patient Safety Technologies, Inc. and several accredited investors
      (Incorporated by reference to the Company’s current report on Form 8-K
      filed with the Securities and Exchange Commission on August 14,
      2008)4.06
                
                Form
      of Warrant Agreement entered into August 1, 2008 between Patient Safety
      Technologies, Inc. and several accredited investors (Incorporated by
      reference to the Company’s current report on Form 8-K filed with the
      Securities and Exchange Commission on August 14, 2008)4.07
                
                Form
      of Warrant Agreement entered into January 29, 2009 between Patient Safety
      Technologies, Inc. and several accredited investors (Incorporated by
      reference to the Company’s current report on Form 8-K filed with the
      Securities and Exchange Commission on February 3, 2009)10.01
                
                Form
      of Senior Secured Note and Warrant Purchase Agreement entered into January
      29, 2009 between Patient Safety Technologies, Inc. and several accredited
      investors (Incorporated by reference to the Company’s current report on
      Form 8-K filed with the Securities and Exchange Commission on February 3,
      2009)10.02
                
                Form
      of Senior Secured Note issued January 29, 2009 by Patient Safety
      Technologies, Inc. to several accredited investors (Incorporated by
      reference to the Company’s current report on Form 8-K filed with the
      Securities and Exchange Commission on February 3, 2009)10.03
                
                Form
      of Security Agreement entered into January 29, 2009 between Patient Safety
      Technologies, Inc. and several accredited investors (Incorporated by
      reference to the Company’s current report on Form 8-K filed with the
      Securities and Exchange Commission on February 3, 2009)10.04
                
                Employment
      Agreement dated January 5, 2009 between Patient Safety Technologies, Inc.
      and David Bruce.10.05*
                
                Employment
      Agreement dated May 7, 2009 between Patient Safety Technologies, Inc. and
      Steven H. Kane.10.06*
                
                Separation
      and General Release Agreement dated May 6, 2009 between Patient Safety
      Technologies, Inc. and David Bruce.31.1*
                
                Certification
      of Chief Executive Officer required by Rule 13a-14(a) or Rule
      15d-14(a)


29





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.


30


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, 2009
                  By:
                  /s/
      Steven H. KaneSteven
      H. KaneChief
      Executive OfficerDate:  May
      20, 2009
                  By:
                  /s/
      Mary A. LayMary
      A. LayInterim
      Chief Financial Officer and
                    Principal
      Accounting
Officer




31