**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
        10-Q**





(Mark
      One)





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





FOR
      THE
      QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007




**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)****27555
                Ynez Road, Suite 330, Temecula, CA 92591****(Address
                of principal executive offices) (Zip
                Code)**





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





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




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


Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx





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 11,972,710 shares of the registrant's common stock outstanding as of
      November 13, 2007.








**PATIENT
      SAFETY TECHNOLOGIES, INC.**





**FORM
      10-Q FOR THE QUARTER**


**ENDED
      SEPTEMBER 30, 2007**





**TABLE
      OF CONTENTS**





**Page****PART
                I - FINANCIAL INFORMATION**Item
                1. Financial Statements
            1Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            18Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            29Item
                4. Controls and Procedures
            30**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            30Item
                1A. Risk Factors
            30Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            30Item
                3. Defaults Upon Senior Securities
            31Item
                4. Submission of Matters to a Vote of Security Holders
            31Item
                5. Other Information
            31Item
                6. Exhibits
            31**SIGNATURES**
            32







**"SAFE
      HARBOR" STATEMENT UNDER**


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





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





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





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











**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**


**PATIENT
                  SAFETY TECHNOLOGIES, INC. AND
                  SUBSIDIARIES**
  **Consolidated
                  Balance Sheets (Unaudited)**
 **September
                  30,**
              
              **December
                  31,****2007**
              
              **2006****ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              83,515
              
              $
              3,775Accounts
                  receivable
              
              
              63,482
              
              
              65,933Inventories
              
              
              27,491
              
              
              42,825Prepaid
                  expenses
              
              
              176,556
              
              
              78,834Other
                  current assets
              
              
              13,420
              
              
              13,125**TOTAL
                  CURRENT ASSETS**
              
              
              364,464
              
              
              204,492Restricted
                  certificate of deposit
              
              
              87,500
              
              
              87,500Notes
                  receivable
              
              
              153,668
              
              
              153,668Property
                  and equipment, net
              
              
              561,282
              
              
              328,202Assets
                  held for sale, net
              
              
              —
              
              
              3,189,674Goodwill
              
              
              1,762,527
              
              
              1,687,527Patents,
                  net
              
              
              3,845,143
              
              
              4,088,850Long-term
                  investments
              
              
              1,430,563
              
              
              1,441,533**TOTAL
                  ASSETS**
              
              $
              8,205,147
              
              $
              11,181,446**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Notes
                  payable, current portion - net
              
              $
              1,293,286
              
              $
              3,517,149Accounts
                  payable
              
              
              843,091
              
              
              1,295,849Accrued
                  liabilities
              
              
              661,823
              
              
              824,466**TOTAL
                  CURRENT LIABILITIES**
              
              
              2,798,200
              
              
              5,637,464Notes
                  payable, less current portion - net
              
              
              2,530,558
              
              
              2,527,562Deferred
                  tax liabilities
              
              
              1,385,331
              
              
              1,473,066**COMMITMENTS
                  AND CONTINGENCIES****STOCKHOLDERS'
                  EQUITY**Convertible
                  preferred stock, $1.00 par value, cumulative 7% dividend:1,000,000
                  shares authorized; 10,950 issued and outstandingat
                  September 30, 2007 and December 31, 2006(Liquidation
                  preference of $1,229,138 at September 30, 2007 and $1,190,813
                  atDecember
                  31, 2006)
              
              
              10,950
              
              
              10,950Common
                  stock, $0.33 par value: 25,000,000 shares authorized;10,643,686
                  shares issued and outstanding as of September 30, 2007;
                  7,489,026shares
                  issued and 6,874,889 shares outstanding at December 31,
                  2006
              
              
              3,512,416
              
              
              2,471,379Additional
                  paid-in capital
              
              
              32,629,842
              
              
              29,654,341Accumulated
                  deficit
              
              
              (34,662,150
              )
              
              (29,483,910
              )1,491,058
              
              
              2,652,760Less:
                  614,137 shares of treasury stock, at cost, at December 31,
                  2006
              
              
              —
              
              
              (1,109,406
              )**TOTAL
                  STOCKHOLDERS' EQUITY**
              
              
              1,491,058
              
              
              1,543,354**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              8,205,147
              
              $
              11,181,446
  The
                  accompanying notes are an integral part of these consolidated interim
                  financial statements.
 1


**PATIENT
                  SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                  Statements of Operations and Comprehensive Loss
                  (Unaudited)**
 **For
                    The Three Months Ended September 30,**
                
                **For
                    The Nine Months Ended September 30,****2007**
                
                **2006**
                
                **2007**
                
                **2006****REVENUES**
                
                $
                212,999
                
                $
                18,514
                
                $
                833,618
                
                $
                122,389**OPERATING
                    EXPENSES**Cost
                    of sales
                
                
                111,975
                
                
                101,478
                
                
                513,645
                
                
                101,478Salaries
                    and employee benefits
                
                
                620,014
                
                
                524,994
                
                
                1,911,077
                
                
                3,411,191Professional
                    fees
                
                
                140,361
                
                
                445,430
                
                
                610,367
                
                
                1,573,450Rent
                
                
                13,022
                
                
                27,022
                
                
                59,392
                
                
                91,085Insurance
                
                
                60,184
                
                
                57,846
                
                
                160,716
                
                
                130,782Taxes
                    other than income taxes
                
                
                3,260
                
                
                25,909
                
                
                68,160
                
                
                79,577Amortization
                    of patents
                
                
                81,235
                
                
                81,235
                
                
                243,706
                
                
                243,706General
                    and administrative
                
                
                322,398
                
                
                280,289
                
                
                917,518
                
                
                842,544**Total
                    operating expenses**
                
                
                1,352,449
                
                
                1,544,203
                
                
                4,484,581
                
                
                6,473,813**Operating
                    loss**
                
                
                (1,139,450
                )
                
                (1,525,689
                )
                
                (3,650,963
                )
                
                (6,351,424
                )**OTHER
                    INCOME (EXPENSES)**Interest,
                    dividend income and other
                
                
                —
                
                
                1,141
                
                
                4,287
                
                
                2,250Realized
                    gain (loss) on investments, net
                
                
                —
                
                
                (1,387,328
                )
                
                22,394
                
                
                (1,437,481
                )Interest
                    expense
                
                
                (810,415
                )
                
                (1,940,653
                )
                
                (1,418,354
                )
                
                (2,930,850
                )Unrealized
                    gain (loss) on marketable securities, net
                
                
                —
                
                
                (27,682
                )
                
                —
                
                
                16,901**Loss
                    from continuing operations before income taxes**
                
                
                (1,949,865
                )
                
                (4,880,211
                )
                
                (5,042,636
                )
                
                (10,700,604
                )**Income
                    tax benefit**
                
                
                29,245
                
                
                29,245
                
                
                87,735
                
                
                87,734**Loss
                    from continuing operations**
                
                
                (1,920,620
                )
                
                (4,850,966
                )
                
                (4,954,901
                )
                
                (10,612,870
                )**Loss
                    from discontinued operations**
                
                
                (18,922
                )
                
                (767,866
                )
                
                (165,851
                )
                
                (1,497,227
                )**Net
                    loss**
                
                
                (1,939,542
                )
                
                (5,618,832
                )
                
                (5,120,752
                )
                
                (12,110,097
                )**Preferred
                    dividends**
                
                
                (19,163
                )
                
                (19,162
                )
                
                (57,488
                )
                
                (57,487
                )**Loss
                    applicable to common shareholders**
                
                $
                (1,958,705
                )
                $
                (5,637,994
                )
                $
                (5,178,240
                )
                $
                (12,167,584
                )**Basic
                    and diluted net loss per common share****Continuing
                    operations**
                
                $
                (0.18
                )
                $
                (0.75
                )
                $
                (0.53
                )
                $
                (1.70
                )**Discontinued
                    operations**
                
                $
                —
                
                $
                (0.12
                )
                $
                (0.02
                )
                $
                (0.24
                )**Net
                    loss**
                
                $
                (0.18
                )
                $
                (0.87
                )
                $
                (0.55
                )
                $
                (1.94
                )**Weighted
                    average common shares outstanding - basic and
                    diluted**
                
                
                10,625,697
                
                
                6,499,929
                
                
                9,501,249
                
                
                6,258,461**Comprehensive
                    loss:****Net
                    loss**
                
                $
                (1,939,542
                )
                $
                (5,618,832
                )
                $
                (5,120,752
                )
                $
                (12,110,097
                )**Other
                      comprehensive (loss) gain, unrealized gain (loss)****on**available-for-sale
                      investments
                
                
                —
                
                
                (176,168
                )
                
                —
                
                
                (2,408,611
                )**Total
                    comprehensive loss**
                
                $
                (1,939,542
                )
                $
                (5,795,000
                )
                $
                (5,120,752
                )
                $
                (14,518,708
                )
  The
                    accompanying notes are an integral part of these consolidated
                    interim
                    financial statements.




2





**PATIENT
                SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                Statements of Cash Flows (Unaudited)**




**For
                The Nine Months Ended September 30,****2007**
            
            **2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (5,120,752
            )
            $
            (12,110,097
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            133,478
            
            
            68,807Amortization
                of patents
            
            
            243,706
            
            
            243,706Non-cash
                interest
            
            
            1,044,560
            
            
            2,879,603Goodwill
                impairment
            
            
            —
            
            
            971,036Realized
                (gain) loss on investments, net
            
            
            (32,561
            )
            
            1,437,481Unrealized
                gain on marketable securities
            
            
            —
            
            
            (16,901
            )Stock-based
                compensation to employees and directors
            
            
            843,310
            
            
            2,399,269Stock-based
                compensation to consultants
            
            
            57,249
            
            
            604,445Income
                tax benefit
            
            
            (87,735
            )
            
            (87,734
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            2,451
            
            
            901,428Marketable
                securities, net
            
            
            —
            
            
            809,260Inventories
            
            
            15,334
            
            
            10,271Prepaid
                expenses
            
            
            402,278
            
            
            (26,815
            )Other
                current assets
            
            
            (295
            )
            
            (33,730
            )Assets
                held for sale, net
            
            
            21,818
            
            
            —Accounts
                payable
            
            
            (452,758
            )
            
            721,876Accrued
                liabilities
            
            
            344,833Due
                to broker
            
            
            —
            
            
            (801,863
            )Net
                cash used in operating activities
            
            
            (2,585,084
            )
            
            (2,029,958
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (386,764
            )
            
            (2,289,355
            )Proceeds
                from sale of property and equipment
            
            
            42,600
            
            
            —Proceeds
                from sale of assets held for sale, net
            
            
            3,178,023
            
            
            249,585Net
                cash provided by (used in) investing activities
            
            
            2,833,859
            
            
            (2,039,770
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock and warrants
            
            
            3,051,100
            
            
            250,000Proceeds
                from notes payable
            
            
            100,000
            
            
            6,939,119Payments
                and decrease on notes payable
            
            
            (3,300,974
            )
            
            (3,172,442
            )Payments
                of preferred dividends
            
            
            (19,162
            )
            
            —Net
                cash (used in) provided by financing activities
            
            
            (169,036
            )
            
            4,016,677Net
                increase (decrease) in cash
            
            
            79,739
            
            
            (53,051
            )Cash
                at beginning of period
            
            
            3,775
            
            
            79,373Cash
                at end of period
            
            $
            83,514
            
            $
            26,322




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




3


**PATIENT
                  SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                  Statements of Cash Flows (continued)**
  **For
                  The Nine Months Ended September 30,****2007**
              
              **2006**Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for interest
              
              $
              222,230
              
              $
              216,779Supplemental
                  schedule of non cash investing and financing activities:Dividends
                  accrued
              
              $
              38,325
              
              $
              57,487Issuance
                  of common stock in connection with prepaid legal services
              
              $
              —
              
              $
              50,000Issuance
                  of common stock in connection with contingent payment with Surgicount
                  acquisition
              
              $
              75,000
              
              $
              —Issuance
                  of common stock in payment of notes payable and accrued
                  interest
              
              $
              579,801
              
              $
              —Issuance
                  of common stock for inventory
              
              $
              500,000
              
              $
              —Payment
                  of accrued liability with long-term investments
              
              $
              10,969
              
              $
              —Reclassification
                  of accrued interest to notes payable, less current portion -
                  net
              
              $
              348,614
              
              $
              —Purchase
                  of the remaining 50% interest in ASG, through issuance of common
                  stock,
                  resulting in the following asset acquired and liabilities assumed
                  during
                  the quarter ended March 31, 2006 as follows:Goodwill
              
              
              
              
              $
              357,008Common
                  stock issued
              
              
              
              
              $
              (610,000
              )Minority
                  interest
              
              
              
              
              $
              252,992Liabilities
                  assumed
              
              
              
              
              $
              —
  The
                  accompanying notes are an integral part of these consolidated interim
                  financial statements.




4





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


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


**September
      30, 2007**





**1.
      DESCRIPTION OF BUSINESS**





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





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





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





**2.
      LIQUIDITY AND GOING CONCERN**





The
      accompanying unaudited consolidated interim financial statements have been
      prepared assuming that the Company will continue as a going concern. At
      September 30, 2007, the Company has an accumulated deficit of approximately
      $34.7 million and a working capital deficit of approximately $2.4 million.
      For
      the nine months ended September 30, 2007, the Company incurred a loss of
      approximately $5.2 million and has used approximately $2.6 million in cash
      in
      its operations. Further, as of September 30, 2007 the Company has only generated
      minimal revenues from its medical products and healthcare solutions segments.
      These conditions raise substantial doubt about the Company’s ability to continue
      as a going concern. The Company has relied on liquidating investments and
      short-term debt financings to fund a large portion of its operations. In order
      to ensure the continued viability of the Company, equity financing must be
      obtained and profitable operations must be achieved in order to repay the
      existing short-term debt and to provide a sufficient source of operating
      capital. Although the Company has received equity financing during the nine
      months ended September 30, 2007, the Company is currently seeking additional
      financing and believes that it will be successful. However, no assurances can
      be
      made that it will be successful obtaining a sufficient amount of equity
      financing to continue to fund its operations or that the Company will achieve
      profitable operations and positive cash flow from its medical products segment.
      The consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





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





**Basis
      of Presentation**





The
      accompanying unaudited consolidated interim financial statements have been
      prepared in accordance with the instructions to Form 10-Q and Article 10 of
      Regulation S-X and do not include all the information and disclosures required
      by accounting principles generally accepted in the United States of America.
      The
      consolidated interim financial information is unaudited but reflects all normal
      adjustments that are, in the opinion of management, necessary to provide a
      fair
      statement of results for the interim periods presented. The consolidated balance
      sheet as of December 31, 2006 was derived
      from the Company’s audited financial statements. The consolidated interim
      financial statements should be read in conjunction with the consolidated
      financial statements in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2006. Results of the three and nine months ended September
      30, 2007 are not necessarily indicative of the results to be expected for the
      full year ending December 31, 2007. All intercompany transactions have been
      eliminated in consolidation.




5


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**




**Revenue
      Recognition**




The
      Company complies with SEC Staff Accounting Bulletin ( ***“SAB”*** )
      101, *Revenue
      Recognition in Financial Statements* ,
      amended
      by SAB 104, *Revenue
      Recognition* .
      Consulting service contract revenue is recognized when the service is performed.
      Consequently, the recognition of such consulting service contract revenue is
      deferred until each phase of the contract is complete. Revenues generated by
      the
      Company’s previously owned automated car wash subsidiary, Automotive Services
      Group were recognized at the time of service. Revenues from sales of the
      Safety-Sponge TM System
      are recorded upon shipment.





**Goodwill
      and Intangible Assets**





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





**Long-Lived
      Assets**





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





**Stock-Based
      Compensation** ******





The
      Company adopted SFAS No. 123(R), *Share-Based
      Payment* ,
      as of
      January 1, 2005 using the modified retrospective application method as provided
      by SFAS 123(R) 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 recognizing expenses from stock options
      prescribed by SFAS 123(R). During the three and nine months ended September
      30,
      2007, the Company had stock-based compensation expense of $207,000 and $843,000,
      respectively, related to issuances to the Company’s employees and directors,
      included in reported net losses for these periods. The total amount of
      stock-based compensation for the nine months ended September 30, 2007 of
      $843,000 included expenses related to restricted stock grants valued at $421,000
      and stock options valued at $422,000. During the three and nine months ended
      September 30, 2006, the Company had stock-based compensation expense, from
      issuances to the Company’s employees and directors, included in reported net
      loss of $274,000 and $2,399,000, respectively. The total amount of stock-based
      compensation for the nine months ended September 30, 2006, of $2,399,000,
      included restricted stock grants valued at $1,102,000 and stock options valued
      at $1,297,000.




6


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**


During
      the three and nine months ended September 30, 2007, the Company had stock-based
      compensation expense from issuances of restricted stock and warrants to
      consultants of the Company included in reported net loss of nil and $57,000,
      respectively. During the three and nine months ended September 30, 2006, the
      Company had stock-based compensation expense, from issuances of restricted
      stock
      and warrants to consultants of the Company included in reported net loss of
      $56,000 and $604,000, respectively. Additionally, during the three and nine
      months ended September 30, 2006, the Company issued restricted stock valued
      at
      $50,000 for prepaid legal expenses.





A
      summary
      of stock option activity for the nine months ended September 30, 2007 is
      presented below:





**Outstanding
                Options****Shares
                Available for Grant**
            
            **Number
                of Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life (years)**
            
            **Aggregate
                Intrinsic Value****December
                31, 2006**
            
            
            **26,026**
            
            
            **1,704,000**
            
            **$**
            **4.50**
            
            
            **8.73**Restricted
                Stock Awards
            
            
            (79,036
            )Grants
            
            
            (125,000
            )
            
            125,000
            
            $
            1.66
            
            
            9.59Cancellations
            
            
            599,000
            
            
            (599,000
            )
            $
            4.59
            
            
            8.25**September
                30, 2007**
            
            
            **420,990**
            
            
            **1,230,000**
            
            **$**
            **4.17**
            
            
            **8.19**
            
            **$**
            **—**Options
                exercisable at:December
                31, 2006
            
            
            
            
            
            832,625
            
            $
            4.90
            
            
            8.54
            
            $
            —September
                30, 2007
            
            
            
            
            
            701,250
            
            $
            4.74
            
            
            7.87
            
            $
            —





All
      options that the Company granted during the nine months ended September 30,
      2007
      and 2006 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:




**Nine
                Months ended September 30,****2007**
            
            **2006**Weighted
                average risk free interest rate
            
            
            4.50
            %
            
            3.75
            %Weighted
                average life (in years)
            
            
            5.00
            
            
            3.00Volatility
            
            
            98
                - 100
            %
            
            87
                - 89
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Weighted
                average grant-date fair value per share of options granted
            
            $
            1.22
            
            $
            3.78





As
      of
      September 30, 2007, total unrecognized compensation cost related to unvested
      stock options was $672,000. This cost is expected to be recognized over a
      weighted average period of 1.40 years.




7


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**





**Beneficial
      Conversion Feature of Convertible Notes Payable**





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





**Earnings
      per Common Share**





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





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





**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.





**Recent
      Accounting Pronouncements**





In
      June 2006, the Financial Accounting Standards Board ( ***“FASB”*** ) issued
      FASB Interpretation Number 48 ( ***“FIN
      48”*** ), *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109* .
      FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position that an entity takes
      or
      expects to take in a tax return. Additionally, FIN 48 provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition.  Under FIN 48, an entity may only
      recognize or continue to recognize tax positions that meet a “more likely than
      not” realization threshold. T he
      Company adopted FIN 48 on January 1, 2007 and i n
      connection with its adoption, no liability for unrecognized income tax benefits
      was recorded and no interest and penalties related to uncertain tax positions
      was recognized. The tax years 2003 - 2006 remain open to examination by the
      major taxing jurisdictions.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, *Fair
      Value Measurements* ( ***“SFAS
      157”*** ).
      SFAS
      157 does not require new fair value measurements but rather defines fair value,
      establishes a framework for measuring fair value and expands disclosure of
      fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. We are
      currently assessing the impact of SFAS 157 on our consolidated financial
      position and results of operations.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment to FASB Statement No. 115* ( ***“SFAS
      159”*** ).
      This
      statement permits companies to choose to measure many financial instruments
      and
      other items at fair value. The objective is to improve financial reporting
      by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. This statement is expected
      to expand the use of fair value measurement of accounting for financial
      instruments. The fair value option established by this statement permits all
      entities to measure eligible items at fair value at specified election dates.
      This statement is effective as of the beginning of an entity’s first fiscal year
      that begins after November 15, 2007. We are currently assessing the impact
      adoption of SFAS No. 159 will have on our consolidated financial
      statements.




8


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**


**4.
      DISCONTINUED OPERATIONS**





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




The
      following sets forth the discontinued operations for the three and nine months
      ended September 30, 2007 and 2006 related to the held for sale assets of
      Automotive Services Group :





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Operating
                revenues
            
            $
            —
            
            $
            103,735
            
            $
            309,455
            
            $
            235,351Operating
                expenses
            
            
            —
            
            
            760,997
            
            
            262,323
            
            
            1,357,212Depreciation
                and amortization
            
            
            —
            
            
            10,955
            
            
            21,819
            
            
            21,378Interest
                expense
            
            
            —
            
            
            99,649
            
            
            201,331
            
            
            353,988Gain
                (loss) on sale of assets
            
            
            (18,922
            )
            
            —
            
            
            10,167
            
            
            —Loss
                from discontinued operations
            
            $
            (18,922
            )
            $
            (767,866
            )
            $
            (165,851
            )
            $
            (1,497,227
            )





The
      following sets forth the assets that are held for sale that are related to
      the
      discontinued operations:





**September
                30,**
            
            **December
                31,****2007**
            
            **2006**Property
                and equipment, net
            
            $
            —
            
            $
            3,189,674Goodwill
            
            
            —
            
            
            —Other
                assets
            
            
            —
            
            
            —Total
                assets of discontinued operations
            
            $
            —
            
            $
            3,189,674





On
      June
      29, 2007, ASG completed the sale of its express car wash and underlying real
      estate in Birmingham, Alabama for $1,500,000, which
      resulted in a realized gain of $29,000. The purchase of the express car wash
      and
      underlying real estate was made by Charles H. Dellaccio and Darrell Grimsley.
      Mr. Grimsley is the Chairman of the Board and Chief Executive Officer of
      Automotive Services Group.





On
      July
      3, 2007, ASG completed the sale of real property located in Tuscaloosa, Alabama
      (the “Tuscaloosa Undeveloped Land”) to Twin Properties, LLC. Pursuant to the
      agreement, ASG was responsible for obtaining title insurance, all required
      taxes
      related to the transaction and providing a marketable title in fee simple to
      Twin Properties, LLC. ASG sold the Tuscaloosa Undeveloped Land for $965,000,
      which resulted in a realized loss of $72,000.




9


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**
  On
          August
          13, 2007, ASG completed the sale of real property located in Birmingham,
          Alabama
          (the “Birmingham Undeveloped Land”) to Mr. Dellaccio and Mr. Grimsley. ASG sold
          the Birmingham Undeveloped Land for $750,000 ,
          which
          resulted in a realized gain of $53,000. The sales of the Tuscaloosa and
          Birmingham Undeveloped Land represent the remaining assets held for sale
          by
          ASG.


**5.
      OTHER CURRENT ASSETS**





At
      September 30, 2007 and December 31, 2006, the Company had other current assets
      of $13,000 consisting primarily of security deposits.





**6.
      GOODWILL AND PATENTS**





The
      Company’s goodwill relates to its SurgiCount subsidiary. As discussed in Note
      10, the Company recorded an additional $75,000 of goodwill as a result of the
      issuance of 50,000 shares of the Company’s common stock to the SurgiCount
      founders. Patents, net, as of September 30, 2007 and December 31, 2006 are
      composed of patents:





**Septemer
                30,**
              **2007**
            
            **December
                31,**
              **2006**Patents
            
            $
            4,684,576
            
            $
            4,684,576Accumulated
                amortization
            
            
            (839,433
            )
            
            (595,726
            )$
            3,845,143
            
            $
            4,088,850





**7.
      LONG-TERM INVESTMENTS**





Long-term
      investments at September 30, 2007 and December 31, 2006 are comprised of the
      following:




**September
                30,**
              **2007**
            
            **December
                31,**
              **2006**Alacra
                Corporation
            
            $
            1,000,000
            
            $
            1,000,000Investments
                in Real Estate
            
            
            430,563
            
            
            430,563Digicorp
            
            
            —
            
            
            10,970$
            1,430,563
            
            $
            1,441,533





*Alacra
      Corporation*





At
      September 30, 2007, the Company had an investment in shares of Series F
      convertible preferred stock of Alacra Corporation ( ***“Alacra”*** ),
      recorded at its cost of $1,000,000, and classified as an available-for-sale
      investment. The Company has the right, to the extent that Alacra has sufficient
      available capital, to have the Series F convertible preferred stock redeemed
      by
      Alacra for face value plus accrued dividends beginning on December 31, 2006.
      Alacra, based in New York, is a global provider of business and financial
      information.





*Investments
      in Real Estate*





At
      September 30, 2007, the Company’s real estate investments consist of
      approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
      0.61
      acres of undeveloped land in Springfield, Tennessee, which are recorded at
      their
      cost of $430,563




10


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**





**8.
      NOTES PAYABLE**





Notes
      payable at September 30, 2007 and December 31, 2006 are comprised of the
      following:




**September
                30,**
              **2007**
            
            **December
                31,**
              **2006**Note
                payable to Winstar Radio Networks, LLC (a)
            
            $
            —
            
            $
            450,000Notes
                payable to Ault Glazer Capital Partners, LLC (b)
            
            
            2,530,558
            
            
            2,575,528Note
                payable to Steven J. Caspi (c)
            
            
            —
            
            
            1,000,000Note
                payable to Steven J. Caspi (d)
            
            
            —
            
            
            1,495,281Notes
                payable to Herb Langsam (e)
            
            
            600,000
            
            
            600,000Note
                payable to Charles Kalina III (f)
            
            
            400,000
            
            
            400,000Other
                notes payable
            
            
            332,539
            
            
            598,232Total
                notes payable
            
            
            3,863,097
            
            
            7,119,041Less:
                debt discount on beneficial conversion feature
            
            
            (39,253
            )
            
            (1,074,330
            )3,823,844
            
            
            6,044,711Less:
                current portion
            
            
            (1,293,286
            )
            
            (3,517,149
            )Notes
                payable - long-term portion
            
            $
            2,530,558
            
            $
            2,527,562





Aggregate
      future required principal payments on these notes during the twelve month period
      subsequent to September 30, 2007 are as follows:





2007
            
            $
            761,2412008
            
            
            571,2982009
            
            
            —2010
            
            
            2,530,558$
            3,863,097





(a)
            On
                August 28, 2001, the Company made an investment in Excelsior Radio
                Networks, Inc. (***“Excelsior”***)
                which was completely liquidated during 2005. As part of the purchase
                price
                paid by the Company for its investment in Excelsior, the Company
                issued a
                $1,000,000 note to Winstar Radio Networks, LLC, a Delaware limited
                liability company (***“Winstar”***).
                This note was due February 28, 2002 with interest at 3.54% per annum
                but
                in accordance with the agreement the Company had a right of offset
                against
                certain representations and warranties made by Winstar. The Company
                applied offsets of $215,000 against the principal balance of the
                note
                relating to legal fees attributed to our defense of certain lawsuits
                filed
                against us. The Company has consistently asserted that the due date
                of the
                note was extended until the lawsuit discussed in Note 13 is settled.
                However, on February 3, 2006, Winstar Global Media, Inc. (***“WGM”***)
                filed a lawsuit against the Company in an attempt to collect upon
                the
                $1,000,000 note between the Company and Winstar. On September 5,
                2006, the
                Company reached a settlement agreement with WGM whereas the Company
                agreed
                to pay Winstar $750,000, pursuant to an agreed upon payment schedule,
                on
                or before July 2, 2007. On November 7, 2006, The United States Bankruptcy
                Court for the District of Delaware, approved the Company’s settlement
                agreement with WGM. Pursuant to the settlement agreement, the Company
                made
                payments of $300,000 during 2006 and the remaining $450,000 during
                the
                three months ended March 31, 2007. The Company recorded a gain during
                2006
                of $191,000 on the elimination of principal and interest in excess
                of the
                settlement amount which is included in gain on debt extinguishment
                in the
                accompanying statement of
                operations.




11


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**




(b)  
      On February 8, 2006, Ault Glazer Capital Partners, LLC (formerly AGB Acquisition
      Fund) (the ***“Fund”*** ),
      a
      related party, loaned $687,000 to ASG. As consideration for the loan, ASG issued
      the Fund a secured promissory note in the principal amount of $687,000 (the ***“ASG
      Note”*** )
      and
      granted a real estate mortgage in favor of the Fund relating to certain real
      property located in Jefferson County, Alabama (the ***“ASG
      Property”*** ).
      The
      ASG Note, as amended, had an interest rate of 10% per annum and was due on
      September 15, 2006. The Fund received warrants to purchase 20,608 shares of
      the
      Company’s common stock at an exercise price of $3.86 per share as additional
      consideration for entering into the loan agreement. The Company recorded debt
      discount in the amount of $44,000 as the estimated value of the warrants. The
      debt discount was amortized as non-cash interest expense over the initial term
      of the debt using the effective interest method. The entire amount of the debt
      discount was amortized as interest expense. As security for the performance
      of
      ASG’s obligations pursuant to the ASG Note, ASG had granted the Fund a security
      interest in all personal property and fixtures located at the ASG Property.
      During the nine months ended September 30, 2007 and 2006, the Company incurred
      interest expense, excluding amortization of debt discount, of $28,000 and
      $44,000, respectively, on the ASG Note.





As
      of
      December 31, 2006, the Fund loaned $1,495,000 to ASG in addition to the ASG
      Note. The loans were advanced to ASG, pursuant to the terms of a Real Estate
      Note dated July 27, 2005, as amended (the ***"Real
      Estate Note"*** ).
      The
      Real Estate Note 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. During the nine months
      ended September 30, 2007 and 2006, the Company incurred interest expense of
      $70,000 and $118,000, respectively, on the Real Estate Note.





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
      Partners Convertible Note"*** ) in
      the
      principal amount of $2,530,558 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.
      In the event that the average closing price of the Company’s common stock is in
      excess of $5.00 per share for thirty (30) consecutive trading days, the Company
      will have the right to redeem the promissory note in shares or in cash. In
      the
      event of redemption in shares, the principal is convertible into shares of
      the
      Company’s common stock at a conversion price of $2.50. The promissory note is
      secured by all of the Company’s assets. Should the Company raise up to
      $2,000,000 in a new credit facility, including any replacement credit
      facilities, the Fund is required to subordinate its security interest in favor
      of the new credit facility. During the nine months ended September 30, 2007,
      the
      Company incurred interest expense of $59,000 on the AG Partners Convertible
      Note.





From
      March 7, 2006 through October 16, 2006, the Fund loaned the Company a total
      of
      $524,000, of which $130,000 was repaid during 2006. The loans were advanced
      to
      the Company pursuant to a Revolving Line of Credit Agreement (the ***“Revolving
      Line of Credit”*** )
      entered
      into with the Fund on March 7, 2006. The Revolving Line of Credit allowed the
      Company to request advances of up to $500,000 from the Fund. 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 $394,000
      and accrued interest of $28,000, which
      was
      in default, was converted into 337,439 shares of the Company’s common stock at a
      conversion price of $1.25 per share. During
      the nine months ended September 30, 2007 and 2006, the Company incurred interest
      expense of $15,000 and $8,000, respectively, on the Revolving Line of Credit.





(c)
            On
                January 12, 2006, Steven J. Caspi loaned $1,000,000 to ASG. As
                consideration for the loan, ASG issued Mr. Caspi a promissory note
                in the
                principal amount of $1,000,000 (the***“Caspi
                Note”***)
                and granted Mr. Caspi a mortgage on certain real estate owned by
                ASG and a
                security interest on all personal property and fixtures located on
                such
                real estate as security for the obligations under the Caspi Note.
                In
                addition, the Company entered into an agreement guaranteeing ASG’s
                obligations pursuant to the Caspi Note and Mr. Caspi received warrants
                to
                purchase 30,000 shares of the Company’s common stock at an exercise price
                of $4.50 per share. The Company recorded debt discount in the amount
                of
                $92,000 based on the estimated fair value of the warrants. The debt
                discount was amortized as non-cash interest expense over the initial
                term
                of the debt using the effective interest method. The entire amount
                of the
                debt discount was amortized as interest expense. The Caspi Note initially
                accrued interest at the rate of 10% per annum, which together with
                principal, was due to be repaid on July 13, 2006. The Caspi Note
                was not
                repaid until June 29, 2007. During the period of time that the Caspi
                Note
                was in default interest accrued at the rate of 18% per annum. During
                the
                nine months ended September 30, 2007 and 2006, the Company incurred
                interest expense of $89,000 and $87,000, respectively, on the Caspi
                Note.




12
 
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**




(d)
            From
                September 8, 2006 through September 19, 2006, Mr. Caspi loaned the
                Company
                a total of $1,495,281. As consideration for the loan, the Company
                issued
                Mr. Caspi a Convertible Promissory Note in the principal amount of
                $1,495,281 (the***“Second
                Caspi Note”***).
                The Second Caspi Note accrued interest at the rate of 12% per annum
                and
                was due upon the earlier of March 31, 2008 or, the occurrence of
                an event
                of default. As security for the performance of the Company’s obligations
                pursuant to the Second Caspi Note, the Company granted Mr. Caspi
                a
                security interest in certain real property. Mr. Caspi received warrants
                to
                purchase 250,000 shares of the Company’s common stock at an exercise price
                of $1.25 per share as additional consideration for entering into
                the loan
                agreement. The Second Caspi Note was repaid on August 13, 2007. During
                the
                nine months ended September 30, 2007 and 2006, the Company incurred
                interest expense, excluding amortization of debt discount, of $109,000
                and
                $11,000, respectively, on the Second Caspi
                Note.





As
      the
      effective conversion price of the Second Caspi Note on the date of issuance
      was
      below the fair market value of the underlying common stock, the Company recorded
      debt discount in the amount of $769,000 based on the intrinsic value of the
      beneficial conversion feature of the note.





The
      warrant issued to Mr. Caspi in conjunction with the Second Caspi Note will
      expire after September 8, 2011. The Company recorded debt discount in the amount
      of $231,000 based on the estimated fair value of the warrants. The debt discount
      as a result of the beneficial conversion feature of the note and the estimated
      fair value of the warrants was amortized as non-cash interest expense over
      the
      term of the debt using the effective interest method. During the nine months
      ended September 30, 2007 and 2006, interest expense of $877,000 and $95,000
      has
      been recorded from the debt discount amortization.





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





On
      November 13, 2006, Mr. Langsam, loaned the Company an additional $100,000.
      The
      loan is documented by a $100,000 Secured Promissory Note (the ***“Second
      Langsam Note”*** )
      payable
      to the Herbert Langsam Irrevocable Trust. The Second Langsam Note accrues
      interest at the rate of 12% per annum and has a maturity date of May 13, 2007.
      Mr. Langsam received warrants to purchase 50,000 shares of the Company’s common
      stock at an exercise price of $1.25 per share as additional consideration for
      entering into the loan agreement. The Company recorded debt discount in the
      amount of $17,000 as the estimated value of the warrants. The debt discount
      was
      amortized as non-cash interest expense over the term of the debt using the
      effective interest method. During the nine months ended September 30, 2007,
      interest expense of $12,000 has been recorded from the debt discount
      amortization. Pursuant to the terms of a Security Agreement dated November
      13,
      2006, the Company granted the Herbert Langsam Revocable Trust a security
      interest in all of the Company’s assets as collateral for the satisfaction and
      performance of the Company’s obligations pursuant to the Second Langsam Note.




13


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**


During
      the nine months ended September 30, 2007 and 2006, the Company incurred interest
      expense, excluding amortization of debt discount, of $64,000 and $24,000,
      respectively, on the Langsam Notes. At September 30, 2007 and December 31,
      2006
      accrued interest on the Langsam Notes totaled $114,000 and $50,000,
      respectively.





(f)   
      On July 12, 2006 the Company, executed a Convertible Promissory Note in the
      principal amount of $250,000 (the ***“Kalina
      Note”*** )
      and a
      warrant for the purchase of 85,000 Shares of the Company’s Common Stock (the ***“Kalina
      Warrant”*** )
      in
      favor of Charles J. Kalina, III, an existing shareholder of the Company. The
      Kalina Note accrued interest at the rate of 12% per annum throughout the term
      of
      the loan. The principal amount of the Kalina Note and any accrued but unpaid
      interest was due to be paid on October 10, 2006. Principal and interest on
      the
      Kalina Note was convertible into shares of the Company’s common stock at a
      conversion price of $3.00 per share.





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





On
                November 3, 2006 the balance due under the Kalina Note was added
                to a new
                Convertible Promissory Note in the principal amount of $400,000 (the***“Second
                Kalina Note”***),
                pursuant to which the Company received proceeds of approximately
                $150,000.
                The Second Kalina Note bears interest at the rate of 12% per annum
                and is
                due on January 31, 2008 or, the occurrence of an event of default.
                Mr.
                Kalina received warrants to purchase 250,000 shares of the Company’s
                common stock at an exercise price of $1.25 per share as additional
                consideration for entering into the loan agreement. During the nine
                months
                ended September 30, 2007, the Company incurred interest expense,
                excluding
                amortization of debt discount of $34,000 on the Second Kalina Note.
                At
                September 30, 2007 and December 31, 2006 accrued interest on the
                Second
                Kalina Note totaled $8,000 and $10,000,
                respectively.





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





The
      warrant issued to Mr. Kalina in conjunction with the Second Kalina Note will
      expire after November 3, 2011. The Company recorded debt discount in the amount
      of $29,000 based on the estimated fair value of the warrants. The debt discount
      as a result of the beneficial conversion feature of the note and the estimated
      fair value of the warrants will be amortized as non-cash interest expense over
      the term of the debt using the effective interest method. During the nine months
      ended September 30, 2007, interest expense of $68,000 has been recorded from
      the
      debt discount amortization.





**9.
      ACCRUED LIABILITIES**





Accrued
      liabilities at September 30, 2007 and December 31, 2006 are comprised of the
      following:





**September
                30,**
              **2007**
            
            **December
                31,**
              **2006**Accrued
                interest
            
            $
            318,370
            
            $
            520,114Accrued
                professional fees
            
            
            —
            
            
            10,000Accrued
                dividends on preferred stock
            
            
            134,138
            
            
            95,812Accrued
                salaries
            
            
            123,604
            
            
            197,495Other
            
            
            85,711
            
            
            1,045$
            661,823
            
            $
            824,466





14




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**


**10.
      EQUITY TRANSACTIONS**





On
      January 29, 2007, the Company entered into a subscription agreement with A
      Plus,
      pursuant to which the Company sold to A Plus 800,000 shares of its common stock
      and warrants to purchase an additional 300,000 shares of its common stock.
      The
      Company received gross proceeds of $500,000 in cash and will receive $500,000
      in
      product over the course of the next twelve (12) months. As of September 30,
      2007, the Company had received $401,000 in product and the remaining $99,000
      is
      included in prepaid expenses. The warrants have a term of five (5) years and
      an
      exercise price equal to $2.00 per share.





Between
      January 29, 2007 and June 7, 2007, the Company entered into a subscription
      agreement with several accredited investors in a private placement exempt from
      the registration requirements of the Securities Act of 1933, as amended (the ***“Securities
      Act”*** ).
      The
      Company issued and sold to the investors an aggregate of 2,152,000 shares of
      its
      common stock and warrants to purchase an additional 1,076,000 shares of its
      common stock. The warrants are exercisable for a period of three to five years,
      have an exercise price equal to $2.00, and 50% of the warrants are callable
      upon
      the occurrence of any one of a number of specified events when, after any such
      specified occurrence, the average closing price of the Company’s common stock
      during any period of five consecutive trading days exceeds $4.00 per share.
      These issuances resulted in aggregate gross proceeds to the Company of
      $2,690,000.




Pursuant
      to the February 2005 Agreement and Plan of Merger and Reorganization (the
“Merger”) between the Company and SurgiCount, in the event that prior to the
      fifth anniversary of the closing of the Merger the cumulative gross revenues
      of
      SurgiCount exceed $500,000, the Company is obligated to issue an additional
      50,000 shares of the Company’s common stock to certain SurgiCount founders.
      Should the cumulative gross revenues exceed $1,000,000 during the five-year
      period ended February 2010, the additional shares would be increased by 50,000,
      for a total of 100,000 additional shares. During the quarter ended June 30,
      2007, cumulative gross revenues of SurgiCount exceeded $500,000 and as such
      the
      Company issued 50,000 shares to the SurgiCount founders. The Company recorded
      $75,000 of goodwill as a result of these issuances, based on the estimated
      fair
      value of the shares.





**11.
      WARRANTS**





During
      the nine months ended September 30, 2007, a total of 1,508,920 warrants, at
      an
      average exercise price of $2.00 per share were issued primarily in connection
      with the various subscription agreements entered into by the Company as well
      as
      payment for services and accrued interest. The warrants were valued using the
      Black-Scholes valuation model assuming expected dividend yield, risk-free
      interest rate, expected life and volatility of 0%, 4.50%, five years and 63%
      -
      97%, respectively. Warrants granted during the year ended December 31, 2006
      were
      valued using an expected dividend yield, risk-free interest rate, expected
      life
      and volatility of 0%, 3.75% - 4.50%, three to five years and 63% - 88%,
      respectively. As of September 30, 2007, a total of 4,751,321 warrants, at
      exercise prices ranging from $1.25 to $6.05 remain outstanding.





**12.
      RELATED PARTY TRANSACTIONS**





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.
      Together, Milton “Todd” Ault III, our former Chairman and Chief Executive
      Officer of the Company, and Louis Glazer, a Class I Director of the Company,
      and
      Melanie Glazer, the former Manager of our real estate segment, (together, the ***“Glazers”*** )
      own a
      controlling interest in the outstanding capital stock of Ault Glazer. As of
      September 30, 2007 and December 31, 2006, Ault Glazer, Mr. Ault and the Glazers
      indirectly beneficially own or control approximately 26% and 40%, respectively,
      of the outstanding common stock of the Company and beneficially own
      approximately 98.2% of the outstanding preferred stock of the Company.




15


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**


*IPEX,
      Inc.*





During
      the three and nine months ended September 30, 2006, the Company recognized
      revenue of nil and $104,000, respectively, in connection with consulting
      services provided to IPEX. The Company’s former Chairman and Chief Executive
      Officer and significant beneficial owner of the Company served as a director
      of
      IPEX during that period. Further, the Chief Executive Officer of ASG served
      as
      an IPEX director and member of IPEX’s Audit Committee from August 2005 through
      January 2006.





*Digicorp*





At
      December 31, 2006, the Company had an investment in Digicorp recorded in
      long-term investments. The Company’s Chief Executive Officer and Chief Financial
      Officer was also Chief Financial Officer of Digicorp and remains a director
      of
      the Company. Further, certain Company officers and directors, both past and
      present, served in various management and director roles at Digicorp.





*Loans*





During
      the nine months ended September 30, 2007 and the year ended December 31, 2006,
      the Company received loans from Ault Gazer Capital Partners, LLC (the ***“Fund”*** ).
      Ault
      Glazer & Company Investment Management, LLC ( ***“AG
      & Company IM”*** )
      is the
      managing member of the Fund. The managing member of AG & Company IM is Ault
      Glazer. Mr. Ault is Chairman, Chief Executive Officer and President of Ault
      Glazer. Until June 8, 2006, the Company’s current Chief Executive Officer, Chief
      Financial Officer and Director was also Chief Financial Officer of Ault
      Glazer.





*ASG*





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





**13.
      COMMITMENTS AND CONTINGENCIES**





*Legal
      Proceedings*





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





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




16


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Interim Financial Statements - Unaudited
        (continued)**


**14.
      SEGMENT REPORTING**





The
      Company reports segment information in accordance with SFAS No. 131, *Disclosures
      about Segments of an Enterprise and Related Information.* The
      segment information previously provided reflected the three distinct lines
      of
      business within the Company’s past organizational structure: medical
      products, financial services and real estate, and
      car
      wash services .
      The
      Company has restructured its operations such that its only continuing operations
      are related to the medical products segment. Accordingly, since the Company
      only
      operates within a single industry, segment information is no longer
      reported.





**15.
      SUBSEQUENT EVENTS**





On
      October 17, 2007, the Company sold, in a private placement exempt from the
      registration requirements of the Securities Act, 1,270,000 shares of its common
      stock (“Common Stock”) at $1.25 price per share and issued five-year warrants to
      purchase 763,000 shares of Common Stock (the “Warrants”) at an exercise price of
      $1.40 per share, pursuant to a Securities Purchase Agreement (the “Agreement”)
      entered into with Francis Capital Management, LLC, an accredited investor.
      The
      investor paid $1,500,000 in cash and agreed to extinguish $90,000 in existing
      debt owed to it by the Company. Pursuant to the terms of the Agreement, the
      Company may sell up to an aggregate of $3,000,000 in common stock and warrants
      under the Agreement by no later than November 16, 2007.





Francis
      Capital Management was granted, along with other potential investors in the
      offering, the right to designate up to two individuals for appointment to the
      Company’s Board of Directors, subject to approval of the Company’s Board of
      Directors, which approval shall not be unreasonably withheld. In order to
      provide for the new Board designees, William B. Horne intends to resign from
      the
      Board of Directors.





17


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





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





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





**Overview**





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





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





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





On
      March
      30, 2005, stockholder approval was obtained to withdraw our election to be
      treated as a BDC and on March 31, 2005 we filed an election to withdraw our
      election with the SEC. At September 30, 2007, 12.2% of our assets, consisting
      primarily of our investment in Alacra Corporation, on a consolidated basis
      with
      our subsidiary were comprised of investment securities within the meaning of
      the
      1940 Act ( ***“Investment
      Securities”*** ).
      If the
      value of our assets that consist of Investment Securities were to exceed 40%
      of
      our total assets (excluding government securities and cash items) on an
      unconsolidated basis we could be required to re-register as an investment
      company under the 1940 Act unless an exemption or exclusion applies. We continue
      to evaluate ways in which we can dispose of these Investment Securities and
      do
      not believe that the value of our Investment Securities will increase in an
      amount that would require us to re-register as a BDC. Registration as an
      investment company would subject us to restrictions that are inconsistent with
      our fundamental business strategy of equity growth through creating, building
      and operating companies in the patient safety medical products industry.
      Registration under the 1940 Act would also subject us to increased regulatory
      and compliance costs, and other restrictions on the way we operate and would
      change the method of accounting for our assets under GAAP.




18




Our
      operations currently focus on the acquisition of controlling interests in
      companies and research and development of products and services in the health
      care and medical products field, particularly the patient safety markets. In
      the
      past we also focused on the financial services and real estate industries.
      On
      October 2005 our Board of Directors authorized us to evaluate alternative
      strategies for the divesture of our non-healthcare assets. As an extension
      on
      our prior focus on real estate, in March 2006 we acquired the remaining 50%
      equity interest in ASG and upon doing so we entered the business of developing
      properties for the operation of automated express car wash sites. However,
      on
      March 29, 2006, our Board of Directors determined to focus our business
      exclusively on the patient safety medical products field. The Board of Directors
      established a special committee in January 2007 to evaluate potential
      divestiture transactions for ASG and our other real estate assets. The
      divestiture of ASG was completed on August 13, 2007.




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





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





Our
      principal executive offices are located at 27555 Ynez Road, Suite 330, Temecula,
      CA 92591. Our telephone number is (951) 587-6201. Our website is located at http://www.patientsafetytechnologies.com .





**Critical
      accounting policies and estimates**





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





**Valuation
      of Non-Marketable Equity Securities**





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




19




Investments
      in non-marketable securities are inherently risky and the one remaining
      privately held company that we have invested in may fail. Its success (or lack
      thereof) is dependent upon product development, market acceptance, operational
      efficiency and other key business success factors. In addition, depending on
      its
      future prospects, it may not be able to raise additional funds when needed
      or it
      may receive lower valuations with less favorable investment terms than in
      previous financings, thus causing our investments to become
      impaired.





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





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





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





**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* ,
      effective 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). 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.




20




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





**New
      Accounting Pronouncements**





In
      June
      2006, the Financial
      Accounting Standards Board ( ***“FASB”*** )
      issued
      FASB Interpretation No. (FIN) 48, *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109* ,
      which
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in an income tax return. T he
      Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 did not
      have a material impact on our financial position, results of operations or
      cash
      flows.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, *Fair
      Value Measurements* ( ***“SFAS
      157”*** ).
      SFAS
      157 does not require new fair value measurements but rather defines fair value,
      establishes a framework for measuring fair value and expands disclosure of
      fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. We are
      currently assessing the impact of SFAS 157 on our consolidated financial
      position and results of operations.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment to FASB Statement No. 115* ( ***“SFAS
      159”*** ).
      This
      statement permits companies to choose to measure many financial instruments
      and
      other items at fair value. The objective is to improve financial reporting
      by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. This Statement is expected
      to expand the use of fair value measurement of accounting for financial
      instruments. The fair value option established by this statement permits all
      entities to measure eligible items at fair value at specified election dates.
      This statement is effective as of the beginning of an entity’s first fiscal year
      that begins after November 15, 2007. We are currently assessing the impact
      adoption of SFAS No. 159 will have on our consolidated financial
      statements.





**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      balance was $84,000 at September 30, 2007, versus $4,000 at December 31, 2006.
      Total current liabilities were $2,798,000 at September 30, 2007, versus
      $5,637,000 at December 31, 2006. The minor amount of cash, combined with
      relatively insignificant amounts of other current assets, resulted in working
      capital deficit of approximately $2,434,000 at September 30, 2007. Since we
      continue to have recurring losses we have relied upon private placements of
      equity and debt securities and we may rely on private placements to fund our
      capital requirements in the future. From August 2006 through the date of this
      report we have sold to accredited investors in our private placements, as
      reflected below, $5,828,000 in equity securities.





**2006
      private placements**





Between
      August 17, 2006 and December 15, 2007, we entered into various subscription
      agreements with accredited investors in private placements exempt from the
      registration requirements of the Securities Act. We issued and sold to these
      accredited investors an aggregate of 438,000 shares of our common stock and
      warrants to purchase an additional 119,000 shares of our common stock. The
      warrants are exercisable for a period of three years with an exercise price
      equal to $2.00. These issuances resulted in gross cash proceeds to us of
      $548,000. We used the net proceeds from these private placement transactions
      primarily for general corporate purposes and repayment of existing
      liabilities.




21




**2007
      private placements**





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





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





In
      addition to our private placements, we have also received a significant amount
      of funding from Ault Glazer Capital Partners, LLC (formerly AGB Acquisition
      Fund) (the ***“Fund”*** ).
      AG
      Management is the managing member of the Fund. The managing member of AG
      Management is The Ault Glazer Group, Inc. ( ***“The
      AG Group”*** )
      (f/k/a
      Ault Glazer Bodnar & Company, Inc.). The Company’s former Chairman and
      former Chief Executive Officer, Milton “Todd” Ault, III, is Chairman, Chief
      Executive Officer and President of The AG Group. At September 30, 2007 the
      outstanding principal balance of the loan that we entered into with the Fund
      was
      $2,531,000. At September 30, 2007 we also had outstanding promissory notes
      primarily to two additional lenders in the principal amount of
      $1,000,000.





On
      May 1,
      2006, Herbert Langsam, a Class II Director of the Company, loaned the Company
      $500,000. The loan is documented by a $500,000 Secured Promissory Note (the ***“Langsam
      Note”*** ).
      The
      Langsam Note accrues interest at the rate of 12% per annum and had a maturity
      date of November 1, 2006. The Langsam Note is in default and classified with
      current liabilities on the balance sheet. As a result of the default, the
      interest rate increased to 16% per annum.





On
      November 13, 2006, Mr. Langsam loaned the Company an additional $100,000. The
      loan is documented by a $100,000 Secured Promissory Note (the ***“Second
      Langsam Note”*** ).
      The
      Second Langsam Note accrues interest at the rate of 12% per annum and had a
      maturity date of May 13, 2007. The Second Langsam Note is in default and
      classified with current liabilities on the balance sheet. As a result of the
      default the interest rate increased to 16% per annum.





Pursuant
      to the terms of Security Agreements dated May 1, 2006 and 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 under the terms of the Langsam Note and the Second
      Langsam Note.




22




On
      November 3, 2006, we entered into a convertible promissory note in the principal
      amount of $400,000 with Charles J. Kalina, III (the ***“Kalina
      Note”*** ).
      The
      Kalina Note bears interest at the rate of 12% per annum, is due to be paid
      on
      January 31, 2008, and is convertible into shares of the Company’s common stock
      at $1.25 per share.





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





Management
      is currently seeking additional financing and believes that it will be
      successful. However, in the event management is not successful in obtaining
      additional financing, existing cash resources, together with proceeds from
      investments and anticipated revenues from operations, may not be adequate to
      fund our operations for the twelve months subsequent to September 30, 2007.
      However, ultimately long-term liquidity is dependent on our ability to attain
      future profitable operations. We intend to undertake additional debt or equity
      financings to better enable us to grow and meet future operating and capital
      requirements.





As
      of
      September 30, 2007, other than our office lease and employment agreements with
      key executive officers, we had no commitments as liabilities not reflected
      in
      our consolidated financial statements.





Cash
      increased by $80,000 to $84,000 during the nine months ended September 30,
      2007,
      compared to a decrease of $53,000 during the nine months ended September 30,
      2006.




Operating
      activities used $2,585,000 of cash during the nine months ended September 30,
      2007, compared to $2,030,000 during the nine months ended September 30,
      2006.




Operating
      activities for the nine months ended September 30, 2007, exclusive of changes
      in
      operating assets and liabilities, used $2,919,000 of cash, as the Company's
      net
      cash used in operating activities of $2,585,000 included non-cash charges for
      depreciation and amortization of $377,000, debt discount of $1,045,000 and
      stock
      based compensation of $901,000. For the nine months ended September 30, 2006,
      operating activities, exclusive of changes in operating assets and liabilities,
      used $3,610,000 of cash, as the Company's net cash used in operating activities
      of $2,030,000 included non-cash charges for depreciation and amortization of
      $313,000 and interest of $2,880,000, realized losses of $1,437,000 and stock
      based compensation of $3,004,000.





Changes
      in operating assets and liabilities used cash of $334,000 during the nine months
      ended September 30, 2007, principally due to decreases in the level of accounts
      payable which were partially offset by an increase in accrued liabilities and
      a
      decrease in prepaid expenses. During the nine months ended September 30, 2006,
      changes in operating assets and liabilities produced cash of $1,580,000 during
      the nine months ended September 30, 2006, principally due to net proceeds
      received from marketable securities, decreases in our receivables from
      investments and increases in the level of accounts payable and accrued
      liabilities which were partially offset by decreases in the amounts due to
      our
      broker. The amount due to our broker was directly attributable to purchases
      of
      marketable investment securities that were purchased on margin or to securities
      that were margined subsequent to their purchase. During the three months ended
      March 31, 2006, we invested our cash balances in the public equity and debt
      markets in an attempt to maximize the short-term return on such assets. The
      amount due to our broker varied throughout the year depending upon the aggregate
      amount of marketable investment securities held by us and the level of borrowing
      against our available-for-sale securities. The actual amount of marketable
      investment securities held was influenced by several factors, including but not
      limited to, our expectations of potential returns available from what we
      considered to be mispriced securities as well as the cash needs of our operating
      activities. During times when we were heavily invested in marketable investment
      securities, our liquidity position was significantly reduced. We no longer
      make
      a practice of investing in marketable investment securities.





The
      principal factor in the $2,834,000 of cash provided by investing activities
      during the nine months ended September 30, 2007 was the
      sale
      of our express car wash and undeveloped land in Alabama for $3,178,000.
      This was
      partially offset by capitalized costs of $286,000 related to the ongoing
      development of purchased software related to our Safety-Sponge  System.
      The principal factor in the $2,040,000 of cash used in investing activities
      during the nine months ended September 30, 2006 was the purchase of land of
      $1,697,000, capitalized construction costs of $383,000 related to ASG, and
      capitalized costs of $159,000 related to the ongoing development of software
      related to our Safety-Sponge  System
      offset by proceeds from the sale of long-term investments of
      $250,000.




23




Cash
      used
      by financing activities during the nine months ended September 30, 2007 of
      $169,000 resulted primarily from net proceeds from the issuance of common stock
      and warrants of $3,051,000 offset by the repayment of the Winstar Note in the
      amount of $450,000 and other notes in the amount of $2,851,000. Cash provided
      by
      financing activities during the nine months ended September 30, 2006, of
      $4,017,000 resulted from the net proceeds from notes payable of $3,767,000
      and
      the proceeds from the issuance of common stock for $250,000.





**Investments**





Our
      financial condition is partially dependent on the success of our existing
      investments. On March 29, 2006 our Board of Directors directed us to liquidate
      all of our investments and other assets that do not relate to the patient safety
      medical products business. Some of our investments are subject to restrictions
      on resale under federal securities laws and otherwise are illiquid, which will
      make it difficult to dispose of the securities quickly. Since we will be forced
      to liquidate some or all of the investments on an accelerated timeline, the
      proceeds of such liquidation may be significantly less than the value at which
      we acquired the investments. The following is a discussion of our most
      significant investments at September 30, 2007.





A
      summary
      of our investment portfolio, which is valued at $1,431,000 and represents 17.4%
      of our total assets, is reflected below. Excluding our real estate investments,
      our investment portfolio represents 12.2% of our total assets. The investment
      portfolio is classified as long-term investments.




**September
                30,**
                **2007**Alacra
                Corporation
            
            $
            1,000,000Real
                Estate
            
            
            430,563$
            1,430,563








*Alacra
      Corporation*





At
      September 30, 2007, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued at $1,000,000, which represents 12.2% of our total assets. On April
      20,
      2000, we purchased $1,000,000 worth of Alacra Series F Convertible Preferred
      Stock. Alacra has recorded revenue growth in every year since the Company’s
      original investment. Further, Alacra is forecasting that 2007 revenues will
      be
      approximately $19.2 million, which would represent an increase of 22% over
      2006
      unaudited revenues and result in net income of approximately $750,000. At
      December 31, 2006, Alacra reported in their unaudited financial statements,
      total assets of approximately $4.7 million with total liabilities of
      approximately $7.4 million. Deferred revenue, which represents subscription
      revenues that are amortized over the term of the contract, which is generally
      one year, represented approximately $3.7 million of the total liabilities.
      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. If Alacra has a sufficient
      amount of cash to redeem our preferred stock, which we believe it has, we would
      expect the redemption to occur in December 2007. In connection with this
      investment, the Company was granted observer rights on Alacra board of directors
      meetings.




24





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





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





The
      information services industry is intensely competitive and we expect it to
      remain so. Although Alacra has been in operation since 1996, they are
      significantly smaller in terms of revenue than a large number of companies
      offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
      LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
      revenues that range anywhere from $100 million to several billion dollars,
      as
      reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
      range of products and services, greater financial and marketing resources,
      larger customer bases, greater name recognition, greater global reach and more
      established relationships with potential customers than Alacra has. These larger
      and better capitalized competitors may be better able to respond to changes
      in
      the financial services industry, to compete for skilled professionals, to
      finance investment and acquisition opportunities, to fund internal growth and
      to
      compete for market share generally.





*Investments
      in Real Estate*





At
      September 30, 2007, we had real estate investments valued at $431,000, which
      represents 5.2% of our total assets. In the past we held our real estate
      investments in Ault Glazer Bodnar Capital Properties, LLC ***(“AGB
      Properties”)*** .
      AGB
      Properties, which was closed during 2006, was a Delaware limited liability
      company and a wholly owned subsidiary. The real estate investments, consisting
      of approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
      0.61 acres of undeveloped land in Springfield, Tennessee, are currently being
      marketed for sale. During the year ended December 31, 2006, we received payment
      on loans that were secured by real estate of $50,000. We expect that any future
      gain or loss recognized on the liquidation of some or all of our real estate
      holdings would be insignificant primarily due to the short period of time that
      the properties were owned combined with the absence of any significant changes
      in property values in the real estate markets where the real estate holdings
      are
      located.





**Results
      of Operations**





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





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





§
            “Operating
                expenses,” which are the related costs and expenses of operating our
                business;





§
            “Interest,
                dividend income and other, net,” which is the amount we receive from
                interest and dividends from our short term investments and money
                market
                accounts;




25




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





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





**Revenues**





We
      recognized revenues of $213,000 and $19,000 during the three months and $834,000
      and $122,000 during the nine months ended September 30, 2007 and 2006,
      respectively. All of the revenues generated during the three and nine months
      ended September 30, 2007 related to sales of our Safety-Sponge  System.
      Revenues during the three and nine months ended September 30, 2007 from sales
      of
      our Safety-Sponge  System
      consisted of sales from the safety sponge of $213,000 and $728,000,
      respectively, and sales from hardware and supplies of $106,000 during the nine
      months ended September 30, 2007. Although hardware sales are not considered
      a
      recurring item, we expect that once an institution adopts our system, they
      will
      be committed to its use and therefore provide a recurring source of revenues
      for
      sales of the safety sponge.





We
      attribute a significant amount of the increase in sales generated by our
      Safety-Sponge  System
      to
      increased product awareness and demand. The Safety-Sponge  System
      is
      currently being evaluated by more than 10 medical institutions, the adoption
      by
      any one of which would have a material impact on our revenues. We expect that
      small medical institutions which adopt the Safety-Sponge System will represent
      approximately $100,000 in annual revenue whereas the larger institutions could
      represent annual recurring revenues of $600,000 or more. The adoption by the University
      of California San Francisco Medical Center in February 2007 of our Safety-Sponge  System
      reflects current demand which we expect will begin to accelerate.





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





Excluding
      the $19,000 of revenues earned during the three months ended September 30,
      2006,
      all of the revenues earned during the nine months ended September 30, 2006
      were
      the result of a consulting agreement, consented to by IPEX, whereby the majority
      shareholder of IPEX and former President, former Chief Executive Officer and
      former director of IPEX ( ***“Majority
      Shareholder”*** ),
      retained us to serve as a business consultant to IPEX. In consideration for
      the
      services, during December 2005 the Majority Shareholder personally transferred
      us 500,000 shares of common stock of IPEX as a non-refundable consulting fee.
      This consulting agreement reflected our prior focus in the financial services
      and real estate industries. Since we now only focus our efforts on the patient
      safety markets, we do not expect to recognize revenue from these types of
      consulting agreements in the future.





**Expenses**





Operating
      expenses were $1,352,000 and $1,544,000 for the three months and $4,485,000
      and
      $6,474,000 for the nine months ended September 30, 2007 and 2006, respectively.





The
      decrease in operating expenses of $1,989,000, for the nine months ended
      September 30, 2007 when compared to the nine months ended September 30, 2006,
      was primarily the result of salaries and employee benefits, which decreased
      by
      $1,500,000. Our Compensation Committee, currently comprised of two independent
      directors, determines and recommends to our Board the cash and stock based
      compensation to be paid to our executive officers and also reviews the amount
      of
      salary and bonus for each of our other officers and employees. The most
      significant component of employee compensation is stock based compensation
      expense.




26





For
      the
      nine months ended September 30, 2007, we recorded $422,000 related to grants
      of
      nonqualified stock options and $295,000 related to restricted stock awards
      to
      our employees and $126,000 related to restricted stock awards to our
      non-employee directors. During the nine months ended September 30, 2006, we
      recorded $1,297,000 relating to grants of nonqualified stock options and
      $1,102,000 related to restricted stock awards to our employees and non-employee
      directors. The issuance of stock options and restricted stock awards to our
      employees and non-employee directors, adjusted for the $126,000 in restricted
      stock awards to our non-employee directors which is recorded in general and
      administrative expenses, resulted in a decrease in stock based compensation
      expense of $1,682,000 for the nine months ended September 30, 2007. Therefore,
      excluding stock based compensation, salaries and employee benefits increased
      by
      $182,000.





At
      September 30, 2007, two of our executives were covered under employment
      agreements. Our Chief Executive Officer of SurgiCount Medical, Inc., Bill Adams
      is covered under a three year employment agreement with annual base compensation
      of $300,000 and; our President of Sales and Marketing of SurgiCount Medical,
      Inc., Richard Bertran, is covered under a three year employment agreement with
      annual base compensation of $250,000. None of our other executives our currently
      covered under an employment agreement, therefore, we are under no financial
      obligation, other than monthly salaries, for our other executive officers.
      Currently, monthly gross salaries for all of our employees are $135,000.
      However, prior to the elimination of three positions, monthly gross salaries
      for
      all of our employees were $155,000 at September 30, 2007 as opposed to $110,000
      at September 30, 2006. We believe, as with all our operating expenses, that
      our
      existing cash resources, together with proceeds from investments, anticipated
      financings and expected revenues from our operations, should be adequate to
      fund
      our salary obligations.





The
      second largest component of our operating expenses is professional fees which
      decreased by $963,000 during the nine months ended September 30, 2007 compared
      to the amount reported during the nine months ended September 30, 2006. This
      decrease is primarily comprised of decreases in stock based compensation to
      outside consultants of $547,000. During the nine months ended September 30,
      2006, stock based compensation expense of $604,000 was the most significant
      component of professional fees. The majority of the $604,000 that was recorded
      in stock based compensation related to a consulting agreement that we entered
      into in February 2006 with Analog Ventures, LLC ( ***“Analog
      Ventures”*** )
      whereby
      Analog Ventures agreed to consult with us on matters relating primarily to
      the
      divestiture of our non-core assets and assist us in our efforts to focus our
      business exclusively on the patient safety medical products field. As an
      incentive for entering into the agreement, we agreed to issue Analog Ventures
      a
      warrant to purchase 175,000 shares of our common stock at an exercise price
      of
      $3.95, exercisable for 3 years. We recognized an expense of $405,000 related
      to
      these warrants.





The
      remaining decrease in professional fees, of $359,000, is primarily attributed
      to
      our clinical trial agreement with Brigham and Women's Hospital, the teaching
      affiliate of Harvard Medical School, relating to SurgiCount's
      Safety-Sponge  System.
      The clinical trial is the result of an on-going collaboration between Harvard
      and SurgiCount to refine the Safety-Sponge System in a clinical optimization
      study. Under terms of the agreement, Brigham and Women's Hospital collected
      data
      on how the Safety-Sponge System saves time, reduces costs and increases patient
      safety in the operating room. The study also assisted in refining the system's
      technical processes in the operating room to provide clear guidance and
      instruction to hospitals, easily integrating the Safety-Sponge  System
      into operating rooms. Brigham and Women's Hospital received a non-exclusive
      license to use the Safety-Sponge  System,
      while we will own all technical innovations and other intellectual properties
      derived from the study. We provided a research grant to Brigham and Women’s
      Hospital over the course of the clinical trial in the aggregate amount of
      $431,000 of which $280,000 was expensed during the nine months ended September
      30, 2006. The clinical trials were completed around September 2006.





All
      of
      our stock based compensation issued to employees, non-employee directors and
      consultants were expensed in accordance with SFAS 123(R). We valued the
      nonqualified stock options and warrants using the Black-Scholes valuation model
      assuming expected dividend yield, risk-free interest rate, expected life and
      volatility of 0%, 3.00% to 4.50%, three to five years and 63% to 102%,
      respectively. The restricted stock awards were valued at the closing price
      on
      the date the restricted shares were granted.




27




The
      increase in cost of sales of $412,000 reflects a shift in our revenue mix from
      revenue generated primarily through consulting services which do not have any
      costs of sales to that of sales of our Safety-Sponge System.





General
      and administrative expenses experienced an increase of $75,000 during the nine
      months ended September 30, 2007 over the prior year. During the nine months
      ended September 30, 2007, we recorded restricted stock awards to our
      non-employee directors of $126,000
      in general and administrative expenses. After adjusting for these non-cash
      expenses general and administrative expenses reflected a decrease of $51,000. As
      discussed above, in Financial Condition, Liquidity and Capital Resources, we
      have a
      working
      capital deficit of $2,404,000 and have experienced continued losses. These
      financial constraints have required us to be selective in the expenses that
      we
      incur and where possible delay or forego an expense. This overall condition
      has
      resulted in a slight decrease in our cash based general and administrative
      expense. General and administrative expenses are comprised of a combination
      of a
      several types of expenses, none of which are significant
      individually.





**Interest,
      dividend income and other, net**





We
      had
      interest income of $4,000 and $2,000 for the nine months ended September 30,
      2007 and 2006, respectively.





The
      increase in interest income for the nine months ended September 30, 2007 when
      compared to September 30, 2006 was primarily the result of an overall increase
      in cash during the nine months ended September 30, 2007.





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





During
      the nine months ended September 30, 2007 we realized a net gain of $22,000
      compared to a loss of $1,437,000 during the nine months ended September 30,
      2006. Realized gains (losses) during the nine months ended September 30, 2007
      reflect the sale of certain non-operating assets. The realized loss during
      the
      nine months ended September 30, 2006 was primarily due to our write down of
      950,000 shares of IPEX common stock with a cost base of $1,458,000.





**Interest
      expense**





We
      had
      interest expense of $1,418,000 and $2,931,000 for the nine months ended
      September 30, 2007 and 2006, respectively.





The
      decrease in interest expense for the nine months ended September 30, 2007 when
      compared to September 30, 2006 is primarily attributable to the non-cash
      interest charges incurred as a result of the debt discount associated with
      our
      short-term debt financings. During the nine months ended September 30, 2007
      and
      2006, we recorded $1,045,000 and $2,880,000, respectively, in non-cash interest
      charges. The non-cash interest charges that were incurred during the nine months
      ended September 30, 2006 included $136,000 that were attributed to our car
      wash
      segment and recorded in loss from discontinued operations. Thus, non-cash
      interest charges recorded in interest expense decreased $1,699,000 and
      represented the primary cause of the decrease in interest expense from 2006
      to
      2007. These non-cash charges resulted from the issuance of debt that either
      had
      conversion prices on the date of issuance that were below the fair market value
      of the underlying common stock or required the issuance of warrants to purchase
      shares of our common stock, which required us to record an expense based on
      the
      estimated fair value of the warrants. The remaining increase in interest expense
      is attributable to the overall increased level of borrowings during the nine
      months ended September 30, 2007 over the prior year.




28




**Unrealized
      gains (losses) on marketable securities, net**





During
      the nine months ended September 30, 2006, unrealized appreciation of investments
      was $17,000. Due to the absence of any material amount of marketable securities
      during the nine months ended September 30, 2007, the Company did not recognize
      any unrealized appreciation. The increase in unrealized appreciation during
      the
      nine months ended September 30, 2006, was primarily due to the sale of 108,200
      shares of Tuxis Corporation common stock, which at December 31, 2005 had
      unrealized depreciation of approximately $134,000. When we exit an investment
      and realize a loss, we make an accounting entry to reverse any unrealized
      depreciation we had previously recorded to reflect the depreciated value of
      the
      investment.





**Loss
      from discontinued car was segment**





The
      loss
      from our discontinued car was segment decreased by $1,331,000 to $166,000 during
      the nine months ended September 30, 2007 from a loss of $1,497,000 during the
      nine months ended September 30, 2006. ASG’s
      first site, developed in Birmingham, Alabama, had its grand opening on March
      8,
      2006. Thus, the nine months ended September 30, 2006 reflected slightly less
      than seven full months of operations whereas, due to the sale of our express
      car
      wash on June 29, 2007, the nine months ended September 30, 2007 reflected
      approximately six full months of operations. Further, a t
      September 30, 2006, a goodwill impairmentcharge
      of $971,000 was recorded in the car wash services operating segment.  This goodwill impairmentrelated
      to goodwill that resulted from the Company’s acquisitions of ASG in March 2006.During
      the nine months ended September 30, 2007, as a result of a more established
      business presence from a more mature business, revenues increased by $73,000
      and
      operating costs decreased by $1,237,000. However, excluding goodwill impairment
      of $971,000, operating costs decreased by $266,000. The remaining operating
      cost
      decrease of $266,000 is primarily attributed to a $153,000 decrease in interest
      expense, of which $136,000 is non-cash interest charges incurred as a result
      of
      debt discount, and the incurrence of only six months of operating expenses
      during the nine months ended September 30, 2007 as opposed to nine months of
      operating expenses during the nine months ended September 30, 2006.





**Accumulated
      other comprehensive income**





Unrealized
      gains (losses) on our investments designated as available-for-sale are recorded
      in accumulated other comprehensive income. At September 30, 2007 and December
      31, 2006, our remaining investments were carried at cost and therefore we did
      not record any unrealized gains (losses) on these investments. At September
      30,
      2006, our restricted holdings in Digicorp were classified as available-for-sale.
      At September 30, 2006, the unrealized gains (losses) on our restricted holdings
      in Digicorp amounted to ($34,000), whereas at December 31, 2005, the unrealized
      gains (losses) on our restricted holdings in IPEX and Digicorp amounted to
      ($328,000) and $2,703,000, respectively. The cumulative decrease in net
      unrealized gains amounts to $2,409,000.





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





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





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




29




Because
      there is no public market for the equity interest in the one remaining privately
      held small company in which we have invested, the valuation of such equity
      interest is subject to estimation. In making our determination, we may consider
      valuation information provided by an independent third party or the portfolio
      company itself. In the absence of a readily ascertainable market value, the
      estimated value of our equity investment may differ significantly from the
      value
      that would be placed on it if a liquid market for the equity interest existed.
      Any changes in valuation are recorded in our consolidated statements of
      operations as either "Unrealized losses on marketable securities, net” or “Other
      comprehensive income."





**Item
      4. Controls and Procedures.**





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





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





As
      of the
      date this report was filed, there have been no material developments in the
      legal proceedings previously reported in our annual report on Form 10-K for
      the
      fiscal year ended December 31, 2006, which was filed with the Securities and
      Exchange Commission on May 16, 2007.





**Item
      1A. Risk Factors.**





There
      have been no material changes from risk factors previously disclosed in
      Item 1A included in our Annual Report on Form 10-K for the fiscal year
      ended December 31, 2006, which was filed with the SEC on May 16, 2007.





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





Between
      August 1, 2007 and October 12, 2007, the Company issued 102,024 shares of Common
      Stock to an employee, director, and creditors of the Company. The Common Stock
      was issued for services and payment of accrued interest. The Common Stock was
      valued at approximately $133,000. These shares were issued in reliance upon
      the
      exemption provided by Section 4(2) of the Securities Act.





On
      October 17, 2007, the Company entered into a securities purchase agreement
      with
      Francis Capital Management, LLC ( *“Francis
      Capital”* ),
      an
      accredited investor, in a private placement exempt from the registration
      requirements of the Securities Act. The Company issued and sold to Francis
      Capital an aggregate of 1,270,000 shares of its common stock and warrants to
      purchase an additional 763,000 shares of its common stock. The warrants are
      exercisable for a period of five years at an exercise price equal to $1.40
      per
      share. These issuances resulted in aggregate gross proceeds to the Company
      of
      $1,500,000 in cash and the extinguishment of $90,000 in existing debt owed
      to
      Francis Capital by the Company. Pursuant to the terms of the securities purchase
      agreement, the Company may sell up to an aggregate of $3,000,000 in common
      stock
      and warrants under the securities purchase agreement by no later than November
      16, 2007. We are required to use our best efforts to cause the registration
      statement to become effective within 120 calendar day from November 16, 2007
      (the *“Filing
      Date”* )
      or, in
      the event of a full review by the Securities and Exchange Commission, within
      150
      calendar days from the Filing Date (collectively the *“Effectiveness
      Date”* ).
      If the
      registration statement has not been declared effective by the Effectiveness
      Date, we will pay in cash, as liquidated damages, to the purchaser of the
      1,270,000 shares of our Common Stock and the warrants to purchase 763,000 shares
      of our Common Stock, an amount equal to 1.5% of the aggregate purchase price
      paid by the purchaser. We intend to use the net proceeds from this private
      placement transaction primarily for general corporate purposes and repayment
      of
      existing liabilities. These securities were sold in reliance upon the exemption
      provided by Section 4(2) of the Securities Act and the safe harbor of Rule
      506
      under Regulation D promulgated under the Securities Act. No advertising or
      general solicitation was employed in offering the securities, the sales were
      made to a limited number of persons, all of whom represented to the Company
      that
      they are accredited investors, and transfer of the securities is restricted
      in
      accordance with the requirements of the Securities Act.




30




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





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





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





On
      December 26, 2006, the Company entered into a promissory note with Maroon Creek
      Capital, LP, a California limited partnership, in the principal amount of
      $81,241 (the ***“Maroon
      Creek Note”*** ),
      of
      which $10,000 was repaid. The Maroon Creek Note was due to be repaid in its
      entirety on April 26, 2007. The Company expects to repay the debt that is owed
      to Maroon Creek Capital, LP during 2007.





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





None.





**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





**Exhibit
                Number**
            
            **Description**10.1
            
            Securities
                Purchase Agreement entered into October 17, 2007 between Patient
                Safety
                Technologies, Inc. and Francis Capital Management, LLC (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on October 22,
                2007).10.2
            
            Registration
                Rights Agreement entered into October 17, 2007 between Patient Safety
                Technologies, Inc. and Francis Capital Management, LLC (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on October 22,
                2007).10.3
            
            Form
                of Warrant entered into October 17, 2007 between Patient Safety
                Technologies, Inc. and Francis Capital Management, LLC (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on October 22,
                2007).31.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(a)
                or
                Rule 15d-14(a)32.1*
            
            Certification
                of Chief Executive and 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.





31


**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:
                November 14, 2007
            By:
            /s/ William
              B. HorneWilliam
                B. HorneChief
                Executive and Chief Financial Officer and
              Principal
                  Accounting Officer













32