**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 JUNE 30, 2006




**OR**





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





FOR
      THE
      TRANSITION PERIOD FROM ________________ TO
      ________________




COMMISSION
      FILE NUMBER





**PATIENT
      SAFETY TECHNOLOGIES, INC.**


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





**Delaware**
            
            **13-3419202****(State
                or other jurisdiction of incorporation or
                organization)**
            
            **(I.R.S.
                Employer Identification Number)****1800
                Century Park East, Ste. 200, Los Angeles, CA
                90067****(Address
                of principal executive offices) (Zip
                Code)**





**Registrant’s
      telephone number, including area code: (310) 895-7750**





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




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 o
            Accelerated
                filer o
            Non-accelerated
                filer x





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





There
      were 6,351,454 shares of the registrant's common stock outstanding as of August
      15, 2006.








**PATIENT
      SAFETY TECHNOLOGIES, INC.**





**FORM
      10-Q FOR THE FISCAL QUARTER**


**ENDED
      JUNE 30, 2006**





**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
            22Item
                3.     Quantitative and Qualitative Disclosures About
                Market Risk
            36Item
                4.     Controls and Procedures
            37**PART
                II - OTHER INFORMATION**Item
                1.     Legal Proceedings
            37Item
                1A.  Risk Factors
            37Item
                2.     Unregistered Sales of Equity Securities and Use
                of Proceeds
            50Item
                3.     Defaults Upon Senior Securities
            50Item
                4.     Submission of Matters to a Vote of Security
                Holders
            50Item
                5.     Other Information
            50Item
                6.     Exhibits
            51**SIGNATURES**
            55







**"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**




**Condensed
      Consolidated Balance Sheets**





**June
                30,**
            
            **December
                31,****2006**
            
            **2005****(Unaudited)****ASSETS****CURRENT
                ASSETS**Cash
            
            $
            9,853
            
            $
            79,373Receivables
                from investments
            
            
            32,603
            
            
            934,031Marketable
                securities
            
            
            22,800
            
            
            923,800Inventories
            
            
            62,481
            
            
            77,481Prepaid
                expenses
            
            
            169,649
            
            
            112,734Other
                current assets
            
            
            134,572
            
            
            118,394**TOTAL
                CURRENT ASSETS**
            
            
            431,958
            
            
            2,245,813Restricted
                certificate of deposit
            
            
            87,500
            
            
            87,500Property
                and equipment, net
            
            
            3,598,746
            
            
            1,348,275Goodwill
            
            
            2,301,555
            
            
            2,301,555Patents,
                net
            
            
            4,251,320
            
            
            4,413,791Long-term
                investments
            
            
            3,364,956
            
            
            5,636,931**TOTAL
                ASSETS**
            
            $
            14,036,035
            
            $
            16,033,865**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES**Notes
                payable, current portion
            
            $
            4,466,306
            
            $
            1,796,554Accounts
                payable
            
            
            919,166
            
            
            785,507Accrued
                liabilities
            
            
            742,598
            
            
            569,116Due
                to broker
            
            
            141,663
            
            
            801,863**TOTAL
                CURRENT LIABILITIES**
            
            
            6,269,733
            
            
            3,953,040**LONG-TERM
                LIABILITIES**Notes
                payable, less current portion
            
            
            1,495,000
            
            
            1,116,838Deferred
                tax liabilities
            
            
            1,531,556
            
            
            1,590,045**TOTAL
                LONG-TERM LIABILITIES**
            
            
            3,026,556
            
            
            2,706,883**MINORITY
                INTEREST**
            
            
            
            
            
            252,992**CONTINGENCIES****STOCKHOLDERS'
                EQUITY**Convertible
                preferred stock, $1 par value, cumulative 7% dividend:1,000,000
                shares authorized; 10,950 issued and outstandingat
                June 30, 2006 and December 31, 2005(Liquidation
                preference $1,152,487)
            
            
            10,950
            
            
            10,950Common
                stock, $0.33 par value: 25,000,000 shares authorized;7,451,545
                shares issued and 6,328,714 shares outstanding as of June 30, 2006;
                6,995,276shares
                issued and 5,672,445 shares outstanding at December 31,
                2005
            
            
            2,459,010
            
            
            2,308,441Paid-in
                capital
            
            
            26,469,176
            
            
            22,600,165Accumulated
                other comprehensive income
            
            
            142,415
            
            
            2,374,858Accumulated
                deficit
            
            
            (22,313,698
            )
            
            (15,784,108
            )6,767,853
            
            
            11,510,306Less:
                1,122,831 and 1,322,831 shares of treasury stock,at
                cost, at June 30, 2006 and December 31, 2005, respectively
            
            
            (2,028,107
            )
            
            (2,389,356
            )**TOTAL
                STOCKHOLDERS' EQUITY**
            
            
            4,739,746
            
            
            9,120,950**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            14,036,035
            
            $
            16,033,865




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




1


**PATIENT
        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
 ****
 **Condensed
        Consolidated Statements of Operations and Comprehensive Loss
        (Unaudited)**
  **For
                  The Three Months Ended June 30,**
              
              **For
                  The Six Months Ended June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****REVENUES**
              
              $
              159,731
              
              $
              586,627
              
              $
              235,491
              
              $
              586,627**OPERATING
                  EXPENSES**Salaries
                  and employee benefits
              
              
              602,769
              
              
              900,385
              
              
              3,053,653
              
              
              2,110,096Professional
                  fees
              
              
              515,714
              
              
              897,974
              
              
              1,128,021
              
              
              1,454,945Rent
              
              
              30,775
              
              
              24,478
              
              
              64,062
              
              
              24,478Insurance
              
              
              53,668
              
              
              22,788
              
              
              83,675
              
              
              43,578Taxes
                  other than income taxes
              
              
              29,076
              
              
              23,947
              
              
              63,337
              
              
              45,982Amortization
                  of patents
              
              
              81,236
              
              
              81,235
              
              
              162,471
              
              
              108,314Goodwill
                  impairment
              
              
              357,008
              
              
              
              
              
              357,008General
                  and administrative
              
              
              378,121
              
              
              204,463
              
              
              624,021
              
              
              461,634**Total
                  operating expenses**
              
              
              2,048,367
              
              
              2,155,270
              
              
              5,536,248
              
              
              4,249,027**Operating
                  loss**
              
              
              (1,888,636
              )
              
              (1,568,643
              )
              
              (5,300,757
              )
              
              (3,662,400
              )**OTHER
                  INCOME (EXPENSES)**Interest,
                  dividend income and other
              
              
              15
              
              
              11,485
              
              
              1,109
              
              
              40,088Equity
                  in loss of investee
              
              
              
              
              
              (17,020
              )
              
              
              
              
              (17,020
              )Realized
                  gain (loss) on investments, net
              
              
              86,109
              
              
              138,372
              
              
              (50,153
              )
              
              103,644Interest
                  expense
              
              
              (1,112,133
              )
              
              (34,243
              )
              
              (1,244,536
              )
              
              (61,561
              )Unrealized
                  gain (loss) on marketable securities, net
              
              
              (32,332
              )
              
              (300,384
              )
              
              44,583
              
              
              43,203**Loss
                  before deferred income tax benefit**
              
              
              (2,946,977
              )
              
              (1,770,433
              )
              
              (6,549,754
              )
              
              (3,554,046
              )**Deferred
                  income tax benefit**
              
              
              29,244
              
              
              —
              
              
              58,489
              
              
              —**Net
                  loss**
              
              
              (2,917,733
              )
              
              (1,770,433
              )
              
              (6,491,265
              )
              
              (3,554,046
              )**Preferred
                  dividends**
              
              
              (19,162
              )
              
              (24,637
              )
              
              (38,325
              )
              
              (37,375
              )**Loss
                  available to common shareholders**
              
              $
              (2,936,895
              )
              $
              (1,795,070
              )
              $
              (6,529,590
              )
              $
              (3,591,421
              )**Basic
                  and diluted net loss per common share**
              
              $
              (0.47
              )
              $
              (0.33
              )
              $
              (1.06
              )
              $
              (0.69
              )**Weighted
                  average common shares outstanding**
              
              
              6,266,890
              
              
              5,430,528
              
              
              6,135,725
              
              
              5,172,181**Comprehensive
                  loss:****Net
                  loss**
              
              $
              (2,917,733
              )
              $
              (1,770,433
              )
              $
              (6,491,265
              )
              $
              (3,554,046
              )**Other
                  comprehensive gain (loss), unrealized gain (loss) on available-for-sale
                  investments**
              
              
              (1,486,728
              )
              
              1,158,750
              
              
              (2,232,443
              )
              
              1,158,750**Total
                  comprehensive loss**
              
              $
              (4,404,461
              )
              $
              (611,683
              )
              $
              (8,723,708
              )
              $
              (2,395,296
              )
 
 The
        accompanying notes are an integral part of these condensed consolidated interim
        financial statements.
  2
 
 **PATIENT
        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Condensed
        Consolidated Statements of Cash Flows (Unaudited)**
  **For
                  The Six Months Ended June 30,****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (6,491,265
              )
              $
              (3,554,046
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              27,334
              
              
              5,131Amortization
                  of patents
              
              
              162,471
              
              
              108,314Non-cash
                  interest
              
              
              1,047,276Goodwill
                  impairment
              
              
              357,008Realized
                  (gain) loss on investments, net
              
              
              50,153
              
              
              (103,644
              )Unrealized
                  gain on marketable securities
              
              
              (44,583
              )
              
              (43,203
              )Stock-based
                  compensation to employees and directors
              
              
              2,124,768
              
              
              1,766,866Stock-based
                  compensation to consultants
              
              
              548,787
              
              
              697,997Stock
                  received for services
              
              
              
              
              
              (10,000
              )Loss
                  on investee
              
              
              
              
              
              17,020Deferred
                  income tax benefit
              
              
              (58,489
              )Changes
                  in operating assets and liabilities:Receivables
                  from investments
              
              
              901,428
              
              
              (1,331,250
              )Marketable
                  securities, net
              
              
              796,050
              
              
              717,245Inventories
              
              
              15,000Prepaid
                  expenses
              
              
              (6,915
              )Other
                  current assets
              
              
              (16,178
              )
              
              (145,198
              )Accounts
                  payable and accrued liabilities
              
              
              268,816
              
              
              873,665Due
                  to broker
              
              
              (660,200
              )
              
              (452,400
              )Net
                  cash used in operating activities
              
              
              (978,539
              )
              
              (1,453,503
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (2,277,804
              )
              
              (59,981
              )Purchase
                  of Surgicount
              
              
              
              
              
              (432,398
              )Proceeds
                  from sale of long-term investments
              
              
              138,909
              
              
              300,466Purchases
                  of long-term investments
              
              
              
              
              
              (163,173
              )Net
                  cash used in investing activities
              
              
              (2,138,895
              )
              
              (355,086
              )Cash
                  flows from financing activities:Proceeds
                  from issuance of common stock and warrants
              
              
              
              
              
              100,000Proceeds
                  from exercise of stock options
              
              
              
              
              
              26,250Payments
                  of preferred dividends
              
              
              
              
              
              (19,163
              )Proceeds
                  from notes payable
              
              
              4,832,857
              
              
              1,000,000Payments
                  and decrease in notes payable
              
              
              (1,784,943
              )
              
              (53,650
              )Net
                  cash provided by financing activities
              
              
              3,047,914
              
              
              1,053,437Net
                  decrease in cash
              
              
              (69,520
              )
              
              (755,152
              )Cash
                  at beginning of period
              
              
              79,373
              
              
              846,404Cash
                  at end of period
              
              $
              9,853
              
              $
              91,252
 
 The
        accompanying notes are an integral part of these condensed consolidated interim
        financial statements.
  3
 
 **PATIENT
        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Condensed
        Consolidated Statements of Cash Flows (Unaudited)
        (continued)**
  **For
                  The Six Months Ended June 30,****2006**
              
              **2005**Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for interest
              
              $
              96,458
              
              $
              32,552Supplemental
                  schedule of non cash investing and financing activities:Dividends
                  accrued
              
              $
              37,375
              
              $
              37,375Issuance
                  of common stock and warrants in connection with Surgicount
                  acquisition
              
              $
              —
              
              $
              4,232,178Issuance
                  of common stock in connection with asset purchase
                  agreement
              
              $
              —
              
              $
              66,895Issuance
                  of common stock in connection with prepaid asset
              
              $
              50,000
              
              $
              —
  In
                  connection with the Company's acquisition of the remaining 50%
                  interest in
                  ASG, equity instruments were issued during 2006 as
                  follows:
  ASGGoodwill
              
              $
              357,008Common
                  stock issued
              
              
              (610,000
              )Minority
                  interest
              
              
              252,992Liabilities
                  assumed
              
              $
              —
 
 The
        accompanying notes are an integral part of these condensed consolidated interim
        financial statements.
  4




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


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


**June
      30, 2006**





**1.
      DESCRIPTION OF BUSINESS AND GOING CONCERN CONSIDERATION**





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





The
      Company, including its wholly-owned operating subsidiaries, is engaged in the
      acquisition of controlling interests in companies and research and development
      of products and services focused primarily in the health care and medical
      products field, particularly the patient safety markets. Surgicount Medical,
      Inc., a provider of patient safety devices and Patient Safety Consulting Group,
      LLC, a healthcare consulting services company, focus on the Company’s primary
      target industries, the health care and medical products field. Automotive
      Services Group, Inc. ( ***“Automotive
      Services Group”*** )
      holds
      the Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
      its
      wholly-owned subsidiary. As discussed in Note 3, the Company purchased the
      remaining equity interest in ASG in March 2006.





**Going
      Concern**





The
      accompanying unaudited condensed consolidated interim financial statements
      have
      been prepared assuming that the Company will continue as a going concern. At
      June 30, 2006, the Company has an accumulated deficit of approximately $22.3
      million and a working capital deficit of approximately $5.8 million. For the
      six
      months ended June 30, 2006, the Company incurred a loss of approximately $6.5
      million. Further, as of June 30, 2006, the Company has yet to generate revenues
      from its medical products and healthcare solutions segments. These conditions
      raise substantial doubt about the Company’s ability to continue as a going
      concern. During the six months ended June 30, 2006, the Company has relied
      on
      liquidating investments and primarily short-term debt financings to fund its
      operations. As a result of the short-term debt financings the Company has
      incurred a significant amount of non-cash interest expense related to debt
      discount and beneficial conversion features associated with the borrowings.
      In
      order to ensure the continued viability of the Company, equity financing must
      be
      obtained in order to repay the existing short-term debt and to provide a
      sufficient source of operating capital. The Company has not yet secured any
      equity financing during 2006, and, although management is currently seeking
      equity financing and believes that it will be successful, no assurances can
      be
      made that it will be successful obtaining a sufficient amount of equity
      financing to continue to fund its operations until the fruition of adequate
      cash
      flow from its medical products segment. The unaudited condensed consolidated
      interim financial statements do not include any adjustments that might result
      from the outcome of this uncertainty.





**2.
      BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of Presentation and Use of Estimates**





The
      accompanying unaudited condensed 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 preparation of financial statements in conformity with accounting
      principles generally accepted in the United States of America requires
      management to make estimates and assumptions that affect the amounts reported
      in
      the financial statements and accompanying notes. The accounting estimates that
      require management’s most difficult and subjective judgments are the valuation
      of the non-marketable equity securities. The actual results may differ from
      management’s estimates.




5




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


**Notes
      to Condensed Consolidated Interim Financial Statements - Unaudited
      (continued)**


**June
      30, 2006**




The
      condensed 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
      condensed consolidated interim financial statements should be read in connection
      with the consolidated financial statements in the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2005. Results of the three and six
      months ended June 30, 2006 are not necessarily indicative of the results to
      be
      expected for the full year ending December 31, 2006. All intercompany
      transactions have been eliminated in consolidation.





**Revenue
      Recognition**




The
      Company complies with SEC Staff Accounting Bulletin (SAB) 101, Revenue
      Recognition, amended by SAB 104. Consulting service contract revenue of $104,000
      and $577,000 at June 30, 2006 and 2005, respectively, is recognized when the
      service is performed. Consequently, the recognition of such consulting service
      contract revenue is deferred until each phase of the contract is complete.
      This
      method is predominately used by the Financial Services and Real Estate segment.
      Service activities may include the following: financial advice on mergers,
      acquisitions, restructurings and similar corporate finance matters. Revenues
      generated by the Company’s automated car wash subsidiary, Automotive Services
      Group, of $131,000 and $0 at June 30, 2006 and 2005, respectively, are
      recognized at the time of service.





**Goodwill
      and Intangible Assets**





In
      accordance with Statement of Financial Accounting Standards ( ***“SFAS”*** )
      No. 142, *Goodwill
      and Intangible Assets* ,
      goodwill is tested for impairment at the reporting unit level (operating segment
      or one level below an operating segment) on an annual basis in the Company’s
      fourth fiscal quarter or more frequently if indicators of impairment exist,
      of
      which none have been identified.  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. As discussed in Note 4, the Company
      believed there were indicators of impairment present for its car wash services
      segment and after performing the tests described above, recorded an impairment
      charge.




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




6


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**





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





The
      Company adopted ***“SFAS”*** No.
      123(R), “ *Share-Based
      Payment* ,”
as
      of
      January 1, 2005 using the modified retrospective application method as provided
      by SFAS 123(R). During the three and six months ended June 30, 2006, the Company
      had stock-based compensation expense, from issuances to the Company’s employee
      and directors, included in reported net loss, of $189,000 and $2,125,000. The
      total amount of stock-based compensation for the six months ended June 30,
      2006,
      of $2,125,000, included restricted stock grants valued at $1,092,000 and stock
      options valued at $1,033,000. During the three and six months ended June 30,
      2005, the Company had stock-based compensation expense, from issuances to the
      Company’s employee and directors, included in reported net loss, of $1,128,000
      and $639,000, respectively. **** The
      total
      amount of stock based compensation for the six months ended June 30, 2005,
      of
      $1,767,000, included restricted stock grants valued at $876,000 and stock
      options valued at $891,000.





During
      the three and six months ended June 30, 2006, the Company had stock-based
      compensation expense, from issuances of restricted stock and warrant to
      consultants of the Company, included in reported net loss, of $549,000.
      Additionally, during the three and six months ended June 30, 2006, the Company
      issued restricted stock valued at $50,000 for prepaid legal expenses. During
      the
      three and six months ended June 30, 2005, the Company had stock-based
      compensation expense, from issuances of restricted stock and warrant to
      consultants of the Company, included in reported net loss, of $698,000.





All
      options that the Company granted in 2006 and 2005 were granted at the per share
      fair market value on the grant date. Vesting of options differs based on the
      terms of each option. The Company utilized the Black-Scholes option pricing
      model and the assumptions used for each period are as follows:




**(Unaudited)**
              **Six
                months ended June 30,****2006**
            
            
            **2005**Weighted
                average risk free interest rate
            
            
            3.75
            %
            
            3.75
            %Weighted
                average life (in years)
            
            
            3.0
            
            
            3.0Volatility
            
            
            87
                - 89
            %
            
            83
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Weighted
                average grant-date fair value per share of options granted
            
            $
            4.25
            
            $
            2.92





**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 condensed 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.





7




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**


Since
      the
      effects of outstanding options, warrants and the conversion of convertible
      preferred stock are anti-dilutive in all periods presented it has been excluded
      from the computation of loss per common share.





**Recent
      Accounting Pronouncements**




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




**3.
      ACQUISITION**





*Automotive
      Services Group, LLC*





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





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





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





8


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**




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





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





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





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





**4.
      GOODWILL**





The
      Company’s goodwill relates primarily to the Car Wash Services and
      Medical Products reporting segment. At June 30, 2006, the Company
      recognized a goodwill impairment charge of 357,000. As
      discussed in Note 1, the Company has an accumulated deficit of
      approximately $22.3 million and has been unable to continue the planned
      build-out on the additional car wash facilities. As a result, revenues and
      cash
      flows will be lower than expected from the car wash services segment and the
      expectation of lower operating results have negatively impacted the market
      price
      of our common stock.  As a result of these events, the Company determined
      that a triggering event had occurred and conducted an interim goodwill
      impairment analysis.  At June 30, 2006, a goodwill impairmentcharge
      of $357,000 in its car wash services operating segment was recorded.  This goodwill impairmentrelated
      to goodwill that resulted from the Company’s acquisitions of ASG in March
      2006.  The fair value of the Company’s reporting units were estimated using
      the expected present value of future cash flows and the valuation employed
      a
      combination of present value techniques to measure fair value and considered
      market factors.




The
      changes in the amount of goodwill for the six months ended June 30, 2006,
      is as follows:





**Goodwill**Balance
                as of December 31, 2005
            
            $
            2,301,555Goodwill
                for purchase of ASG
            
            
            357,008Impairment
                of ASG Goodwill
            
            
            (357,008
            )Balance
                as of June 30, 2006 (unaudited)
            
            $
            2,301,555





9


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


**Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**


**5.
      LONG-TERM INVESTMENTS**





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





****June
                30,****
              **2006**
            
            **December
                31,**
              **2005****(unaudited)**Alacra
                Corporation
            
            $
            1,000,000
            
            $
            1,000,000Digicorp
            
            
            1,671,392
            
            
            3,025,398IPEX,
                Inc.
            
            
            228,000
            
            
            1,130,500Investments
                in Real Estate
            
            
            465,564
            
            
            481,033$
            3,364,956
            
            $
            5,636,931





*Alacra
      Corporation*





At
      June
      30, 2006, the Company had an investment in shares of Series F convertible
      preferred stock of Alacra Corporation ( ***“Alacra”*** ),
      valued
      at $1,000,000, and classified as an available-for-sale investment. The Company
      has the right to have the Series F convertible preferred stock redeemed by
      Alacra for face value plus accrued dividends on December 31, 2006. Alacra,
      based
      in New York, is a global provider of business and financial information. Alacra
      provides a diverse portfolio of fast, sophisticated online services that allow
      users to quickly find, analyze, package and present mission-critical business
      information. Alacra's customers include more than 750 financial institutions,
      management consulting, law and accounting firms and other corporations
      throughout the world.





*Digicorp*





At
      June
      30, 2006, the Company held 2,621,792 shares, or approximately 7.0%, of the
      common stock of Digicorp. The Company has borrowed against 200,500 of these
      shares and has therefore pledged 200,500 shares to a financial institution
      as
      discussed in Note 8. Prior to December 31, 2005, the Company accounted for
      its
      investment in Digicorp under the equity method of accounting and the Company’s
      proportionate share of income or losses from this investment was recorded in
      equity in income (loss) of investee. However, on December 29, 2005, Digicorp
      completed the purchase of all of the issued and outstanding shares of capital
      stock of Rebel Crew Films, Inc. ( ***"Rebel
      Crew"*** ),
      a
      California corporation. Digicorp issued approximately 21 million shares of
      its
      common stock to the shareholders of Rebel Crew which decreased the Company’s
      ownership interest from approximately 20% at September 30, 2005, to
      approximately 7.5% at December 29, 2005. The 2,621,792 shares of common stock
      are valued at $1,671,392. Digicorp's common stock is traded on the OTC Bulletin
      Board, which reported a closing price, at June 30, 2006, of $0.85 per share.
      The
      Company has valued its holdings in Digicorp at an approximate 25% discount
      to
      the $0.85 closing price, or $0.6375 per share, due to the limited average number
      of shares traded on the OTC Bulletin Board.





*IPEX,
      Inc.*





At
      June
      30, 2006, the Company held 1,045,000 shares of common stock and warrants to
      purchase 787,500 shares of common stock at $1.00 per share of IPEX, formerly
      Administration for International Credit & Investments, Inc. The Company
      acquired 450,000 shares of the common stock and all of the warrants directly
      from IPEX in March 2005 and received 500,000 shares of the common stock directly
      from the majority shareholder of IPEX, former President, former Chief Executive
      Officer and former director of IPEX and, until such time as the sale of the
      securities is either registered with the SEC or the securities are eligible
      to
      be sold without restriction pursuant to Rule 144(k) promulgated pursuant to
      the
      Securities Exchange Act of 1934, the Company is restricted from publicly selling
      these securities except in accordance with Rule 144. The remaining 95,000 shares
      of common stock are valued at $22,800 and included in marketable securities.
      The
      Company has borrowed against these 95,000 shares and has therefore pledged
      these
      shares to a financial institution as discussed in Note 8. IPEX's common stock
      is
      traded on the OTC Bulletin Board, which reported a closing price, at June 30,
      2006, of $0.32. The Company has valued its holdings in IPEX at a 25% discount
      to
      the $0.32 closing price, or $0.24 per share, due to the limited average number
      of shares traded on the OTC Bulletin Board as well as other trading restrictions
      on the Company’s unregistered holdings in IPEX. The warrants are exercisable for
      a period of five years and are callable by IPEX in certain instances. IPEX
      operates an electronic market for collecting, detecting, converting, enhancing
      and routing telecommunication traffic and digital content. Members of the
      exchange anonymously exchange information based on route quality and price
      through a centralized, web accessible database and then route traffic. IPEX’s
      fully-automatic, highly scalable Voice over Internet Protocol routing platform
      updates routes based on availability, quality and price and executes the
      capacity request of the orders using proprietary software and delivers them
      through IPEX’s system. IPEX invoices and processes payments for its members’
transactions and offsets credit risk through its credit management programs
      with
      third parties.




10




****Patient
        Safety Technologies, Inc. and Subsidiaries****
 **Notes
          to Condensed Consolidated Interim Financial Statements - Unaudited
          (continued)**
 **June
          30, 2006**


*Investments
      in Real Estate*





At
      June
      30, 2006, the Company had several real estate investments, recorded at its
      cost
      of $465,564. These investments are included in long-term investments. The
      Company holds its real estate investments in AGB Properties. AGB Properties
      real
      estate holdings consist of approximately 8.5 acres of undeveloped land in Heber
      Springs, Arkansas, 0.61 acres of undeveloped land in Springfield, Tennessee,
      and
      various loans secured by real estate in Heber Springs, Arkansas. AGB Properties
      is in the process of liquidating its real estate holdings.





**6.
      NOTES PAYABLE**





Notes
      payable at June 30, 2006 and December 31, 2005 are comprised of the
      following:





**June
                  30,**
              **2006**
            
            **December
                31,**
              **2005****(unaudited)**Note
                payable to Winstar (a)
            
            $
            784,862
            
            $
            796,554Note
                payable to Bodnar Capital Management, LLC (b)
            
            
            —
            
            
            1,000,000Notes
                payable to Ault Glazer Bodnar Acq. Fund, LLC (c)
            
            
            2,356,444
            
            
            1,116,838Note
                payable to Steven J. Caspi (d)
            
            
            1,000,000
            
            
            —Convertible
                debt payable to Alan Morelli (e)
            
            
            1,100,000
            
            
            —Note
                payable to Herb Langsam (f)
            
            
            500,000
            
            
            —Other
                notes payable
            
            
            220,000
            
            
            —Total
                notes payable
            
            $
            5,961,306
            
            $
            2,913,392





11




****Patient
        Safety Technologies, Inc. and Subsidiaries****
 **Notes
          to Condensed Consolidated Interim Financial Statements - Unaudited
          (continued)**
 **June
          30, 2006**


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





2006
            
            $
            4,466,3062007
            
            
            —2008
            
            
            —2009
            
            
            —2010
            
            
            1,495,000$
            5,961,306





(a)
            On
                August 28, 2001, the Company made an investment in Excelsior Radio
                Networks, Inc. (***“Excelsior”***)
                which was completely liquidated during 2005. As part of the purchase
                price
                paid by the Company for its investment in Excelsior, the Company
                issued a
                $1,000,000 note to Winstar. This note was due February 28, 2002 with
                interest at 3.54% per annum but in accordance with the agreement
                has a
                right of offset against certain representations and warranties made
                by
                Winstar and we believe the amount of the offsets exceed the amount
                of the
                note payable. However, since Winstar does not agree with this belief,
                the
                only offsets against the principal balance of the note reflected
                in the
                accompanying condensed consolidated interim financial statements
                relate to
                legal fees attributed to our defense of the lawsuits filed against
                us. The
                due date of the note is extended until the lawsuit discussed in Note
                11 is
                settled. At June 30, 2006, the Company had incurred a total of $215,000
                in
                legal expenses, of which $12,000 and $54,000 was incurred during
                the six
                months ended June 30, 2006 and 2005, respectively. These amounts
                have been
                offset against the amount due.





(b)
            On
                April 7, 2005, the Company issued a $1,000,000 principal amount promissory
                note (the***"Bodnar
                Note"***)
                to Bodnar Capital Management, LLC, in consideration for a loan from
                Bodnar
                Capital Management, LLC to the Company in the amount of $1,000,000.
                Steven
                J. Bodnar is a managing member of Bodnar Capital Management, LLC.
                Mr.
                Bodnar, through Bodnar Capital Management, LLC, is a principal stockholder
                of the Company. The principal amount of the Bodnar Note and interest
                at
                the rate of 6% per annum was payable on May 31, 2006. The obligations
                under the Note were collateralized by all real property owned by
                the
                Company. During the six months ended June 30, 2006 and 2005, the
                Company
                had incurred interest expense of $25,000 and $14,000, respectively.
                During
                June 2006, the Company repaid the outstanding principal amount and
                accrued
                interest of $68,000.




(c)
            From
                January 11, 2006 through June 30, 2006, AGB Acquisition Fund, a related
                party, loaned the Company a total of $443,000, all of which was repaid.
                As
                consideration for the loans, the Company issued AGB Acquisition Fund
                secured promissory notes with an interest rate of 7% per annum (the***“AGB
                Acquisition Fund Notes”***),
                and entered into a security agreement granting AGB Acquisition Fund
                a
                security interest in the Company’s personal property and fixtures,
                inventory, products and proceeds as security for the Company’s obligations
                under the AGB Acquisition Fund Notes. During the six months ended
                June 30,
                2006, the Company had incurred and paid interest expense of $2,000
                on the
                AGB Acquisition Fund Notes.




On
      February 8, 2006, AGB Acquisition Fund loaned $687,000 to ASG and at June 30,
      2006 the entire amount was outstanding. As consideration for the loan, ASG
      issued AGB Acquisition Fund a secured promissory note in the principal amount
      of
      $687,000 (the ***“ASG
      Note”*** )
      and
      granted a real estate mortgage in favor of AGB Acquisition Fund relating to
      certain real property located in Jefferson County, Alabama (the ***“ASG
      Property”*** ).
      The
      ASG Note, as amended, bears interest at the rate of 10% per annum and is due
      on
      September 15, 2006. AGB Acquisition Fund received warrants to purchase 20,608
      shares of the Company’s common stock at an exercise price of $3.86 per share as
      additional consideration for entering into the loan agreement. The Company
      recorded debt discount in the amount of $44,000 as the estimated value of the
      warrants. The debt discount was amortized as non-cash interest expense over
      the
      initial term of the debt using the effective interest method. Through June
      30,
      2006, the entire amount of the debt discount was amortized as interest expense.
      As security for the performance of ASG’s obligations pursuant to the ASG Note,
      ASG granted AGB Acquisition Fund a security interest in all personal property
      and fixtures located at the ASG Property. During the six months ended June
      30,
      2006, the Company had incurred interest expense, excluding amortization of
      debt
      discount, of $27,000 on the ASG Note, all of which is accrued at June 30,
      2006.




12




****Patient
      Safety Technologies, Inc. and
      Subsidiaries**** **Notes
          to Condensed Consolidated Interim Financial Statements - Unaudited
          (continued)**
 **June
          30, 2006**




As
      of
      June 30, 2006 and December 31, 2005, AGB Acquisition Fund had loaned an
      aggregate of $1,495,000 and $1,117,000, respectively, to ASG. The loans were
      advanced to ASG pursuant to the terms of a Real Estate Note dated July 27,
      2005,
      as amended (the ***"Real
      Estate Note"*** ).
      The
      Real Estate Note bears interest at the rate of 3% above the Prime Rate as
      published in the Wall Street Journal (8.25% at June 30, 2006). All unpaid
      principal, interest and charges under the Real Estate Note are due in full
      on
      July 31, 2010. The Real Estate Note is collateralized by a mortgage on certain
      real estate owned by ASG pursuant to the terms of a Future Advance Mortgage
      Assignment of Rents and Leases and Security Agreement dated July 27, 2005
      between ASG and AGB Acquisition Fund. During the six months ended June 30,
      2006
      and 2005, the Company had incurred interest expense of $74,000 and nil,
      respectively, on the Real Estate Note, all of which is accrued at June 30,
      2006.





From
      March 7, 2006 through June 30, 2006, AGB Acquisition Fund loaned the Company
      a
      total of $285,000, of which $110,000 was repaid. The outstanding balance at
      June
      30, 2006 is $175,000. The loans were advanced to the Company pursuant to a
      Revolving Line of Credit Agreement (the ***“Revolving
      Line of Credit”*** )
      entered
      into with AGB Acquisition Fund on March 7, 2006. The Revolving Line of Credit
      allows the Company to request advances of up to $500,000 from AGB Acquisition
      Fund. The initial term of the Revolving Line of Credit is for a period of six
      months and may be extended for one or more additional six month periods upon
      mutual agreement of the parties. Each advance under the Revolving Line of Credit
      will be evidenced by a secured promissory note and a security agreement. The
      secured promissory notes issued pursuant to the Revolving Line of Credit must
      be
      repaid with interest at the Prime Rate plus 1% within 60 days from issuance
      and
      will be convertible into shares of the Company’s common stock at the option of
      AGB Acquisition Fund at a price of $3.10 per share. The obligations of the
      Company pursuant to such secured promissory notes are secured by the Company’s
      assets, personal property and fixtures, inventory, products and proceeds
      therefrom. During the six months ended June 30, 2006, the Company had incurred
      interest expense of $2,000 on the ASG Note, of which $1,000 is accrued at June
      30, 2006.





(d)
            On
                January 12, 2006, Steven J. Caspi (***“Caspi”***)
                loaned $1,000,000 to ASG. As consideration for the loan, ASG issued
                Caspi
                a promissory note in the principal amount of $1,000,000 (the***“Caspi
                Note”***)
                and granted Caspi a mortgage on certain real estate owned by ASG
                and a
                security interest on all personal property and fixtures located on
                such
                real estate as security for the obligations under the Caspi Note.
                In
                addition, the Company entered into an agreement guaranteeing ASG’s
                obligations pursuant to the Caspi Note and Caspi received warrants
                to
                purchase 30,000 shares of the Company’s common stock at an exercise price
                of $4.50 per share. The Company recorded debt discount in the amount
                of
                $92,000 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. Through June 30, 2006, the entire
                amount of the debt discount was amortized as interest expense. The
                Caspi
                Note accrues interest at the rate of 10% per annum, which together
                with
                principal, was due to be repaid on July 13, 2006. The Company is
                in the
                process of amending the Caspi Note to extend the due date. During
                the six
                months ended June 30, 2006, the Company had incurred and paid interest
                expense of $46,000 on the Caspi Note.




13
 
  Patient Safety Technologies, Inc. and Subsidiaries **Notes
            to Condensed Consolidated Interim Financial Statements - Unaudited
            (continued)**
 **June
            30, 2006**


(e)
            On
                June 6, 2006 the Company entered into a Secured Convertible Note
                and
                Warrant Purchase Agreement (the***“Purchase
                Agreement”***)
                pursuant to which the Company sold a $1,100,000 principal amount
                Secured
                Convertible Promissory Note (the***“Morelli
                Note”***)
                and a warrant to purchase 401,460 shares of the Company’s common stock
                (the***“Morelli
                Warrant”***)
                to Alan E. Morelli.





As
      security for the Company’s obligations under the Morelli Note, pursuant to a
      Pledge Agreement and an Account Control Agreement, the Company pledged the
      equity securities owned by the Company in Digicorp, IPEX, Inc., Automotive
      Services Group, Inc., Alacra, Inc. and Surgicount Medical, Inc. As additional
      security for the Company’s obligations under the Morelli Note, pursuant to a
      Mortgage and a Deed of Trust, the Company pledged 8.5 acres of undeveloped
      land
      it owns in Heber Springs, Arkansas and 0.61 acres of undeveloped land it owns
      in
      Springfield, Tennessee, respectively. In connection with the security interests
      granted to Mr. Morelli, Ault Glazer Bodnar Acquisition Fund, LLC and Herbert
      Langsam Revocable Trust entered into Subordination Agreements with Mr. Morelli
      and the Company agreeing to subordinate their existing security interests in
      the
      Company’s assets to the security interests granted Mr. Morelli. As further
      security, Milton “Todd” Ault, III and Louis Glazer, M.D. gave their personal
      guaranty of the Company’s obligations under the Morelli Note.





The
      Morelli Note accrues interest at the rate of 12% per annum through July 6,
      2006,
      after which the interest rate increases to 15% per annum from July 6, 2006
      through the date the loan is repaid. The principal amount of the Morelli Note
      and any accrued but unpaid interest is due to be paid on October 6, 2006, or
      the
      occurrence of an event of default. In the event of an occurrence and during
      the
      continuance of any event of default, interest shall accrue on the unpaid
      principal amount and any interest that has not been paid when due at a rate
      equal to 4% per annum above the rate otherwise provided. The Company is required
      to make a mandatory repayment of its obligations under the Morelli Note upon
      the
      sale of 50% or more of the equity interest of the Company to any person or
      group
      or any sale of 50% or more of the assets of the Company in a single transaction
      or series of related transactions. Additionally, the Company is required to
      make
      a mandatory prepayment of its obligations under the Morelli Note in an amount
      equal to the proceeds of the sale of any of the pledged securities and
      undeveloped land or upon the incurrence of debt for borrowed money. The Company
      is required to obtain the prior written consent of Mr. Morelli to the incurrence
      of indebtedness. During June 2006, and subsequent to entering into the Morelli
      Note, the Company incurred additional indebtedness without the prior written
      consent of Mr. Morelli. Further, mandatory prepayments from the proceeds of
      indebtedness were not made; therefore, the Company is currently in an event
      of
      default.





Principal
      and interest on the Morelli Note is convertible into shares of the Company’s
      common stock at a conversion price of $2.74. If the Company issues shares of
      common stock or securities convertible or exercisable into shares of common
      stock below the then applicable conversion price, the conversion price of the
      Morelli Note will be reduced accordingly. The conversion price of the Morelli
      Note also will be adjusted if the Company pays a stock dividend, subdivides
      or
      combines outstanding shares of common stock into a greater or lesser number
      of
      shares, or takes such other actions as would otherwise result in dilution of
      Mr.
      Morelli’s position. During the six months ended June 30, 2006, the Company had
      incurred interest expense of $9,000, on the Morelli Note, all of which is
      accrued at June 30, 2006.




14




**Patient
      Safety Technologies, Inc. and
      Subsidiaries** **Notes
          to Condensed Consolidated Interim Financial Statements - Unaudited
          (continued)**
 **June
          30, 2006**


As
      the
      effective conversion price of the Morelli 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 $85,000 based on the intrinsic value of the beneficial
      conversion feature of the note. Since the Morelli Note was convertible at the
      time of issuance, the debt discount as a result of the beneficial conversion
      feature was amortized as non-cash interest expense.





The
      Morelli Warrant has an exercise price of $3.04 per share and will expire after
      June 6, 2011. If the Company issues shares of common stock or securities
      convertible or exercisable into shares of common stock below the then applicable
      exercise price, the exercise price of the Morelli Warrant will be reduced
      accordingly. The exercise price of the Morelli Warrant also will be adjusted
      if
      the Company pays a stock dividend, subdivides or combines outstanding shares
      of
      common stock into a greater or lesser number of shares, or takes such other
      actions as would otherwise result in dilution of Mr. Morelli’s position. The
      Company recorded debt discount in the amount of $827,000 as the estimated value
      of the warrants. The debt discount will be amortized as non-cash interest
      expense over the term of the debt using the effective interest method. Through
      June 30, 2006, interest expense of $827,000 has been recorded from the debt
      discount amortization during the period due to the acceleration of the Morelli
      Note due to the event of default discussed above.




(f)
            On
                May 1, 2006, Herbert Langsam, a Class II Director of the Company,
                loaned
                the Company $500,000. The loan is documented by a $500,000 Secured
                Promissory Note (the***“Langsam
                Note”***)
                payable to the Herbert Langsam Irrevocable Trust. The Langsam Note
                accrues
                interest at the rate of 12% per annum and has a maturity date of
                November
                1, 2006. In the event of breach or default on any provision of the
                Langsam
                Note, the interest rate will increase to 16% per annum. Pursuant
                to the
                terms of a Security Agreement dated May 1, 2006, the Company granted
                the
                Herbert Langsam Revocable Trust a security interest in all of the
                Company’s assets as collateral for the satisfaction and performance of the
                Company’s obligations pursuant to the Langsam
                Note.





**7.
      ACCRUED LIABILITIES**





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





**June
                30,**
              **2006**
            
            **December
                31,**
              **2005****(unaudited)**Accrued
                officer's severance
            
            $
            156,614
            
            $
            22,716Accrued
                interest
            
            
            299,990
            
            
            215,093Accrued
                professional fees
            
            
            138,750
            
            
            160,000Deferred
                revenue
            
            
            —
            
            
            103,875Accrued
                salaries
            
            
            59,864
            
            
            45,833Other
            
            
            87,380
            
            
            21,599$
            742,598
            
            $
            569,116





15


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**


**8.
      DUE TO BROKER**





In
      August
      2005, the Company entered into an agreement with a financial institution to
      borrow against securities. The agreement, which extends for 53 weeks, is subject
      to a premium of up to 6% of the amount of the borrowings which is amortized
      on a
      straight line basis over the term of the agreement. To the extent the agreement
      is terminated early, the Company does not incur a premium for the amount of
      time
      that the agreement is terminated. The agreement also provides that in addition
      to the securities held by the financial institution, the Company pledge a total
      of 25% of the value of the securities in cash. The pledged cash is reduced
      daily
      by the amount of the earned premium and protects the financial institution
      from
      decreases in the market value of the securities. Any decrease in the market
      value of the pledged securities in excess of 5% over the securities notional
      value would require the Company to fund additional monies, such that 25% of
      the
      initial borrowing, as adjusted by the earned premium, was covered. If the
      Company failed to fund additional monies the financial institution has the
      right
      to liquidate the pledged securities. In the event the proceeds from liquidation
      are insufficient to cover the amount of the borrowings, the financial
      institution’s sole recourse is against the pledged cash. During the six months
      ended June 30, 2006, the Company received proceeds from such borrowings of
      $645,000, of which $503,000 was repaid. Consequently, the Company recorded
      a
      liability at June 30, 2006 of $142,000 which is included in the condensed
      consolidated balance sheet in current liabilities under the heading “Due to
      broker.”





**9.
      WARRANTS**





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





In
      May
      2006, the Company issued 32,120 warrants to purchase shares of common stock
      at
      $3.50 per share to a consultant. The warrants vested immediately and have a
      one-year life. The warrants were valued at $31,000 and are being expensed over
      a
      twelve month period.





Warrants
      granted during the six months ended June 30, 2006, were valued using the
      Black-Scholes valuation model assuming expected dividend yield, risk-free
      interest rate, expected life and volatility of 0%, 3.75%, three to five years
      and 88% - 89%, respectively. Warrants granted during the year ended December
      31,
      2005 were valued using the same assumptions with the exception that the Company
      used volatility of 83%. As of June 30, 2006, all warrants issued to the
      consultants remain outstanding.





**10.
      RELATED PARTY TRANSACTIONS**





During
      the year ended December 31, 2005, the Company paid approximately 75% of the
      base
      rent on the corporate offices and Ault Glazer Bodnar & Company Investment
      Management LLC ( ***"Ault
      Glazer"*** ),
      based
      upon their usage of the facilities, paid the remaining base rent. Ault Glazer
      is
      a private investment management firm that manages an estimated $20 million
      in
      individual client accounts and private investment funds. Ault Glazer has been
      given discretionary authority to buy, sell, and vote securities on behalf of
      each of those client accounts and funds. Together, Milton “Todd” Ault III
      ( ***“Ault”*** ),
      our
      former Chairman and current Chief Executive Officer of the Company, and Louis
      Glazer, Chief Health and Science Officer and Class I Director of the Company,
      and Melanie Glazer, Manager of AGB Propeties, (together, the ***“Glazers”*** )
      own
      approximately 69% of the outstanding membership interests in Ault Glazer. As
      of
      December 31, 2005, Ault Glazer, Ault and the Glazers indirectly beneficially
      own
      or control approximately 25% of the outstanding common stock of the Company
      and
      beneficially own approximately 98.2% of the outstanding preferred stock of
      the
      Company.




16




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**


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





*AGB
      Properties*





On
      April
      28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
      Tennessee from a related party. The purchase price consisted of $90,000 in
      cash,
      20,444 shares of common stock and 10,221 warrants to purchase common stock
      at an
      exercise price of $4.53 and a 5 year contractual life valued at
      $86,000.





*IPEX,
      Inc.*





On
      June
      30, 2005, the Company formalized the terms of a consulting agreement, consented
      to by IPEX, whereby the Company was retained by Wolfgang Grabher, the majority
      shareholder of IPEX, former President, former Chief Executive Officer and former
      director of IPEX, to serve as a business consultant to IPEX. At June 30, 2005,
      Mr. Grabher owned 18,855,900 shares of IPEX's 28,195,566 outstanding shares
      of
      common stock and granted Mr. Ault, the Company’s Chairman and Chief Executive
      Officer at that time, an irrevocable voting proxy for his shares. At December
      31, 2005, the Company held 7.8% of IPEX’s outstanding shares of common stock. On
      June 30, 2005, the Company agreed with IPEX as to the scope of such consulting
      services and the consideration for such services. The Company has provided
      and/or will provide if reasonably necessary within the next 12 months, the
      following services to IPEX: (a) substantial review of IPEX's business and
      operations in order to facilitate an analysis of IPEX's strategic options
      regarding a turnaround of IPEX's business; (b) providing advice in the following
      areas: (i) identification of financing sources; (ii) providing capital
      introductions of financial institutions and/or strategic investors; (iii)
      evaluation and recommendation of candidates for appointment as officers,
      directors or employees; (iv) making personnel of the Company available to IPEX
      to provide services to IPEX on a temporary or permanent basis; (v) evaluation
      and/or negotiation of merger or sale opportunities, or such other form of
      transaction or endeavor which IPEX may elect to pursue; and (vi) providing
      any
      other services as are mutually agreed upon in writing by the Company and
      Wolfgang Grabher from time to time; and (c) assisting IPEX in installing a
      new
      management team.





The
      Company has performed all of the services stipulated under the terms of the
      consulting agreement, including but not limited to: (i) a review of the business
      and operations; (ii) the execution of two purchase agreements for the purchase
      of certain intellectual property assets; (iii) the hiring of a Chief Executive
      Officer, Chief Operating Officer and a Vice President of Research &
Development; and (iv) the appointment of two members to the Board of Directors
      of IPEX. The Company initially valued the amount of the consulting services
      at
      $1,331,000, which was due on August 15, 2005. The Company received 500,000
      shares of IPEX common stock in December 2005 as payment for the services. At
      the
      time of payment, the fair market value of IPEX common stock had decreased by
      approximately 33%. Accordingly, the Company reduced the initial value of the
      consulting services by the amount of the decrease in the fair market value
      of
      IPEX common stock, $675,000. As a result of the decrease in the fair market
      value of IPEX common stock, the Company ultimately recognized $656,000 in
      revenue as a result of this agreement, of which $104,000 was recognized during
      the six months ended June 30, 2006.




17




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**


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





*Digicorp*





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





*Loans*





During
      the six months ended June 30, 2006 and year ended December 31, 2005, the Company
      received loans from AGB Acquisition Fund (see Note 6). Ault Glazer Bodnar &
Company Investment Management, LLC ( ***“AGB
      & Company IM”*** )
      is the
      managing member of AGB Acquisition Fund. The managing member of AGB &
Company IM is Ault Glazer Bodnar & Company, Inc. ( ***“AGB
      & Company”*** ).
      The
      Company’s Chairman and Chief Executive Officer, Milton “Todd” Ault, III, is
      Chairman, Chief Executive Officer and President of AGB & Company. The
      Company’s Chief Financial Officer, William B. Horne, was the former Chief
      Financial Officer of AGB & Company. Melanie Glazer, former Manager of the
      Company’s subsidiary AGB Properties, is also a director of AGB & Company.





*Due
      from Related Parties*





At
      June
      30, 2006 and December 31, 2005, the Company had an amount due from related
      parties of $121,000 and $85,000, respectively, recorded in the condensed
      consolidated balance sheets in other current assets. This amount relates to
      an
      allocation of expenses from the Company to the related parties.





**11.
      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.




18




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**


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 condensed consolidated interim
      financial statements do not include any adjustments for the possible outcome
      of
      this uncertainty.





On
      February 3, 2006, Winstar Global Media, Inc. ( ***“WGM”*** )
      filed a
      lawsuit against the Company. The WGM lawsuit attempts to collect upon the
      $1,000,000 note between the Company and Winstar discussed in Note 6. The Company
      believes the lawsuit is without merit and intends to vigorously defend
      itself.





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





*Severance
      Agreement*





On
      January 9, 2006, Milton “Todd” Ault, III resigned as the Company’s Chairman and
      Chief Executive Officer, pursuant to a Severance Agreement, the Company agreed
      to pay Mr. Ault $180,000 and to grant Mr. Ault 60,000 restricted shares of
      common stock and options to purchase 90,000 shares of common stock with an
      exercise price of $4.50 per share and an expiration date of July 8, 2007. In
      addition, Mr. Ault will be eligible for health insurance, life insurance,
      disability and 401(k) participation continuing for a period of twelve months
      from his resignation date. Effective July 11, 2006, Mr. Ault was re-appointed
      Chief Executive Officer and a director of the Company. In consideration of
      his
      re-appointment as Chief Executive Officer, Mr. Ault has agreed to cash
      compensation of only $1 per year.





19




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**


**12.
      SEGMENT REPORTING**





The
      Company reports selected segment information in its financial reports to
      shareholders in accordance with SFAS No. 131, *“Disclosures
      about Segments of an Enterprise and Related Information.”* The
      segment information provided reflects the three distinct lines of business
      within the Company’s organizational structure: medical
      products, which consists of SurgiCount and Patient Safety Consulting Group,
      LLC,
      a provider of patient safety devices and health care solutions, financial
      services and real estate, which consists of AGB
      Properties and car wash services, which consists of Automotive Services
      Group . Unallocated
      corporate expenses are centrally managed at the corporate level and not reviewed
      by the Company’s chief operating decision maker in evaluating results by
      segment.





Transactions
      between segments are not common and are not material to the segment information.
      Some business activities that cannot be classified in the aforementioned
      segments are shown under “corporate”.





Segment
      information for the three and six months ended June 30, 2006 and 2005 is as
      follows:




**(Unaudited)**
            
            **(Unaudited)****Three
                Months Ended**
            
            **Six
                Months Ended****June 30,**
              **2006**
            
            **June
                30,**
              **2005**
            
            ****June 30,****
              **2006**
            
            ****June 30,****
              **2005****Medical
                Products**Revenue
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Net
                loss
            
            $
            (852,473
            )
            $
            (1,053,094
            )
            $
            (1,358,589
            )
            $
            (1,401,550
            )Total
                Assets
            
            $
            6,358,900
            
            $
            4,576,262
            
            $
            6,358,900
            
            $
            4,576,262**Financial
                Services and Real Estate**Revenue
            
            $
            48,882
            
            $
            586,627
            
            $
            103,875
            
            $
            586,627Net
                income (loss)
            
            $
            69,855
            
            $
            237,901
            
            $
            30,365
            
            $
            313,064Total
                Assets
            
            $
            3,420,359
            
            $
            6,685,736
            
            $
            3,420,359
            
            $
            6,685,736**Car
                Wash Services**Revenue
            
            $
            110,849
            
            $
            —
            
            $
            131,616
            
            $
            —Goodwill
                impairment
            
            $
            (357,008
            )
            $
            —
            
            $
            (357,008
            )
            $
            —Net
                loss
            
            $
            (559,149
            )
            $
            —
            
            $
            (729,361
            )
            $
            —Total
                Assets
            
            $
            3,862,971
            
            $
            —
            
            $
            3,862,971
            
            $
            —**Corporate**Revenue
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Net
                loss
            
            $
            (1,575,966
            )
            $
            (955,240
            )
            $
            (4,433,680
            )
            $
            (2,465,560
            )Total
                Assets
            
            $
            393,805
            
            $
            526,109
            
            $
            393,805
            
            $
            526,109**Total**Revenue
            
            $
            159,731
            
            $
            586,627
            
            $
            235,491
            
            $
            586,627Goodwill
                impairment
            
            $
            (357,008
            )
            $
            —
            
            $
            (357,008
            )
            $
            —Net
                loss
            
            $
            (2,917,733
            )
            $
            (1,770,433
            )
            $
            (6,491,265
            )
            $
            (3,554,046
            )Total
                Assets
            
            $
            14,036,035
            
            $
            11,788,107
            
            $
            14,036,035
            
            $
            11,788,107




20




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Condensed Consolidated Interim Financial Statements - Unaudited
        (continued)**
 **June
        30, 2006**


**13.
      SUBSEQUENT EVENTS**





On
      July
      12, 2006 the Company, executed a Convertible Promissory Note in the principal
      amount of $250,000 (the ***“Kalina
      Note”*** )
      and a
      Warrant for the Purchase of 85,000 Shares of the Company’s Common Stock (the ***“Kalina
      Warrant”*** )
      in
      favor of Charles J. Kalina, III, an existing shareholder of the Company. The
      Kalina Note accrues interest at the rate of 12% per annum throughout the term
      of
      the loan. The principal amount of the Kalina Note and any accrued but unpaid
      interest is due to be paid upon the earlier of October 10, 2006, or the
      occurrence of an event of default. Principal and interest on the Kalina Note
      is
      convertible into shares of the Company’s common stock at a conversion price of
      $3.00. If the Company issues shares of common stock or securities convertible
      or
      exercisable into shares of common stock below the then applicable conversion
      price, the conversion price of the Kalina Note will be reduced accordingly.
      The
      conversion price of the Kalina Note also will be adjusted if the Company pays
      a
      stock dividend, or subdivides or combines outstanding shares of common stock
      into a greater or lesser number of shares.





The
      Kalina Warrant has an exercise price of $ 2.69 per share and will expire on
      July
      11, 2011. If the Company issues shares of common stock or securities convertible
      or exercisable into shares of common stock below the then applicable exercise
      price, the exercise price of the Kalina Warrant will be reduced accordingly.
      The
      exercise price of the Kalina Warrant also will be adjusted if the Company pays
      a
      stock dividend, or subdivides or combines outstanding shares of common stock
      into a greater or lesser number of shares. The Company will record debt discount
      in the amount of $161,000 as the estimated value of the Kalina Warrants. The
      debt discount will be amortized as non-cash interest expense over the term
      of
      the debt using the effective interest method.





On
      August
      15, 2006 the Company received a notice of default regarding the Morelli Note
      entered into on June 6, 2006. The notice of default specifically cited the
      Company’s failure to obtain the prior written consent of Mr. Morelli to the
      incurrence of indebtedness and failure to repay the obligations owing under
      the
      Morelli Note in an amount equal to the proceeds of the indebtedness (see Note
      6).




21




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





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





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





**Overview**





Until
      March 31, 2005, Patient Safety Technologies, Inc., a Delaware corporation
      (referred to herein as the ***“Company,”
      “we,” “us,”*** and ***“our”*** ),
      elected to be a Business Development Company ( ***“BDC”*** )
      under
      the Investment Company Act of 1940, as amended (the ***“1940
      Act”*** ).
      On
      March 30, 2005, stockholder approval was obtained to withdraw our election
      to be
      treated as a BDC and on March 31, 2005 we filed an election to withdraw our
      election with the Securities and Exchange Commission. At June 30, 2006, 20.4%
      of
      our assets on a consolidated basis with subsidiaries were comprised of
“investment securities” within the meaning of the 1940 Act. 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.
      Registration as an investment company would subject us to restrictions that
      are
      inconsistent with our fundamental business strategy of equity growth through
      creating, building and operating companies
      in the patient safety medical products industry. Registration under the 1940
      Act
      would also subject us to increased regulatory and compliance costs, and other
      restrictions on the way we operate and would change the method of accounting
      for
      our assets under GAAP.





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





SurgiCount
      Medical, Inc., developer of the Safety-Sponge TM System,
      Patient Safety Consulting Group, LLC, a healthcare consulting services company,
      Automotive Services Group, Inc. (formerly Ault Glazer Bodnar Merchant Capital,
      Inc.), a holding company for ASG, Ault Glazer Bodnar Capital Properties, LLC, a
      real estate development and management company, and ASG, a
      company formed to develop properties for the operation of automated car wash
      sites, are
      wholly-owned operating subsidiaries, which were either acquired or created
      to
      enhance our ability to focus our efforts in each targeted industry. Currently,
      we are evaluating ways in which to monetize our non-patient safety related
      assets (the “ ***non-core
      assets*** ”).
      However, the divesture of any assets will be dependent on a number of factors
      including: (1) lack of a liquid market to dispose of such assets; (2) potential
      adverse tax effects from a disposition; and/or (3) our Board of Directors and
      management may change their decision to dispose of certain of the assets.


22


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





**Critical
      accounting policies and estimates**





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





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





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





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





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





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


23


**Accounting
      Developments**





In
      December 2004, Statement of Financial Accounting Standards ( ***"SFAS"*** )
      No.
      123(R), " *Share-Based
      Payment* ,"
      which
      addresses the accounting for employee stock options, was issued. SFAS 123(R)
      revises the disclosure provisions of SFAS 123, " *Accounting
      for Stock Based Compensation* "
      and
      supercedes Accounting Principles Board ( ***"APB"*** )
      Opinion
      No. 25, " *Accounting
      for Stock Issued to Employees* ."
      SFAS
      123(R) requires that the cost of all employee stock options, as well as other
      equity-based compensation arrangements, be reflected in the financial statements
      based on the estimated fair value of the awards. We elected early adoption
      of
      SFAS No. 123(R) as of January 1, 2005.


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





**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      and marketable securities were $33,000 at June 30, 2006, versus $1,003,000
      at
      December 31, 2005. Total current liabilities were $6,300,000 at June 30, 2006,
      versus $4,000,000 at December 31, 2005. Included in current liabilities at
      June
      30, 2006 and December 31, 2005 is a note payable, and accrued interest on such
      note, payable to Winstar Communications, Inc. ( ***“Winstar”*** )
      in the
      amount of $941,000 and $939,000, respectively. As discussed in Note 6 in
      the notes to the accompanying condensed consolidated financial statements filed
      with this Form 10-Q, the due date on the note payable to Winstar was February
      28, 2002. However, as a result of the lawsuits filed against us by Jeffrey
      A.
      Leve and Jeffrey Leve Family Partnership, L.P. the due date of the note is
      extended until the lawsuit discussed in Note 11 is settled. The note payable
      has
      a right of offset against certain representations and warranties made by Winstar
      and we believe the amount of the offsets exceed the amount of the note payable.
      It is our contention that the initial lawsuit filed on October 15, 2001,
      impaired our ability to raise capital. This inability to raise capital
      ultimately resulted in the premature liquidation of our investment in Excelsior
      Radio Networks, Inc. ( ***“Excelsior”*** )
      at a
      price that was significantly less than what we would have realized had we been
      able to hold our investment until its subsequent sale to an unrelated third
      party. Winstar does not agree with this belief and on February 3, 2006 Winstar
      Global Media, Inc. ( ***“WGM”*** )
      filed a
      lawsuit claiming that we were in default under the terms of the note.
      Accordingly, the only offsets against the principal balance of the note
      reflected in the accompanying financial statements relate to legal fees
      attributed to our defense of the lawsuits filed against us. As of June 30,
      2006,
      we had incurred $215,000 in legal fees attributed to our defense of lawsuits
      filed by Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. and the
      representations and warranties made by Winstar Radio Networks, Inc. These fees
      have been offset against the note with the remaining principal balance of
      $785,000 reflected as a note payable on the accompanying balance
      sheet.





At
      June
      30, 2006 and December 31, 2005, we had $10,000 and $80,000, respectively, in
      cash. During 2005 our Board authorized us to invest our cash balances in the
      public equity and debt markets as appropriate to maximize the short-term return
      on such assets. Such investments are typically short-term and focus on what
      we
      believe to be mispriced domestic public equities and instruments.





In
      August
      2005, we entered into an agreement with the financial institution IXIS
      Derivatives Inc. to
      borrow against securities which we hold. The agreement, which extended for
      53
      weeks, was subject to a premium of up to 6% of the amount of the borrowings
      which is amortized on a straight line basis over the term of the agreement.
      At
      December 31, 2005, we terminated the August 2005 agreement with IXIS Derivatives
      Inc. To the extent the agreement was terminated early, we did not incur a
      premium for the amount of time that the agreement was terminated. The agreement
      also provided that in addition to the securities held by the financial
      institution, we pledge a total of 25% of the value of the securities in cash.
      The pledged cash was reduced daily by the amount of the earned premium and
      protected the financial institution from decreases in the market value of the
      securities. Any decrease in the market value of the pledged securities in excess
      of 5% over the securities notional value would require us to fund additional
      monies, such that 25% of the initial borrowing, as adjusted by the earned
      premium, was covered. If we failed to fund additional monies the financial
      institution had the right to liquidate the pledged securities. In the event
      the
      proceeds from liquidation were insufficient to cover the amount of the
      borrowings, the financial institution’s sole recourse was against the pledged
      cash. During January 2006, we renewed our August 2005 agreement with IXIS
      Derivatives Inc. to borrow against securities and during the six months ended
      June 30, 2006, we received proceeds from such borrowings of $645,000, of which
      $503,000 was repaid. Consequently we recorded a liability at June 30, 2006
      of
      $142,000 which is included in current liabilities under the heading “Due to
      broker.”


24


We
      had a
      working capital deficit of approximately $5.8 million at June 30, 2006 and
      we
      continue to have recurring losses. In the past we have relied upon private
      placements of equity and debt securities and we plan to rely on private
      placements to fund our capital requirements in the future. We have received
      shareholder approval to sell equity and/or debt securities of the Company up
      to
      $10 million in any calendar year to our former Chairman and current Chief
      Executive Officer, Milton “Todd” Ault, III, to the Company’s President and
      Secretary, Lynne Silverstein, to our former Chairman and former Chief
      Executive Officer and the Chief Health and Science Officer of our subsidiary
      Patient Safety Consulting Group, LLC, Louis Glazer, and to the former Manager
      of
      our closed subsidiary Ault Glazer Bodnar Capital Properties, LLC and Mr.
      Glazer’s spouse, Melanie Glazer. If we propose to sell more than $10 million of
      securities in a calendar year to such persons additional shareholder approval
      would be required. We do not currently anticipate selling equity or debt
      securities to these persons and, in the event we elected to pursue such an
      investment, we cannot guarantee that such persons would be willing to further
      invest in the Company. We have, however, received funding from Ault Glazer
      Bodnar Acquisition Fund, LLC ( ***"AGB
      Acquisition Fund*** ").
      Ault
      Glazer Bodnar & Company Investment Management, LLC ( ***“AGB
      & Company IM”*** )
      is the
      managing member of AGB Acquisition Fund. The managing member of AGB &
Company IM is Ault Glazer Bodnar & Company, Inc. ( ***“AGB
      & Company”*** ).
      The
      Company’s former Chairman and current Chief Executive Officer, Milton “Todd”
Ault, III, is Chairman, Chief Executive Officer and President of AGB &
Company.





On
      January 12, 2006, Steven J. Caspi ( ***“Caspi”*** )
      loaned
      $1,000,000 to ASG. As consideration for the loan, ASG issued Caspi a promissory
      note in the principal amount of $1,000,000 (the ***“Caspi
      Note”*** )
      and
      granted Caspi a mortgage on certain real estate owned by ASG and a security
      interest on all personal property and fixtures located on such real estate
      as
      security for the obligations under the Caspi Note. In addition, we entered
      into
      an agreement guaranteeing ASG’s obligations pursuant to the Caspi Note and Caspi
      received warrants to purchase 30,000 shares of our common stock at an exercise
      price of $4.50 per share. We recorded debt discount in the amount of $92,000
      as
      the estimated value of the warrants. The debt discount was amortized as non-cash
      interest expense over the initial term of the debt using the effective interest
      method. Through June 30, 2006, the entire amount of the debt discount was
      amortized as interest expense. The Caspi Note accrues interest at the rate
      of
      10% per annum, which together with principal, was due to be repaid on July
      13,
      2006. The Company is in the process of amending the Caspi Note to extend the
      due
      date. During the six months ended June 30, 2006, the Company had incurred and
      paid interest expense of $46,000 on the Caspi Note.





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





On
      February 8, 2006, AGB Acquisition Fund loaned $687,000 to ASG. As consideration
      for the loan, ASG issued AGB Acquisition Fund a secured promissory note in
      the
      principal amount of $687,000 (the “ASG Note”) and granted a real estate mortgage
      in favor of AGB Acquisition Fund relating to certain real property located
      in
      Jefferson County, Alabama (the “Property”). The Note bears interest at the rate
      of 10% per annum and is due on April 10, 2006, or within 30 days thereafter.
      AGB
      Acquisition Fund received warrants to purchase 20,608 shares of our common
      stock
      at an exercise price of $3.86 per share as additional consideration for entering
      into the loan agreement. We recorded debt discount in the amount of $44,000
      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. Through June 30, 2006, the entire amount of the debt discount was
      amortized as interest expense. As security for the performance of ASG’s
      obligations pursuant to the ASG Note, ASG granted AGB Acquisition Fund a
      security interest in all personal property and fixtures located at the ASG
      Property. During the six months ended June 30, 2006, we had incurred interest
      expense, excluding amortization of debt discount, of $27,000 on the ASG Note,
      all of which is accrued at June 30, 2006


25


In
      addition, as of June 30, 2006, AGB Acquisition Fund had loaned an aggregate
      of
      $1,495,000 to ASG pursuant to the terms of a Real Estate Note dated July 27,
      2005, as amended (the ***"Real
      Estate Note"*** ).
      The
      Real Estate Note bears interest at the rate of 3% above the Prime Rate as
      published in the Wall Street Journal (8.25% at June 30, 2006). All unpaid
      principal, interest and charges under the Real Estate Note are due in full
      on
      July 31, 2010. The Real Estate Note is collateralized by a mortgage on certain
      real estate owned by ASG pursuant to the terms of a Future Advance Mortgage
      Assignment of Rents and Leases and Security Agreement dated July 27, 2005
      between ASG and AGB Acquisition Fund. During the six months ended June 30,
      2006
      we had incurred interest expense of $74,000 on the Real Estate Note, all of
      which is accrued at June 30, 2006.





From
      March 7, 2006 through June 30, 2006 AGB Acquisition Fund loaned us a total
      of
      $285,000, of which $110,000 was repaid. The outstanding balance at June 30,
      2006
      is $175,000. . The loans were advanced to us pursuant to a Revolving Line of
      Credit Agreement (the ***“Revolving
      Line of Credit”*** )
      entered
      into with AGB Acquisition Fund on March 7, 2006. The Revolving Line of Credit
      allows us to request advances of up to $500,000 from AGB Acquisition Fund.
      The
      initial term of the Revolving Line of Credit is for a period of six months
      and
      may be extended for one or more additional six month periods upon mutual
      agreement of the parties. Each advance under the Revolving Line of Credit is
      evidenced by a secured promissory note and a security agreement. The secured
      promissory notes issued pursuant to the Revolving Line of Credit must be repaid
      with interest at the Prime Rate plus 1% within 60 days from issuance and are
      convertible into shares of our common stock at the option of AGB Acquisition
      Fund at a price of $3.10 per share. Our obligations pursuant to such secured
      promissory notes are secured by our assets, personal property and fixtures,
      inventory, products and proceeds therefrom. During the six months ended June
      30,
      2006, we had incurred interest expense of $2,000 on the ASG Note, of which
      $1,000 is accrued at June 30, 2006.





On
      June
      6, 2006 we entered into a Secured Convertible Note and Warrant Purchase
      Agreement (the ***“Purchase
      Agreement”*** )
      pursuant to which we sold a $1,100,000 principal amount Secured Convertible
      Promissory Note (the ***“Morelli
      Note”*** )
      and a
      warrant to purchase 401,460 shares of our common stock (the ***“Morelli
      Warrant”*** )
      to Alan
      E. Morelli. As security for our obligations under the Morelli Note, pursuant
      to
      a Pledge Agreement and an Account Control Agreement, we pledged the equity
      securities owned by us in Digicorp, IPEX, Inc., Automotive Services Group,
      Inc.,
      Alacra, Inc. and Surgicount Medical, Inc. As additional security for our
      obligations under the Morelli Note, pursuant to a Mortgage and a Deed of Trust,
      we pledged 8.5 acres of undeveloped land we own in Heber Springs, Arkansas
      and
      0.61 acres of undeveloped land we own in Springfield, Tennessee, respectively.
      In connection with the security interests granted to Mr. Morelli, Ault Glazer
      Bodnar Acquisition Fund, LLC and Herbert Langsam Revocable Trust entered into
      Subordination Agreements with Mr. Morelli and us agreeing to subordinate their
      existing security interests in our assets to the security interests granted
      Mr.
      Morelli. As further security, Milton “Todd” Ault, III and Louis Glazer, M.D.
      gave their personal guaranty of our obligations under the Note.





The
      Morelli Note accrues interest at the rate of 12% per annum through July 6,
      2006,
      after which the interest rate increases to 15% per annum from July 6, 2006
      through the date the loan is repaid. The principal amount of the Morelli Note
      and any accrued but unpaid interest is due to be paid on October 6, 2006, or
      the
      occurrence of an event of default. In the event of an occurrence and during
      the
      continuance of any event of default, interest shall accrue on the unpaid
      principal amount and any interest that has not been paid when due at a rate
      equal to 4% per annum above the rate otherwise provided. We are required to
      make
      a mandatory repayment of our obligations under the Morelli Note upon the sale
      of
      50% or more of the equity interest of the Company to any person or group or
      any
      sale of 50% or more of the assets of the Company in a single transaction or
      series of related transactions. Additionally, we are required to make a
      mandatory prepayment of its obligations under the Morelli Note in an amount
      equal to the proceeds of the sale of any of the pledged securities and
      undeveloped land or upon the incurrence of debt for borrowed money. We are
      required to obtain the prior written consent of Mr. Morelli to the incurrence
      of
      indebtedness. During June 2006, and subsequent to entering into the Morelli
      Note, we incurred additional indebtedness without the prior written consent
      of
      Mr. Morelli. Further, mandatory prepayments from the proceeds of indebtedness
      were not made; therefore, we are currently in an event of default. On August
      15,
      2006 we received a notice of default regarding the Morelli Note. The notice
      of
      default specifically cited our failure to obtain the prior written consent
      of
      Mr. Morelli to the incurrence of indebtedness and failure to repay the
      obligations owing under the Morelli Note in an amount equal to the proceeds
      of
      the indebtedness.


26


The
      Morelli Warrant has an exercise price of $3.04 per share and will expire after
      June 6, 2011. If we issues shares of our common stock or securities convertible
      or exercisable into shares of our common stock below the then applicable
      exercise price, the exercise price of the Morelli Warrant will be reduced
      accordingly. The exercise price of the Morelli Warrant also will be adjusted
      if
      we pay a stock dividend, subdivide or combine outstanding shares of our common
      stock into a greater or lesser number of shares, or takes such other actions
      as
      would otherwise result in dilution of Mr. Morelli’s position.





Of
      the
      $1,100,000 of gross proceeds $1,068,000 was used to repay outstanding principal
      and interest on a $1,000,000 principal amount promissory note that we entered
      into with Bodnar Capital Management, LLC on April 7, 2005.





On
      July
      12, 2006 we executed a Convertible Promissory Note in the principal amount
      of
      $250,000 (the ***“Kalina
      Note”*** )
      and a
      warrant for the Purchase of 85,000 Shares of the our common stock (the ***“Kalina
      Warrant”*** )
      in
      favor of Charles J. Kalina, III, an existing shareholder of the Company. The
      Kalina Note accrues interest at the rate of 12% per annum throughout the term
      of
      the loan. The principal amount of the Kalina Note and any accrued but unpaid
      interest is due to be paid upon the earlier of October 10, 2006, or the
      occurrence of an event of default. Principal and interest on the Kalina Note
      is
      convertible into our shares of common stock at a conversion price of $3.00.
      If
      we issues shares of common stock or securities convertible or exercisable into
      shares of common stock below the then applicable conversion price, the
      conversion price of the Kalina Note will be reduced accordingly. The conversion
      price of the Kalina Note also will be adjusted if we pay a stock dividend,
      or
      subdivide or combine outstanding shares of common stock into a greater or lesser
      number of shares.





The
      Kalina Warrant has an exercise price of $ 2.69 per share and will expire on
      July
      11, 2011. If we issue shares of our common stock or securities convertible
      or
      exercisable into shares of our common stock below the then applicable exercise
      price, the exercise price of the Kalina Warrant will be reduced accordingly.
      The
      exercise price of the Kalina Warrant also will be adjusted if we pay a stock
      dividend, or subdivide or combine outstanding shares of our common stock into
      a
      greater or lesser number of shares. We will record debt discount in the amount
      of $161,000 as the estimated value of the Kalina Warrants. The debt discount
      will be amortized as non-cash interest expense over the term of the debt using
      the effective interest method.





Management
      is currently seeking additional financing and believes that it will be
      successful. However, in the event management is not successful in obtaining
      additional financing, existing cash resources, together with proceeds from
      investments and anticipated revenues from operations, may not be adequate to
      fund our operations for the twelve months subsequent to December 31, 2005.
      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
      June 30, 2006, other than our office lease, we had no commitments not reflected
      in our condensed consolidated financial statements.





Cash
      decreased by $70,000 to $10,000 during the six months ended June 30, 2006,
      compared to a decrease of $755,000 during the six months ended June 30, 2005.




Operating
      activities used $979,000 of cash during the six months ended June 30, 2006,
      compared to using $1,454,000 during the six months ended June 30,
      2005.




Operating
      activities for the six months ended June 30, 2006, exclusive of changes in
      operating assets and liabilities, used $2,277,000 of cash, as the Company's
      net
      cash used in operating activities of $979,000 included non-cash charges for
      depreciation, amortization and interest of $1,237,000, realized losses of
      $50,000 and stock based compensation of $2,674,000. For the six months ended
      June 30, 2005, operating activities, exclusive of changes in operating assets
      and liabilities, used $1,116,000 of cash, as the Company's net cash used in
      operating activities of $1,454,000 included non-cash charges for depreciation
      and amortization of $113,000, realized gains of $104,000 and stock based
      compensation of $2,465,000.


27


Changes
      in operating assets and liabilities produced cash of $1,298,000 during the
      six
      months ended June 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 and amounts due to our broker. The amount
      due to our broker is directly attributable to purchases of marketable investment
      securities that were purchased on margin or to securities that were margined
      subsequent to their purchase. During the six months ended June 30, 2006 and
      year
      ended December 31, 2005, the Company invested its cash balances in the public
      equity and debt markets in an attempt to maximize the short-term return on
      such
      assets. The amount due to our broker varied throughout the year depending upon
      the aggregate amount of marketable investment securities held by us and the
      level of borrowing against our available-for-sale securities. The actual amount
      of marketable investment securities held was influenced by several factors,
      including but not limited to, our expectations of potential returns available
      from what we considered to be mispriced securities as well as the cash needs
      of
      our operating activities. During times when we were heavily invested in
      marketable investment securities our liquidity position was significantly
      reduced. To the extent we have a need for an excess cash balance to meet our
      financial obligations the amount of securities purchased on margin will either
      decrease or disappear altogether. However, if we are in a position where we
      have
      excess cash with no immediate need for liquidity, and we believe opportunities
      exist to maximize the short-term return on such assets then we may purchase
      marketable securities on margin **.** During
      the six months ended June 30, 2005, changes in operating assets and liabilities
      used cash of $338,000 primarily due to an increase in our receivables from
      investments and decreases in the amount due to our broker which were partially
      offset by net proceeds received from marketable securities and an increase
      in
      the level of accounts payable and accrued liabilities.




The
      principal factor in the $2,139,000 of cash used in investing activities during
      the six months ended June 30, 2006 was the purchase of land of $1,697,000,
      capitalized construction costs of $383,000 related to ASG, and capitalized
      costs
      of $148,000 related to the ongoing development of software related to our
      Safety-Sponge TM System
      offset by proceeds from the sale of long-term investments of $139,000. The
      principal factor in the $355,000 of cash used in investing activities during
      the
      six months ended June 30, 2005 was due to our investment in Surgicount of
      $432,000 combined with purchases of long-term investments of $163,000 offset
      by
      proceeds from the repayment of a loan included in long-term investments of
      $300,000.





Cash
      provided by financing activities during the six months ended June 30, 2006,
      of
      $3,048,000 resulted from the net proceeds from notes payable. Cash provided
      by
      financing activities for the six months ended June 30, 2005, of $1,053,000
      resulted primarily from the net proceeds from notes payable of $947,000 and
      the
      proceeds from the issuance of common stock and warrants of $100,000.
      Additionally, as discussed above, during the six months ended June 30, 2006
      and
      2005 the note payable to Winstar was offset by certain payments made allowed
      for
      in the note payable.





**Investments**





A
      summary
      of our investment portfolio, which at June 30, 2006 was valued at $3,388,000
      and
      represented 23.4% of our total assets, is reflected below. Excluding our real
      estate investments, our investment portfolio represents 20.1% of our total
      assets. The investment portfolio is comprised of marketable securities of
      $23,000 and long-term investments of $3,365,000. Our investments in marketable
      securities that are bought and held principally for the purpose of selling
      them
      in the near-term are classified as trading securities. Our remaining investments
      are classified as long-term investments.


28




**June
                  30,**
                **2006**Alacra
                  Corporation
              
              
              
              
              $
              1,000,000Digicorp
              
              
              
              
              
              1,671,392IPEX,
                  Inc.
              
              
              
              
              
              250,800Real
                  Estate
              
              
              
              
              
              465,564$
              3,387,756





*Alacra
      Corporation*





At
      June
      30, 2006, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued
      at $1,000,000, which represents 6.9% of our total assets. On April 20, 2000,
      we
      purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
      Alacra has recorded revenue growth in every year since the Company’s original
      investment, further, 2005 revenues of approximately $16.5 million, were in
      excess of the prior year’s revenues by approximately 45%. At December 31, 2005,
      Alacra had total assets of approximately $3.5 million with total liabilities
      of
      approximately $6.0 million. Deferred revenue, which represents subscription
      revenues are amortized over the term of the contract, which is generally one
      year, and represented approximately $2.9 million of the total liabilities.
      The
      Company has the right to have the preferred stock redeemed by Alacra for face
      value plus accrued dividends beginning on December 31, 2006. In connection
      with
      this investment, the Company was granted observer rights on Alacra board of
      directors meetings.





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





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


29


*Digicorp*





At
      June
      30, 2006, we had an investment in Digicorp valued at $1,671,000, which
      represents 11.6% of our total assets. On December 29, 2004, we entered into
      a
      Common Stock Purchase Agreement with certain shareholders of Digicorp (the ***"Digicorp
      Agreement"*** ),
      to
      purchase an aggregate of 3,453,527 shares of Digicorp common stock. We purchased
      2,229,527 of such shares on December 29, 2004 (2,128,740 shares at a price
      of
      $0.135 per share and 100,787 shares at a price of $0.145 per share). We were
      also required to purchase the remaining 1,224,000 shares from the selling
      shareholders at a price of $0.145 per share at such time that Digicorp registers
      the resale of the shares with the SEC. During December 2005 we amended the
      Digicorp Agreement and an unrelated third party assumed the obligation to
      purchase 1,000,000 of the remaining 1,224,000 shares from the selling
      shareholders. Additionally, we extended loans of $33,000 to the selling
      shareholders from our working capital. Such loans represented the amount of
      the
      remaining obligation to purchase 224,000 shares of Digicorp common stock and
      are
      secured by the 224,000 shares of Digicorp common stock presently held by such
      selling shareholders. Digicorp’s common stock is traded on the OTC Bulletin
      Board, which reported a closing price, at June 30, 2006, of $0.85. In connection
      with the Digicorp Agreement, we were entitled to designate two members to the
      Board of Directors of Digicorp. Our first designee, Melanie Glazer was appointed
      on December 29, 2004. Milton “Todd” Ault, III, our former Chairman and Chief
      Executive Officer, was appointed Chief Executive Officer of Digicorp on April
      26, 2005. On July 16, 2005, Alice M. Campbell, one of our directors, and Mr.
      Ault was appointed to the Board of Directors of Digicorp. On July 20, 2005,
      Lynne Silverstein, our President and Secretary, was appointed as a director
      of
      Digicorp, and William B. Horne, our Chief Financial Officer, was appointed
      as a
      director and as Chief Financial Officer of Digicorp. On September 30, 2005,
      Mr.
      Ault resigned from all positions with Digicorp and Mr. Horne was appointed
      as
      the interim Chief Executive Officer. On December 29, 2005, William B. Horne
      resigned as Chief Executive Officer and Lynne Silverstein and Melanie Glazer
      resigned as directors.





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





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





On
      December 29, 2005, Digicorp acquired all of the issued and outstanding capital
      stock of Rebel Crew Films, Inc., a California corporation ( ***“Rebel
      Crew Films”*** ),
      in
      consideration for the issuance of 21,207,080 shares of Digicorp common stock
      (the ***“Purchase
      Price”*** )
      to the
      shareholders of Rebel Crew Films. From the Purchase Price, 4,000,000 shares
      are
      held in escrow pending satisfaction of certain performance milestones. In
      addition, from the Purchase Price, 16,666,667 shares are subject to lock up
      agreements as follows: (a) 3,333,333 shares are subject to lockup agreements
      for
      one year; (b) 6,666,667 shares are subject to lockup agreements for two years;
      and (c) 6,666,667 shares, of which the 4,000,000 escrowed shares are a
      component, are subject to lockup agreements for three years.


30


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





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





*IPEX,
      Inc.*





At
      June
      30, 2006, we held 1,045,000 shares of common stock and warrants to purchase
      787,500 shares of common stock at $1.00 per share of IPEX, Inc. (“ ***IPEX”*** ),
      valued
      at $251,000, which represents 1.7% of our total assets. IPEX's common stock
      is
      traded on the OTC Bulletin Board, which reported a closing price, at June 30,
      2006, of $0.32. The warrants are exercisable for a period of five years and
      are
      callable by IPEX in certain instances. IPEX operates a Voice over Internet
      Protocol ( ***"VoIP"*** )
      routing
      platform that directs telecommunication traffic. VoIP permits a user to send
      voice, fax and other information over the Internet, rather than through a
      regular telephone network system based on switches Pursuant to two separate
      asset purchase agreements entered into during 2005, in consideration for
      $6,000,000 of IPEX common stock and $275,000 cash, IPEX purchased certain
      intellectual property assets that may be used to enhance, compact, store,
      encrypt, stream and display digital image content over wireless networks and
      over the Internet and for image enhancement, compacting and content protection
      applications. On March 21, 2006 IPEX reported that it is in the process of
      transferring ownership of such assets to its subsidiary RGB Channel, Inc. On
      June 23, 2005, Alice M. Campbell, who is one of our directors, was appointed
      to
      the Board of Directors of IPEX. Ms. Campbell subsequently resigned from IPEX’s
      Board effective February 2, 2006. In addition, from May 26, 2005 until July
      20,
      2005, Milton “Todd” Ault, III, our former Chairman and Chief Executive Officer,
      served as interim Chief Executive Officer of IPEX and Mr. Ault has been a
      director of IPEX since May 26, 2005.





The
      Company’s initial investment into IPEX occurred On March 2, 2005 in the amount
      of $450,000. This investment was part of the private placement that IPEX
      completed on March 18, 2005. The total amount of IPEX’s private placement was
      for 3,500,000 shares of common stock, 1,750,000 Series A Warrants and 1,750,000
      Series B Warrants for aggregate proceeds of $3,500,000, less issuance costs
      of
      $260,000, resulting in net realized proceeds of $3,240,000. The common stock,
      Series A and Series B Warrants were sold as Units, with each Unit consisting
      of
      two shares of common stock, one series A Warrant and one Series B Warrant.
      Each
      Series A Warrant entitles the holder to purchase one share of common stock
      at
      $1.50 per share, exercisable for a period of five years. Each Series B Warrant
      entitles the holder to purchase one share of common stock at $2.00 per share,
      exercisable for a period of five years. Subsequent to the effectiveness of
      a
      registration statement covering the re-sale of shares underlying the warrants,
      the Series A and Series B Warrants are callable by IPEX, under certain
      circumstances, if IPEX's common stock trades at or above $2.00 and $2.50,
      respectively, for ten consecutive trading days. In such event IPEX must give
      us
      30 days prior written notice of its intention to call the warrants after which
      it has the right to repurchase the warrants at a purchase price of $0.01 per
      share of common stock then purchasable pursuant to the warrants. During such
      30
      day notice period we would have the right to exercise the warrants. As of June
      30, 2006 IPEX has not filed a registration statement covering the re-sale of
      the
      shares underlying the warrants and accordingly IPEX does not have a right to
      call them. However, in the event the warrants are called by IPEX, the warrants
      would be likely be in-the-money and we would likely exercise the warrants.
      To
      the extent we did not have a sufficient amount of cash available to exercise
      the
      warrants we would most likely liquidate a portion of our existing shares in
      IPEX
      common stock to satisfy the exercise amount. On March 21, 2006 IPEX sold
      $800,000 principal amount of 10% secured convertible notes to four accredited
      investors in a private placement transaction. The 10% secured convertible notes
      are convertible into either IPEX common stock at a price of $1.00 per share
      or
      into common stock of IPEX’s subsidiary RGB Channel, Inc. at a conversion price
      equal to the lesser of (a) $0.50, or (b) the price at which, at any time while
      the 10% secured convertible notes are outstanding, RGB Channel, Inc. sells
      shares of its common stock or any other securities convertible into or
      exchangeable for RGB Channel, Inc. common stock. The sale by IPEX of the 10%
      secured convertible notes caused an adjustment to the exercise price of the
      Series A Warrants and the Series B Warrants to equal $1.00 per share and an
      increase in the number of shares of common stock purchasable under such Series
      A
      and B Warrants. Pursuant to such warrants that we own, we are now entitled
      to
      purchase a total of 787,500 shares of IPEX common stock at an exercise price
      of
      $1.00 per share.


31


As
      reflected in IPEX’s quarterly report on Form 10-QSB for the three months ended
      March 31, 2006, trading revenues rose to $3,308,000 as compared to sales of
      $1,802,000 from the prior three month period ended March 31, 2005. Trading
      revenues represent fees generated from minutes purchased through IPEX’s VoIP
      exchange platform. Revenues from VoIP activities are recognized in the period
      minutes are delivered through the telecom exchange platform. In the past, due
      to
      prior working capital constraints, IPEX could only maintain selling to customers
      on a weekly net 5 basis ( ***“Tier
      3 carriers”*** ).
      The
      additional working capital provided by IPEX’s March 2005 private placement
      allowed IPEX to extend credit to five customers on net 15 terms ( ***“Tier
      2 carriers”*** )
      and two
      carriers on net 30 terms ( ***“Tier
      1 carriers”*** )
      thereby
      increasing the number of overall customers. The 84% increase in sales at IPEX
      is
      almost entirely attributable to the extension of credit that was made possible
      by the increase in IPEX’s working capital. The addition of a few new Tier 3
      carriers added marginally to the increase in sales.





IPEX’s
      cost of sales as a percentage of sales for the quarter ended March 31, 2006
      remained relatively constant at 96% compared to 96% for the quarter ended March
      31, 2005. Net loss for the three months ended March 31, 2006 and 2005 was
      $338,000 and $150,000, respectively. The increase in IPEX’s net loss for the
      three months ended March 31, 2006 is primarily due to increased salaries and
      wages related to management personnel .





*Real
      Estate Investments*





At
      June
      30, 2006, we had several real estate investments, valued at $465,000, which
      represents 3.2% of our total assets. In the past we held our real estate
      investments in Ault Glazer Bodnar Capital Properties, LLC ***(“AGB
      Properties”)*** ,
      which
      was a Delaware limited liability company and a wholly owned subsidiary. AGB
      Properties was closed in June 2006 and we are in the process of liquidating
      our
      real estate holdings. Our real estate holdings consist of approximately 8.5
      acres of undeveloped land in Heber Springs, Arkansas, 0.61 acres of undeveloped
      land in Springfield, Tennessee, and various loans secured by real estate in
      Heber Springs, Arkansas. We expect that any future gain or loss recognized
      on
      the liquidation of some or all of our real estate holdings would be
      insignificant primarily due to the short period of time that the properties
      were
      owned combined with the absence of any significant changes in property values
      in
      the real estate markets where the real estate holdings are located.





**Results
      of Operations**





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





·
            "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, and our proportionate share of income or losses from investments
                accounted for under the equity method of
                accounting;




32


·
            “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.





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





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





**Revenues**





We
      recognized revenues of $160,000 and $587,000 during the three months and
      $235,000 and $587,000 during the six months ended June 30, 2006 and 2005,
      respectively. Although none of the revenues that we recognized during related
      to
      sales of our Safety-Sponge TM System
      we
      began recognizing revenues from the Safety-Sponge TM System
      during the three month period ending September 30, 2006. As expected, these
      initial revenues will not have a significant impact on our results of
      operations, however, we expect revenues will increase during the three month
      period ending December 31, 2006 and the revenues from our
      Safety-Sponge TM System
      may start to become a continual source of funds to cover a portion of our
      operating costs.




Of
      the
      revenue earned during the three and six months ended June 30, 2006, $49,000
      and
      $104,000, respectively, was the result of a consulting agreement, consented
      to
      by IPEX, whereby Wolfgang Grabher, the majority shareholder of IPEX, former
      President, former Chief Executive Officer and former director of IPEX, retained
      us to serve as a business consultant to IPEX. In consideration for the services,
      during December 2005, Mr. Grabher personally transferred us 500,000 shares
      of
      common stock of IPEX as a non-refundable consulting fee. Mr. Grabher owned
      18,855,900 shares of IPEX's 28,195,566 outstanding shares of common stock.
      On
      December 14, 2005 Mr. Grabher agreed to surrender 14,855,900 of the shares
      of
      IPEX common stock owned by him to IPEX to be retired and returned to treasury.
      Such shares represented 49.4% of IPEX’s outstanding shares of common stock at
      the time. At June 30, 2006, we held 7.8% of IPEX’s outstanding shares of common
      stock. On June 30, 2005, we agreed with IPEX as to the scope of the consulting
      services and the consideration for such services and at June 30, 2006, we had
      performed all of the services stipulated under the terms of the consulting
      agreement. During
      the three months ended June 30, 2005 we recognized $577,000 of revenue as a
      result of our consulting agreement with Wolfgang Grabher.





The
      remaining revenue generated during the three and six months ended June 30,
      2006,
      of $111,000 and $131,000, respectively, was generated from car wash services
      by
      our wholly-owned operating subsidiary, ASG.  ASG
      was
      formed to develop and operate automated car wash sites under the trade name
      “Bubba’s Express Wash” . ASG’s
      first site, developed in Birmingham, Alabama, had its grand opening on March
      8,
      2006 .





**Expenses**





Operating
      expenses were $2,048,000 and $2,155,000 for the three months and $5,536,000
      and
      $4,249,000 for the six months ended June 30, 2006 and 2005, respectively.





The
      increase in operating expenses for the six months ended June 30, 2006 when
      compared to June 30, 2005, was primarily the result of salaries and employee
      benefits, which increased by $944,000. Our Compensation Committee, which is
      comprised of three independent directors for purposes of AMEX rules, determines
      and recommends to our Board the cash and stock based compensation to be paid
      to
      our executive officers and also reviews the amount of salary and bonus for
      each
      of our other officers and employees. The most significant component of employee
      compensation is stock based compensation expense. For the six months ended
      June
      30, 2006, we recorded $1,033,000 relating to grants of nonqualified stock
      options and $1,092,000 related to restricted stock awards to our employees
      and
      non-employee directors. During the six months ended June 30, 2005, we recorded
      $891,000 relating to grants of nonqualified stock options and $876,000 related
      to restricted stock awards to our employees and non-employee directors. Thus,
      the increase in expenses related to the issuance of stock options and restricted
      stock awards to our employees and non-employee directors amounted to $358,000.
      The remaining increase in employee compensation of $586,000 is attributed to
      a
      combination of factors. During the three months ended March 31, 2005 no salary
      expense was incurred of four highly compensated employees and a non-recurring
      severance package paid of $180,000 was paid to Milton “Todd” Ault III, our
      former Chairman and Chief Executive Officer during January 2006. Taking into
      consideration the $180,000 paid to Mr. Ault as part of his severance package,
      salary expense of these four highly compensated employees, of which Mr. Ault
      is
      one of, salary expense increased by $238,000 during the six months ended June
      30, 2006. In July 2006, subsequent to the payment of Mr. Ault’s severance
      package, Mr. Ault was re-appointed as our Chief Executive Officer. In
      consideration of Mr. Ault’s re-appointment as Chief Executive Officer, Mr. Ault
      has agreed to cash compensation of $1 per year. Another significant factor
      that
      significantly increased employee compensation during the six months ended June
      30, 2006 was the additional salaries of four key executives covered by
      employment agreements.


33


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





The
      second largest component of our operating expenses is professional fees, which
      decreased by $327,000 during the six months ended June 30, 2006 compared to
      the
      amount reported during the six months ended June 30, 2005. This decrease is
      primarily comprised of decreases in stock based compensation to outside
      consultants of $149,000 and decreases in legal fees of $249,000 offset by an
      overall increase paid to consultants used to generate awareness and train health
      care professionals in the use of our Safety-Sponge TM System.
      As in the case of employee compensation, stock based compensation expense is
      the
      most significant component of professional fees. During the six months ended
      June 30, 2006 and 2005, professional fees included stock based compensation
      related to the issuances of restricted stock and warrants of $549,000 and
      $698,000, respectively. Of these amounts, warrant issuances accounted for
      $436,000 and $625,000, respectively. A significant amount of the warrants issued
      during the six months ended June 30, 2006, relate to a consulting agreement
      that
      we entered into in February 2006 with Analog Ventures, LLC ( ***“Analog
      Ventures”*** )
      whereby
      Analog Ventures agreed to consult with us on matters relating primarily to
      the
      divestiture of our non-core assets and assist us in our efforts to focus our
      business exclusively on the patient safety medical products field. As an
      incentive for entering into the agreement, we agreed to issue Analog Ventures
      a
      warrant to purchase 175,000 shares of our common stock at an exercise price
      of
      $3.95, exercisable for 3 years. We recognized an expense of $405,000 related
      to
      these warrants. During the six months ended June 30, 2005 the primary amount
      of
      the warrants issued related to a consulting agreement with Health West Marketing
      Incorporated ( ***“Health
      West”*** )
      that we
      entered into in April 2005. As an incentive for entering into the agreement,
      we
      agreed to issue Health West a callable warrant to purchase 150,000 shares of
      our
      common stock at an exercise price of $5.95, exercisable for 5 years. We
      recognized an expense of $527,958 related to these warrants.


34


The
      decrease in legal fees is primarily attributable to either the absence of or
      significant reduction in the level of work during the six months ended June
      30,
      2006 on our proxy statements, registration statements and annual report. These
      reports required significantly more time to prepare during the six months ended
      June 30, 2005 due to our change from a business development company to an
      operating company.





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





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





General
      and administrative expenses experienced an increase of $162,000 during the
      current six month reporting period over the prior year. Travel related expenses
      are a large component of general and administrative expenses and represented
      an
      increase of $80,000. This increase was attributed to expenses incurred in
      marketing our Safety-Sponge TM System
      to
      hospitals throughout the United States, attendance at trade shows and
      conventions to promote the Company’s Safety-Sponge TM System,
      and travel abroad to inspect the manufacturing facilities for our
      Safety-Sponge TM System.
      The remaining increase in general and administrative expenses is a combination
      of a several types of expenses, none of which are significant individually.





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





We
      had
      interest income of $11,000 and $40,000 for the six months ended June 30, 2006
      and 2005, respectively.





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





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





During
      the six months ended June 30, 2006, we realized net losses of $50,000 primarily
      from losses generated from the sale of 108,200 shares of Tuxis Corporation
      offset by gains from the sale of 128,569 shares of Digicorp.





During
      the six months ended June 30, 2005, we realized net gains of $104,000 from
      the
      sale of our marketable securities.





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


35


**Interest
      expense**





We
      had
      interest expense of $1,245,000 and $62,000 for the six months ended June 30,
      2006 and 2005, respectively.





The
      increase in interest expense for the six months ended June 30, 2006 when
      compared to June 30, 2005 is primarily attributable to the non-cash interest
      charges incurred as a result of the debt discount associated with our short-term
      debt financings. On June 6, 2006 we, entered into a Secured Convertible Note
      and
      Warrant Purchase Agreement (the ***“Purchase
      Agreement”*** )
      pursuant to which we sold a $1,100,000 principal amount Secured Convertible
      Promissory Note (the ***“Morelli
      Note”*** )
      and a
      warrant to purchase 401,460 shares of our common stock (the ***“Morelli
      Warrant”*** )
      to Alan
      E. Morelli. As
      the
      effective conversion price of the Morelli Note on the date of issuance was
      below
      the fair market value of the underlying common stock, we recorded debt discount
      in the amount of $85,000 based on the intrinsic value of the beneficial
      conversion feature of the Morelli Note. Additionally, we recorded debt discount
      in the amount of $827,000 as the estimated value of the Morelli Warrant. Through
      June 30, 2006, interest expense of $912,000 has been recorded from the Purchase
      Agreement. Additionally, we incurred debt discount related to other short-term
      debt financings during the six months ended June 30, 2006 of $136,000. The
      remaining increase in interest expense is attributable to the overall increase
      in borrowings that occurred during the six months ended June 30, 2006 of
      $3,048,000.





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





Unrealized
      appreciation of investments increased by $45,000 during the six months ended
      June 30, 2006, primarily due to the sale of 108,200 shares of Tuxis Corporation
      common stock, which at December 31, 2005 had unrealized depreciation of
      $134,000. When we exit an investment and realize a loss, we make an accounting
      entry to reverse any unrealized depreciation we had previously recorded to
      reflect the depreciated value of the investment. The increase in unrealized
      appreciation related to the sale of our shares of Tuxis common stock was
      partially offset by a decrease in the value of the 95,000 shares of IPEX common
      stock held as trading securities. IPEX common stock is traded on the OTC
      Bulletin Board, which reported a closing price, at December 31, 2005 of $2.38
      per share compared with $0.32 per share at June 30, 2006. We valued our holdings
      in IPEX at a discount to the closing prices, or $1.19 and $0.24 per share at
      December 31, 2005 and June 30, 2006, respectively, due primarily to the limited
      average number of shares traded on the OTC Bulletin Board.





Unrealized
      appreciation of investments increased by $43,000 during the six months ended
      June 30, 2005, primarily due to the price appreciation of our marketable
      securities





**Accumulated
      other comprehensive income**





Unrealized
      gains (losses) on our investments designated as available-for-sale are recorded
      in accumulated other comprehensive income. At June 30, 2006, we classified
      all
      of our restricted holdings in IPEX and Digicorp as available-for-sale. At June
      30, 2006, the unrealized gains (losses) on our restricted holdings in IPEX
      and
      Digicorp amounted to ($1,230,000) and $1,373,000, respectively, 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 $2,232,000.





**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. We expect that some of our venture capital investments will be
      a
      complete loss or will be unprofitable and that some will appear to be likely
      to
      become successful but never realize their potential.


36


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





**Item
      4. Controls and Procedures.**





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





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





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





**Item
      1A. Risk Factors.**





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





**RISKS
      RELATING TO OUR BUSINESS AND STRUCTURE**





**We
      have not made any sales or generated any revenue to date from our Safety-SpongeTM
System and a substantial amount of our revenue during the six months ended
      June
      30, 2006 is from a related party. Because of this, you should not rely on our
      historical results of operations as an indication of our future performance.**





We
      have
      not made any significant amount of sales or generated any
      significant amount of revenue to date from our Safety-SpongeTM System.
      Further, of our $235,000 of revenue during the six months ended June 30, 2006,
      $104,000 was generated from a contract to provide management consulting services
      to one of our portfolio companies IPEX, Inc., which is considered a related
      party. Our future success is dependent on our ability to develop our
      patient-safety related assets into a successful business, which depends upon
      wide-spread acceptance of and commercializing our Safety-SpongeTM System. None of
      these factors is demonstrated by our historic performance to date and there
      is
      no assurance we will be able to accomplish them in order to sustain our
      operations. As a result, you should not rely on our historical results of
      operations as an indication of the future performance of our
      business.


37


**We
      recently restructured our business strategy and objective and have limited
      operating history under our new structure. If we cannot successfully implement
      our new business structure the value of your investment in our business could
      decline.**





Upon
      the
      change of control that occurred in October 2004, we restructured our business
      strategy and objective to focus on the medical products, healthcare solutions,
      financial services and real estate industries instead of the radio and
      telecommunications industries. Although we still own certain real estate assets,
      we are no longer focusing on the financial services and real estate industries.
      As of March 29, 2006, our Board of Directors determined to focus our business
      exclusively on the patient safety medical products field. We have a limited
      operating history under this new structure. Historically, we have not typically
      invested in these industries and therefore our historical results of operations
      should not be relied upon as an indication of our future financial performance.
      If we do not successfully implement our new business structure the value of
      your
      investment in our business could decline substantially.





**Withdrawal
      of our election to be treated as a BDC may increase the risks to our
      shareholders since we are no longer subject the regulatory restrictions or
      financial reporting benefits of the 1940 Act.**





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





The
      nature of our business has changed from investing in radio and
      telecommunications companies with the goal of achieving gains on appreciation
      and dividend income, to actively operating businesses in the medical products
      and health care solutions industries, with the goal of generating income from
      the operations of those businesses. No assurance can be given that our business
      strategy or investment objectives will be achieved by withdrawing our election
      to be treated as a BDC.





Further,
      our election to withdraw as a BDC under the 1940 Act has resulted in a
      significant change in our method of accounting. BDC financial statement
      presentation and accounting utilizes the value method of accounting used by
      investment companies, which allows BDCs to recognize income and value their
      investments at market value as opposed to historical cost. As an operating
      company, the required financial statement presentation and accounting for
      securities held is either fair value or historical cost methods of accounting,
      depending on the classification of the investment and our intent with respect
      to
      the period of time we intend to hold the investment.





A
      change
      in our method of accounting could reduce the market value of our investments
      in
      privately held companies by eliminating our ability to report an increase in
      the
      value of our holdings as they occur. Also, as an operating company, we have
      to
      consolidate our financial statements with subsidiaries, thus eliminating the
      portfolio company reporting benefits available to BDCs.





**Together
      with our subsidiaries, we may have to take actions that are disruptive to our
      business strategy to avoid registration under the 1940
      Act.**





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


38


**We
      intend to undertake additional financings to meet our growth, operating and/or
      capital needs, which may result in dilution to your ownership and voting
      rights.**





We
      anticipate that revenue from our operations for the foreseeable future will
      not
      be sufficient to meet our growth, operating and/or capital requirements. We
      believe that in order to have the financial resources to meet our operating
      requirements for the next twelve months we will need to undertake additional
      equity or debt financings to allow us to meet our future growth, operating
      and/or capital requirements. We currently have no commitments for any such
      financings. Any equity financing may be dilutive to our stockholders, and debt
      financing, if available, may involve restrictive covenants or other adverse
      terms with respect to raising future capital and other financial and operational
      matters. We
      may
      not be able to obtain additional financing in sufficient amounts or on
      acceptable terms when needed, which could adversely affect our operating results
      and prospects. If we fail to arrange for sufficient capital in the future,
      we
      may be required to reduce the scope of our business activities until we can
      obtain adequate financing.





**We
      have received shareholder approval to sell up to $10 million of equity and/or
      debt securities to certain related parties** **which may result in dilution to your ownership and voting rights or may result
      in the incurrence of substantial debt.** ****





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





**Should
      the value of our patents be less than their purchase price, we could incur
      significant impairment charges.**





At
      June
      30, 2006, patents received in the acquisition of Surgicount Medical, Inc.,
      net
      of accumulated amortization, represented $4,251,000, or 29.5%, of our total
      assets. We
      perform an annual review in the fourth quarter of each year, or more frequently
      if indicators of potential impairment exist to determine if the recorded amount
      of our patents is impaired. This determination requires significant judgment
      and
      changes in our estimates
      and assumptions could materially affect the determination of fair value and/or
      impairment of patents. We may incur charges for the impairment of our patents
      in
      the future if sales of our patient safety products, in particular our
      Safety-SpongeTM System, fail to achieve our assumed revenue growth rates or
      assumed operating margin results.


39


**We
      may not be able to effectively integrate our acquisition targets, which would
      be
      detrimental to our business.**





On
      February 25, 2005, we purchased Surgicount Medical, Inc., a holding company
      for
      intellectual property rights relating to our Safety-SpongeTM System. We
      anticipate seeking other acquisitions in furtherance of our plan to acquire
      assets and businesses in the patient safety medical products industry.
      Acquisitions involve numerous risks, including potential difficulty in
      integrating operations, technologies, systems, and products and services of
      acquired companies, diversion of management’s attention and disruption of
      operations, increased expenses and working capital requirements and the
      potential loss of key employees and customers of acquired companies. In
      addition, acquisitions involve financial risks, such as the potential
      liabilities of the acquired businesses, the dilutive effect of the issuance
      of
      additional equity securities, the incurrence of additional debt, the financial
      impact of transaction expenses and the amortization of goodwill and other
      intangible assets involved in any transactions that are accounted for by using
      the purchase method of accounting, and possible adverse tax and accounting
      effects. Any of the foregoing could materially and adversely affect our
      business.





**Failure
      to properly manage our potential growth would be detrimental to our
      business.**





Any
      growth in our operations will place a significant strain on our resources and
      increase demands on our management and on our operational and administrative
      systems, controls and other resources. There can be no assurance that our
      existing personnel, systems, procedures or controls will be adequate to support
      our operations in the future or that we will be able to successfully implement
      appropriate measures consistent with our growth strategy. As part of this
      growth, we may have to implement new operational and financial systems,
      procedures and controls to expand, train and manage our employee base and
      maintain close coordination among our technical, accounting, finance, marketing,
      sales and editorial staffs. We cannot guarantee that we will be able to do
      so,
      or that if we are able to do so, we will be able to effectively integrate them
      into our existing staff and systems. We may fail to adequately manage our
      anticipated future growth. We will also need to continue to attract, retain
      and
      integrate personnel in all aspects of our operations. Failure to manage our
      growth effectively could hurt our business.





**If
      the protection of our intellectual property rights is inadequate, our ability
      to
      compete successfully could be impaired.**





In
      connection with our purchase of Surgicount Medical, Inc., we acquired one
      registered U.S. patent and one registered international patent of the Safety-SpongeTM
      System. We regard our patents, copyrights, trademarks, trade secrets and similar
      intellectual property as critical to our business. We rely on a combination
      of
      patent, trademark and copyright law and trade secret protection to protect
      our
      proprietary rights. Nevertheless, the steps we take to protect our proprietary
      rights may be inadequate. Detection and elimination of unauthorized use of
      our
      products is difficult. We may not have the means, financial or otherwise, to
      prosecute infringing uses of our intellectual property by third parties.
      Further, effective patent, trademark, service mark, copyright and trade secret
      protection may not be available in every country in which we will sell our
      products and offer our services. If we are unable to protect or preserve the
      value of our patents, trademarks, copyrights, trade secrets or other proprietary
      rights for any reason, our business, operating results and financial condition
      could be harmed.





Litigation
      may be necessary in the future to enforce our intellectual property rights,
      to
      protect our trade secrets, to determine the validity and scope of the
      proprietary rights of others, or to defend against claims that our products
      infringe upon the proprietary rights of others or that proprietary rights that
      we claim are invalid. Litigation could result in substantial costs and diversion
      of resources and could harm our business, operating results and financial
      condition regardless of the outcome of the litigation.


40





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





**There
      are significant potential conflicts of interest with our officers, directors
      and
      our affiliated entities which could adversely affect our results from
      operations.**





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





Certain
      conflicts of interest may also arise from time to time with our officers,
      directors and the companies in which we invest. Of our $235,000 of revenue
      during the six months ended June 30, 2006, $104,000 was generated from a
      contract to provide management consulting services to our portfolio company
      IPEX, Inc. Mr. Ault is currently a director of IPEX, Inc. and he served as
      interim Chief Executive Officer of IPEX, Inc. from May 26, 2005 until July
      13,
      2005. From May 28, 2005 until approximately December 14, 2005 Mr. Ault held
      an
      irrevocable proxy to vote 67% of the outstanding shares of IPEX, Inc. owned
      by
      the former Chief Executive Officer and a founder of IPEX, Inc. Darrell W.
      Grimsley, Jr., Chief Executive Officer of Automotive Services Group, LLC, a
      subsidiary which is wholly owned by Automotive Services Group, Inc., served
      as a
      director of IPEX, Inc. and a member of its Audit Committee from August 30,
      2005
      until January 30, 2006. Ms. Campbell served as a director of IPEX, Inc. and
      Chairman of its Audit Committee from June 23, 2005 until January 30, 2006.
      Mr.
      Horne is currently Chief Financial Officer and a director of our portfolio
      company Digicorp. From September 30, 2005 until December 29, 2005, Mr. Horne
      also served as Digicorp’s Chief Executive Officer and Chairman of Digicorp’s
      Board of Directors. One of our directors and Audit Committee Chairman, Alice
      Campbell, is currently a director of Digicorp. Mr. Ault served as Chief
      Executive Officer of Digicorp from April 26, 2005 until September 30, 2005
      and
      Chairman of Digicorp’s Board of Directors from July 16, 2005 until September 30,
      2005. Ms. Silverstein served as Secretary of Digicorp from April 26, 2005 until
      December 29, 2005. Mr. Grimsley served as a director of Digicorp from July
      16,
      2005 until December 29, 2005.





Because
      of these possible conflicts of interest, such individuals may direct potential
      business and investment opportunities to other entities rather than to us,
      which
      may not be in the best interest of our stockholders. We will attempt to resolve
      any such conflicts of interest in our favor. Our Board of Directors does not
      believe that we have experienced any losses due to any conflicts of interest
      with the business of Ault Glazer Bodnar & Company Investment Management LLC,
      other than certain of our officers’ responsibility to devote their time to
      provide management and administrative services to Ault Glazer Bodnar &
Company Investment Management LLC. and its clients from time-to-time. Similarly,
      our Board of Directors does not believe that we have experienced any losses
      due
      to any conflicts of interest with the companies in which we hold investments
      other than certain of our officers’ and directors’ responsibility to devote
      their time to provide management services to some of such companies. However,
      subject to applicable law, we may engage in transactions with Ault Glazer Bodnar
      & Company Investment Management LLC. and other related parties in the
      future. These related party transactions may raise conflicts of interest and,
      although we do not have a formal policy to address such conflicts of interest,
      our Audit Committee intends to evaluate relationships and transactions involving
      conflicts of interest on a case-by-case basis and the approval of our Audit
      Committee is required for all such transactions. The Audit Committee intends
      that any related party transactions will be on terms and conditions no less
      favorable to us than terms and conditions reasonably obtainable from third
      parties and in accordance with applicable law.




41




**Our
      management has limited experience in managing and operating a public company.
      Any failure to comply or adequately comply with federal securities laws, rules
      or regulations could subject us to fines or regulatory actions, which may
      materially adversely affect our business, results of operations and financial
      condition.**





Although
      our present Chairman, Louis Glazer, M.D., Ph.G., has extensive experience in
      the
      medical field, he has limited experience managing and operating a public
      company. In addition, prior to the change in control that occurred in October
      2004, other members of our current senior management were primarily engaged
      in
      operating a private investment management firm. In this capacity they developed
      a general understanding of the administrative and regulatory environment in
      which public companies operate. However, our senior management lacks practical
      experience operating a public company and relies in many instances on the
      professional experience and advice of third parties including its consultants,
      attorneys and accountants. Failure to comply or adequately comply with any
      laws,
      rules, or regulations applicable to our business may result in fines or
      regulatory actions, which may materially adversely affect our business, results
      of operation, or financial condition.





**We
      have experienced turnover in our Chief Executive Officer position in recent
      months and we are presently searching for a new Chief Executive Officer to
      replace Milton “Todd” Ault III. If we are not able to retain a new Chief
      Executive Officer with significant professional experience in the patient safety
      or medical markets and pubic market experience, we may have difficulty
      implementing our business strategy.**





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





**Our
      former Chief Executive Officer controls a significant portion of our outstanding
      common stock and his ownership interest may conflict with our other stockholders
      who may be unable to influence management and exercise control over our
      business.**





As
      of May
      1, 2006, Milton “Todd” Ault, III, our former Chief Executive Officer and
      Chairman, beneficially owned approximately 26.8% of our common stock. As a
      result, Mr. Ault may be able to exert significant influence over our management
      and policies to:





·
            elect
                or defeat the election of our directors;


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


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


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





42




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





**RISKS
      RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED
      BUSINESS**





**We
      rely on a third party manufacturer and supplier to manufacture our
      Safety-SpongeTM System, the loss of which may interrupt our
      operations.**





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





**The
      unpredictable product cycles of the medical device and healthcare-related
      industries and uncertain demand for products could cause our revenues to
      fluctuate.**





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





**We
      are subject to changes in the regulatory and economic environment in the
      healthcare industry, which could adversely affect our
      business.**





The
      healthcare industry in the United States continues to experience change. In
      recent years, the United States Congress and state legislatures have introduced
      and debated various healthcare reform proposals. Federal, state and local
      government representatives will, in all likelihood, continue to review and
      assess alternative healthcare delivery systems and payment methodologies, and
      ongoing public debate of these issues is expected. Cost containment initiatives,
      market pressures and proposed changes in applicable laws and regulations may
      have a dramatic effect on pricing or potential demand for medical devices,
      the
      relative costs associated with doing business and the amount of reimbursement
      by
      both government and third-party payors to persons providing medical services.
      In
      particular, the healthcare industry is experiencing market-driven reforms from
      forces within the industry that are exerting pressure on healthcare companies
      to
      reduce healthcare costs. Managed care and other healthcare provider
      organizations have grown substantially in terms of the percentage of the
      population in the United States that receives medical benefits through such
      organizations and in terms of the influence and control that they are able
      to
      exert over an increasingly large portion of the healthcare industry. Managed
      care organizations are continuing to consolidate and grow, increasing the
      ability of these organizations to influence the practices and pricing involved
      in the purchase of medical devices, including our products, which is expected
      to
      exert downward pressure on product margins. Both short-and long-term cost
      containment pressures, as well as the possibility of continued regulatory
      reform, may have an adverse impact on our business, financial condition and
      operating results.




43




**We
      are subject to government regulation in the United States and abroad, which
      can
      be time consuming and costly to our business.**





Our
      products and operations are subject to extensive regulation by numerous
      governmental authorities, including, but not limited to, the FDA and state
      and
      foreign governmental authorities. In particular, we must obtain specific
      clearance or approval from the FDA before we can market new products or certain
      modified products in the United States. The FDA administers the Food, Drug
      and
      Cosmetics Act (the ***“FDC
      Act”*** ).
      Under
      the FDC Act, most medical devices must receive FDA clearance through the
      Section 510(k) notification process ( ***“510(k)”*** )
      or the
      more lengthy premarket approval ( ***“PMA”*** )
      process
      before they can be sold in the United States. All of our products, currently
      consisting only of the Safety-SpongeTM System, must receive 510(k) clearance or
      PMA approval. The Safety-SpongeTM System has already received 501(k) exempt
      status from the FDA. To obtain 510(k) marketing clearance, a company must show
      that a new product is “substantially equivalent” in terms of safety and
      effectiveness to a product already legally marketed and which does not require
      a
      PMA. Therefore, it is not always necessary to prove the actual safety and
      effectiveness of the new product in order to obtain 510(k) clearance for such
      product. To obtain a PMA, we must submit extensive data, including clinical
      trial data, to prove the safety, effectiveness and clinical utility of our
      products. The process of obtaining such clearances or approvals can be
      time-consuming and expensive, and there can be no assurance that all clearances
      or approvals sought by us will be granted or that FDA review will not involve
      delays adversely affecting the marketing and sale of our products. FDA’s quality
      system regulations also require companies to adhere to certain good
      manufacturing practices requirements, which include testing, quality control,
      storage, and documentation procedures. Compliance with applicable regulatory
      requirements is monitored through periodic site inspections by the FDA. In
      addition, we are required to comply with FDA requirements for labeling and
      promotion. The Federal Trade Commission also regulates most device advertising.





In
      addition, international regulatory bodies often establish varying regulations
      governing product testing and licensing standards, manufacturing compliance,
      such as compliance with ISO 9001 standards, packaging requirements, labeling
      requirements, import restrictions, tariff regulations, duties and tax
      requirements and pricing and reimbursement levels. Our inability or failure
      to
      comply with the varying regulations or the imposition of new regulations could
      restrict our ability to sell our products internationally and thereby adversely
      affect our business, financial condition and operating results.





Failure
      to comply with applicable federal, state or foreign laws or regulations could
      subject us to enforcement actions, including, but not limited to, product
      seizures, injunctions, recalls, possible withdrawal of product clearances,
      civil
      penalties and criminal prosecutions, any one or more of which could have a
      material adverse effect on our business, financial condition and operating
      results. Federal, state and foreign laws and regulations regarding the
      manufacture and sale of medical devices are subject to future changes, as are
      administrative interpretations of regulatory requirements. Any such changes
      may
      have a material adverse effect on our business, financial condition and
      operating results.





**We
      are subject to intense competition in the medical products and health-care
      related markets, which could harm our business.**





The
      medical products and healthcare solutions industry is highly competitive. We
      compete against other medical products and healthcare solutions companies,
      some
      of which are much larger and have significantly greater financial resources,
      management resources, research and development staffs, sales and marketing
      organizations and experience in the medical products and healthcare solutions
      industries than us. In addition, these companies compete with us to acquire
      technologies from universities and research laboratories. We also compete
      against large companies that seek to license medical products and healthcare
      solutions technologies for themselves. We cannot assure you that we will be
      able
      to successfully compete against these competitors in the acquisition,
      development, or commercialization of any medical products and healthcare
      solutions, funding of medical products and healthcare solutions companies or
      marketing of our products and solutions. If we cannot compete effectively
      against our competitors, our business, financial condition and results of
      operations may be materially adversely affected.





44




**We
      may be subject to product liability claims and if our insurance is not
      sufficient to cover product liability claims our business and financial
      condition will be materially adversely affected.**





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





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





**RISKS
      RELATED TO OUR INVESTMENTS**





**We
      may experience fluctuations in our quarterly results due to the success rate
      of
      investments we hold.**





We
      may
      experience fluctuations in our quarterly operating results due to a number
      of
      factors, including the success rate of our current investments, variations
      in
      and the timing of the recognition of realized and unrealized gains or losses,
      and general economic conditions. As a result of these factors, results for
      any
      period should not be relied upon as being indicative of performance in future
      periods.





**We
      have invested in non-marketable investment securities which may subject us
      to
      significant impairment charges.**





We
      have
      invested in illiquid equity securities acquired directly from issuers in private
      transactions. At June 30, 2006, 20.3% of our assets on a consolidated basis
      with
      subsidiaries was comprised of investment securities, the majority of which
      are
      illiquid investments. Investments in illiquid, or non-marketable, securities
      are
      inherently risky and a number of the companies we invest in are expected to
      fail. We review all of our investments quarterly for indicators of impairment;
      however, for non-marketable equity securities, the impairment analysis requires
      significant judgment to identify events or circumstances that would likely
      have
      a material adverse effect on the fair value of the investment. The indicators
      we
      use to identify those events or circumstances include as relevant, the nature
      and value of any collateral, the portfolio company’s ability to make payments
      and its earnings, the markets in which the portfolio company does business,
      comparison to valuations of publicly traded companies, comparisons to recent
      sales of comparable companies, the discounted cash flows of the portfolio
      company and other relevant factors. Because such valuations are inherently
      uncertain and may be based on estimates, our determinations of fair value may
      differ materially from the values that would be assessed if a ready market
      for
      these securities existed. Investments identified as having an indicator of
      impairment are subject to further analysis to determine if the investment is
      other than temporarily impaired, in which case we write the investment down
      to
      its impaired value. When a company in which we hold investments is not
      considered viable from a financial or technological point of view, we write
      down
      the entire investment since we consider the estimated fair market value to
      be
      nominal. Although we only recognized a $50,000 impairment charge for the fiscal
      year ended December 31, 2005, since a significant amount of our assets are
      comprised of non-marketable investment securities, any future impairment charges
      from the write down in value of these securities will most likely have a
      material adverse affect on our financial condition. ****





45





**Economic
      recessions or downturns could impair investments and harm our operating results.**





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





**Investing
      in private companies involves a high degree of risk** .





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





**The
      lack of liquidity in our investments may adversely affect our business.**





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





**We
      may not realize gains from our equity investments.**





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





**There
      is uncertainty regarding the value of our investments that are not publicly
      trades securities, which could adversely affect the determination of our asset
      value.**





The
      fair
      value of investments that are not publicly traded securities is not readily
      determinable. Therefore, we value these securities at fair value as determined
      in good faith by our Board of Directors. The types of factors that our Board
      of
      Directors takes into account include, as relevant, the nature and value of
      any
      collateral, the portfolio company’s ability to make payments and its earnings,
      the markets in which the portfolio company does business, comparison to
      valuations of publicly traded companies, comparisons to recent sales of
      comparable companies, the discounted value of the cash flows of the portfolio
      company and other relevant factors. Because such valuations are inherently
      uncertain and may be based on estimates, our determinations of fair value may
      differ materially from the values that would be assessed if a ready market
      for
      these securities existed.




46




**We
      borrow money, which magnifies the potential for gain or loss on amounts invested
      and may increase the risk of investing in us.**





Borrowings,
      also known as leverage, magnify the potential for gain or loss on amounts
      invested and, therefore, increase the risks associated with investing in our
      securities. We may borrow from and issue senior debt securities to banks,
      insurance companies, and other lenders. Lenders of these senior securities
      have
      fixed dollar claims on our consolidated assets that are superior to the claims
      of our common shareholders. If the value of our consolidated assets increases,
      then leveraging would cause the value of our consolidated assets to increase
      more sharply than it would have had we not leveraged. Conversely, if the value
      of our consolidated assets decreases, leveraging would cause the value of our
      consolidated net assets to decline more sharply than it otherwise would have
      had
      we not leveraged. Similarly, any increase in our consolidated income in excess
      of consolidated interest payable on the borrowed funds would cause our net
      income to increase more than it would without the leverage, while any decrease
      in our consolidated income would cause net income to decline more sharply than
      it would have had we not borrowed.





**RISKS
      RELATED TO OUR REAL ESTATE HOLDINGS**





**The
      value of real estate fluctuates depending on conditions in the general economy
      and the real estate business. These conditions may limit revenues from our
      real
      estate properties and available cash.**





The
      value
      of our real estate holdings is affected by many factors including, but not
      limited to: national, regional and local economic conditions; consequences
      of
      any armed conflict involving or terrorist attacks against the United States;
      our
      ability to secure adequate insurance; local conditions such as an oversupply
      of
      space or a reduction in demand for real estate in a particular area; competition
      from other available space; whether tenants consider a property attractive;
      the
      financial condition of tenants, including the extent of tenant bankruptcies
      or
      defaults; whether we are able to pass some or all of any increased operating
      costs through to tenants; how well we manage our properties; fluctuations in
      interest rates; changes in real estate taxes and other expenses; changes in
      market rental rates; the timing and costs associated with property improvements
      and rentals; changes in taxation or zoning laws; government regulation;
      potential liability under environmental or other laws or regulations; and
      general competitive factors. The rents we expect to receive and the occupancy
      levels at our properties may not materialize as a result of adverse changes
      in
      any of these factors. If our rental revenue fails to materialize, we generally
      would expect to have less cash available to pay our operating costs. In
      addition, some expenses, including mortgage payments, real estate taxes and
      maintenance costs, generally do not decline when the related rents decline.





**Our
      current real estate holdings are concentrated in Heber Springs, Arkansas and
      Springfield, Tennessee. Adverse circumstances affecting these areas generally
      could adversely affect our business.**




A
      significant proportion of our real estate investments are in Heber Springs,
      Arkansas and Springfield, Tennessee and are affected by the economic cycles
      and
      risks inherent to those regions. Like other real estate markets, the real estate
      markets in these areas have experienced economic downturns in the past, and
      we
      cannot predict how the current economic conditions will impact these markets
      in
      both the short and long term. Further declines in the economy or a decline
      in
      the real estate markets in these areas could hurt our financial performance
      and
      the value of our properties. The factors affecting economic conditions in these
      regions include: business layoffs or downsizing; industry slowdowns; relocations
      of businesses; changing demographics; and any oversupply of or reduced demand
      for real estate.





47


**RISKS
      RELATED TO OUR CAR WASH BUSINESS**





**If
      a competing car wash facility is opened within the service area of one of our
      express car wash sites our car wash business may lose
      revenue.**





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





**Adverse
      weather conditions may cause ASG’s express car was sites to lose revenue.**





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





**RISKS
      RELATED TO OUR COMMON STOCK**





**Our
      historic stock price has been volatile and the future market price for our
      common stock may continue to be volatile. Further, the limited market for our
      shares will make our price more volatile. This may make it difficult for you
      to
      sell our common stock for a positive return on your investment.**





The
      public market for our common stock has historically been very volatile. Over
      the
      past two fiscal years and the subsequent interim quarterly periods, the market
      price for our common stock has ranged from $0.30 to $7.33 (as adjusted to
      reflect a
      3:1
      forward stock split effective April 5, 2005 ).
      Any
      future market price for our shares may continue to be very volatile. This price
      volatility may make it more difficult for you to sell shares when you want
      at
      prices you find attractive. We do not know of any one particular factor that
      has
      caused volatility in our stock price. However, the stock market in general
      has
      experienced extreme price and volume fluctuations that often are unrelated
      or
      disproportionate to the operating performance of companies. Broad market factors
      and the investing public’s negative perception of our business may reduce our
      stock price, regardless of our operating performance. Further, the market for
      our common stock is limited and we cannot assure you that a larger market will
      ever be developed or maintained. Our common stock is currently listed on the
      American Stock Exchange ( ***“AMEX”*** ).
      As of
      August 15, 2006, the average daily trading volume of our common stock over
      the
      past three months was approximately 8,100 shares. The last reported sales price
      for our common stock on August 15, 2006, was $1.98 per share. Market
      fluctuations and volatility, as well as general economic, market and political
      conditions, could reduce our market price. As a result, this may make it
      difficult or impossible for you to sell our common stock.





**If
      we fail to meet continued listing standards of AMEX, our common stock may be
      delisted which would have a material adverse effect on the price of our common
      stock.**





Our
      common stock is currently traded on the American Stock Exchange (“AMEX”) under
      the symbol “PST”. In order for our securities to be eligible for continued
      listing on AMEX, we must remain in compliance with certain listing standards.
      On
      June 24, 2004, we received a letter from AMEX inquiring as to our ability to
      remain listed. Specifically, AMEX indicated that our common stock was subject
      to
      delisting under sections 1003(a)(i) and 1003(a)(ii) of AMEX’s Company Guide
      because our stockholders’ equity was below the level required by AMEX’s
      continued listing standards. Our stockholders’ equity fell below the required
      standard due to years of continued losses. On September 15, 2004, AMEX notified
      us that it had accepted our proposed plan to comply with AMEX’s continued
      listing standards. Significant events which increased our stockholders’ equity
      in excess
      of
      AMEX’s continued listing standards were the completion of an approximately $4
      million equity financing combined with the acquisition of Surgicount Medical,
      Inc. which was done primarily through the issuance of common stock. AMEX will
      normally consider suspending dealings in, or removing from the listing of,
      securities of a company under Section 1003(a)(i) for a company that has
      stockholders' equity of less than $2,000,000 if such company has sustained
      losses from continuing operations and/or net losses in two of its three most
      recent fiscal years; or under Section 1003(a)(ii) for a company that has
      stockholders' equity of less than $4,000,000 if such company has sustained
      losses from continuing operations and/or net losses in three of its four most
      recent fiscal years. As of June 30, 2005, our second consecutive quarter in
      which our stockholders’ equity was in excess of $4,000,000, we believe we have
      re-gained compliance with AMEX’s continued listing requirements. As of June 30,
      2006, our stockholders’ equity was still in excess of that required
      under Section 1003(a)(ii) of AMEX’s Company Guide. During April 2006 AMEX
      notified us that we have been removed from AMEX’s continued listing standards
      deficiency list based on financial results reported in our Form 10-K for the
      year ended December 31, 2005. If we were to again become noncompliant with
      AMEX’s continued listing requirements, our common stock may be delisted which
      would have a material adverse affect on the price and liquidity of our common
      stock.





48




**If
      we are delisted from AMEX, our common stock may be subject to the “penny stock”
rules of the SEC, which would make transactions in our common stock cumbersome
      and may reduce the value of an investment in our stock.**





The
      SEC
      has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for
      the purposes relevant to us, as any equity security that has a market price
      of
      less than $5.00 per share or with an exercise price of less than $5.00 per
      share, subject to certain exceptions. For any transaction involving a penny
      stock, unless exempt, Rule 15g-9 require:





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


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





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





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


·
            make
                a reasonable determination that the transactions in penny stocks
                are
                suitable for that person and the person has sufficient knowledge
                and
                experience in financial matters to be capable of evaluating the risks
                of
                transactions in penny stocks.





The
      broker or dealer must also deliver, prior to any transaction in a penny stock,
      a
      disclosure schedule prescribed by the SEC relating to the penny stock market,
      which, in highlight form:





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


·
            that
                the broker or dealer received a signed, written agreement from the
                investor prior to the transaction.





Generally,
      brokers may be less willing to execute transactions in securities subject to
      the
“penny stock” rules. This may make it more difficult for investors to dispose of
      our common stock and cause a decline in the market value of our
      stock.





49




Disclosure
      also has to be made about the risks of investing in penny stocks in both public
      offerings and in secondary trading and about the commissions payable to both
      the
      broker-dealer and the registered representative, current quotations for the
      securities and the rights and remedies available to an investor in cases of
      fraud in penny stock transactions. Finally, monthly statements have to be sent
      disclosing recent price information for the penny stock held in the account
      and
      information on the limited market in penny stocks.





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





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





On
      June
      6, 2006 the Company entered into a Secured Convertible Note and Warrant Purchase
      Agreement pursuant to which the Company sold a $1,100,000 principal amount
      Secured Convertible Promissory Note (the ***“Morelli
      Note”*** )
      to Alan
      E. Morelli.. As an inducement for entering into the Secured Convertible Note
      and
      Warrant Purchase Agreement, Mr. Morelli received warrants to purchase 401,460
      shares of the Company’s common stock. The warrants are exercisable for a period
      of five years and have an exercise price equal to $3.04. If the Company issues
      shares of common stock or securities convertible or exercisable into shares
      of
      common stock below the then applicable exercise price, the exercise price of
      the
      warrants will be reduced accordingly. The exercise price of the warrants also
      will be adjusted if the Company pays a stock dividend, subdivides or combines
      outstanding shares of common stock into a greater or lesser number of shares,
      or
      takes such other actions as would otherwise result in dilution of Mr. Morelli’s
      position. The issuance of the above warrants to Mr. Morelli was exempt from
      registration requirements pursuant to Section 4(2) of the Securities Act of
      1933, as amended, and Rule 506 promulgated thereunder. No advertising or general
      solicitation was employed in offering the securities and Mr. Morelli represented
      that he is an accredited investor and that he is able to bear the economic
      risk
      of his investment.





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





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





On
      June
      6, 2006 the Company entered into a Secured Convertible Note and Warrant Purchase
      Agreement pursuant to which the Company sold a $1,100,000 principal amount
      Secured Convertible Promissory Note (the ***“Morelli
      Note”*** )
      to Alan
      E. Morelli. During June 2006, and subsequent to entering into the Morelli Note,
      the Company incurred additional indebtedness without the prior written consent
      of Mr. Morelli. Further, mandatory prepayments from the proceeds of indebtedness
      were not made; therefore, the Company is currently in an event of default.





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





None.





**Item
      5. Other Information.**





None.





50


**Item
      6. Exhibits.**





**Exhibit
                Number**
            
            **Description**2.3
            
            Unit
                Purchase Agreement dated March 14, 2006 by and between Automotive
                Services
                Group, LLC, Darell W. Grimsley, Ault Glazer Bodnar Merchant Capital,
                Inc.
                and Patient Safety Technologies, Inc. (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 17, 2006)4.1
            
            Certificate
                of Designation of Series A Convertible Preferred Stock (Included
                in
                Amended and Restated Certificate of Incorporation (Incorporated by
                reference to the Company’s annual report on Form 10-K for the fiscal year
                ended December 31, 2004, filed with the Securities and Exchange Commission
                on March 30, 2005))4.2
            
            $1,000,000
                principal amount Promissory Note dated August 28, 2001 issued to
                Winstar
                Radio Networks, LLC, Winstar Global Media, Inc. or Winstar Radio
                Productions, LLC (Incorporated by reference to the Company’s annual report
                on Form 10-K for the fiscal year ended December 31, 2005, filed with
                the
                Securities and Exchange Commission on April 17, 2006)4.3
            
            $1,000,000
                principal amount Promissory Note dated April 7, 2005 issued to Bodnar
                Capital Management, LLC (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on April 13, 2005)4.4
            
            Form
                of non-callable Warrant issued to James Colen (Incorporated by reference
                to the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on April 26, 2005)4.5
            
            Form
                of callable Warrant issued to James Colen (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on April 26, 2005)4.6
            
            Real
                Estate Note dated July 27, 2005 in the principal amount of $480,000
                issued
                by Automotive Services Group, LLC to Ault Glazer Bodnar Acquisition
                Fund,
                LLC (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on September 29,
                2005)4.7
            
            Addendum
                I dated August 10, 2005 to Real Estate Note issued by Automotive
                Services
                Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on September 29,
                2005)4.8
            
            Addendum
                II to Real Estate Note issued by Automotive Services Group, LLC to
                Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on September 29, 2005)4.9
            
            Addendum
                III to Real Estate Note issued by Automotive Services Group, LLC
                to Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on December 23, 2005)4.10
            
            Addendum
                IV to Real Estate Note issued by Automotive Services Group, LLC to
                Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on December 23, 2005)4.11
            
            Addendum
                V to Real Estate Note issued by Automotive Services Group, LLC to
                Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on December 23, 2005)4.12
            
            Addendum
                VI dated January 10, 2006 to Real Estate Note issued by Automotive
                Services Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 6,
                2006)4.13
            
            Addendum
                VII dated February 1, 2006 to Real Estate Note issued by Automotive
                Services Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 6,
                2006)




51




4.14
            
            Promissory
                Note in the principal amount of $130,000 issued January 5, 2006 to
                Glazer
                Family Partnership LP (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                January 10, 2006)4.15
            
            Secured
                Promissory Note in the principal amount of $150,000 issued January
                11,
                2006 to Ault Glazer Bodnar Acquisition Fund (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on January 18, 2006)4.16
            
            Promissory
                Note in the principal amount of $1,000,000 issued January 12, 2006
                by
                Automotive Services Group, LLC to Steven J. Caspi (Incorporated by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on January 18, 2006)4.17
            
            Secured
                Promissory Note in the principal amount of $85,000 issued January
                19, 2006
                to Ault Glazer Bodnar Acquisition Fund LLC (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on January 24, 2006)4.18
            
            Secured
                Promissory Note in the principal amount of $25,000 issued January
                26 2006
                to Ault Glazer Bodnar Acquisition Fund LLC (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 1, 2006)4.19
            
            Secured
                Promissory Note in the principal amount of $35,000 issued January
                27, 2006
                to Ault Glazer Bodnar Acquisition Fund LLC (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 1, 2006)4.20
            
            Secured
                Promissory Note in the principal amount of $45,750 issued February
                1, 2006
                to Ault Glazer Bodnar Acquisition Fund LLC (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 6, 2006)4.21
            
            Secured
                Promissory Note in the principal amount of $65,000 issued February
                2, 2006
                to Ault Glazer Bodnar & Company, Inc. (Incorporated by reference to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 6, 2006)4.22
            
            Promissory
                Note dated February 8, 2006 issued by Automotive Services Group,
                LLC to
                Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 14, 2006)4.21
            
            Secured
                Promissory Note in the principal amount of $65,000 issued February
                2, 2006
                to Ault Glazer Bodnar & Company, Inc. (Incorporated by reference to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 6, 2006)4.22
            
            Promissory
                Note dated February 8, 2006 issued by Automotive Services Group,
                LLC to
                Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 14, 2006)4.23
            
            Secured
                Promissory Note in the principal amount of $12,000 issued February
                23,
                2006 to Ault Glazer Bodnar Acquisition Fund LLC (Incorporated by
                reference
                to the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 1, 2006)4.24
            
            Secured
                Promissory Note in the principal amount of $60,000 issued February
                28,
                2006 to Ault Glazer Bodnar Acquisition Fund LLC (Incorporated by
                reference
                to the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 1, 2006)4.25
            
            Secured
                Promissory Note in the principal amount of $30,000 issued March 6,
                2006 to
                Ault Glazer Bodnar Acquisition Fund LLC (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 8, 2006)4.26
            
            Revolving
                Line of Credit Agreement dated and effective as of March 7, 2006
                by and
                between Ault Glazer Bodnar Acquisition Fund LLC and Patient Safety
                Technologies, Inc. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                March 8, 2006)4.27
            
            $1.1
                million principal amount Secured Convertible Promissory Note issued
                by
                Patient Safety Technologies, Inc. to Alan E. Morelli on June 6, 2006
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on June 9,
                2006)4.28
            
            Warrant
                to purchase 401,460 shares of common stock issued by Patient Safety
                Technologies, Inc. to Alan E. Morelli on June 6, 2006 (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on June 9,
                2006)




52




4.29
            
            $250,000
                principal amount Convertible Promissory Note issued by Patient Safety
                Technologies, Inc. to Charles J. Kalina III on July 12, 2006 (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on July 14, 2006)4.30
            
            Warrant
                to purchase 85,000 shares of common stock issued by Patient Safety
                Technologies, Inc. to Charles J. Kalina III on July 12, 2006 (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on July 14, 2006)10.1
            
            Amended
                Employment Agreement entered into as of January 30, 2006 between
                Automotive Services Group, LLC and D.W. Grimsley, Jr. (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on February 1, 2006)10.2
            
            Security
                Agreement by and between Glazer Family Partnership LP and Patient
                Safety
                Technologies, Inc. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                January 10, 2006)10.3
            
            Security
                Agreement by and between Ault Glazer Bodnar Acquisition Fund and
                Patient
                Safety Technologies, Inc. (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on January 18, 2006)10.4
            
            Real
                Estate Mortgage dated January 12, 2006 in favor of Steven J. Caspi
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on January 18,
                2006)10.5
            
            Continuing
                Guaranty dated January 12, 2006 of Patient Safety Technologies in
                connection with the $1,000,000 Promissory Note issued January 12,
                2006 by
                Automotive Services Group, LLC to Steven J. Caspi (Incorporated by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on January 18, 2006)10.6
            
            Security
                Agreement by and between Ault Glazer Bodnar Acquisition Fund LLC
                and
                Patient Safety Technologies, Inc. (Incorporated by reference to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on January 24, 2006)10.7
            
            Security
                Agreement dated January 26, 2006 by and between Ault Glazer Bodnar
                Acquisition Fund LLC and Patient Safety Technologies, Inc. (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on February 1, 2006)10.8
            
            Security
                Agreement dated January 27, 2006 by and between Ault Glazer Bodnar
                Acquisition Fund LLC and Patient Safety Technologies, Inc. (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on February 1, 2006)10.9
            
            Security
                Agreement dated February 1, 2006 by and between Ault Glazer Bodnar
                Acquisition Fund LLC and Patient Safety Technologies, Inc. (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on February 6, 2006)10.10
            
            Security
                Agreement dated February 2, 2006 by and between Ault Glazer Bodnar
&
                Company, Inc. and Patient Safety Technologies, Inc. (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on February 6, 2006)10.11
            
            Real
                Estate Mortgage executed as of February 8, 2006 by Automotive Services
                Group, LLC in favor of Ault Glazer Bodnar Acquisition Fund, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 14,
                2006)10.12
            
            Security
                Agreement dated February 23, 2006 by and between Ault Glazer Bodnar
                Acquisition Fund LLC and Patient Safety Technologies, Inc. (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on March 1, 2006)10.13
            
            Security
                Agreement dated February 28, 2006 by and between Ault Glazer Bodnar
                Acquisition Fund LLC and Patient Safety Technologies, Inc. (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on March 1,
                2006)




53




10.14
            
            Security
                Agreement dated March 6, 2006 by and between Ault Glazer Bodnar
                Acquisition Fund LLC and Patient Safety Technologies, Inc. (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on March 8, 2006)10.15
            
            Engagement
                Letter dated February 10, 2006 between Analog Ventures, LLC and Patient
                Safety Technologies, Inc. (Incorporated by reference to the Company’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2006,
                filed
                with the Securities and Exchange Commission on May 19,
                2006)10.16
            
            Secured
                Convertible Note and Warrant Purchase Agreement dated June 6, 2006
                by and
                between Patient Safety Technologies, Inc. and Alan E. Morelli
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on June 9,
                2006)10.17
            
            Letter
                agreement dated May 31, 2006 between Bodnar Capital Management, LLC
                and
                Patient Safety Technologies, Inc. (Incorporated by reference to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on June 9, 2006)10.18
            
            Registration
                Rights Agreement dated June 6, 2006 by and between Patient Safety
                Technologies, Inc. and Alan E. Morelli (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on June 9, 2006)10.19
            
            Pledge
                Agreement dated June 6, 2006 by and between Patient Safety Technologies,
                Inc. and Alan E. Morelli (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on June 9, 2006)10.20
            
            Subordination
                Agreement dated June 6, 2006 by and between Alan E. Morelli and Herbert
                Langsam Revocable Trust and consented to by Patient Safety Technologies,
                Inc. (Incorporated by reference to the Company’s current report on Form
                8-K filed with the Securities and Exchange Commission on June 9,
                2006)10.21
            
            Subordination
                Agreement dated June 6, 2006 by and between Alan E. Morelli and Ault
                Glazer Bodnar Acquisition Fund, LLC and consented to by Patient Safety
                Technologies, Inc. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                June 9, 2006)10.22
            
            Mortgage
                with Security Agreement, Absolute Assignment of Rents and Leases,
                Fixture
                Filing and Financing Statement dated June 1, 2006 by Patient Safety
                Technologies, Inc. in favor of Alan E. Morelli (Incorporated by reference
                to the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on June 9, 2006)10.23
            
            Tennessee
                Deed of Trust with Security Agreement, Assignment of Rents and Leases
                and
                Fixture Filing dated June 1, 2006 by and among Patient Safety
                Technologies, Inc., Robert C. Liddon and Thomas F. Baker, IV as trustees,
                and Alan E. Morelli (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                June 9, 2006)31.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(a) or Rule
                15d-14(a)31.2*
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(a) or Rule
                15d-14(a)32.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
                and Section 1350 of Chapter 63 of Title 18 of the United States
                Code32.2*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
                and Section 1350 of Chapter 63 of Title 18 of the United States
                Code


*
        Filed herewith.





54


**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:
              August 21, 2006
            By:
            /s/ Milton “Todd” Ault IIIMilton
“Todd”
Ault
              IIIChief
              Executive Officer Date:
              August 21, 2006
            By:
            /s/ William B. HorneWilliam
              B. HorneChief
              Financial Officer


55