**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-Q**





(Mark
      One)





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





FOR
      THE
      QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008




**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   001-09727





**PATIENT
      SAFETY TECHNOLOGIES, INC.**


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





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




**43460
                Ridge Park Drive, Suite 140, Temecula, CA
                92590****(Address
                of principal executive offices) (Zip
                Code)**





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





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





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


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





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





There
      were 17,172,872 shares of the registrant's common stock outstanding as of
      November 14, 2008.









**PATIENT
      SAFETY TECHNOLOGIES, INC.**





**FORM
      10-Q FOR THE QUARTER**


**ENDED
      SEPTEMBER 30, 2008**





**TABLE
      OF CONTENTS**




**Page****PART
                  I - FINANCIAL INFORMATION**Item
                  1.
              
              
              Financial
                  Statements
              
              
              1Item
                  2.
              
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              
              16Item
                  3.
              
              
              Quantitative
                  and Qualitative Disclosures About Market Risk.
              
              
              25Item
                  4T.
              
              
              Controls
                  and Procedures
              
              
              25**PART
                  II - OTHER INFORMATION**Item
                  1.
              
              
              Legal
                  Proceedings
              
              
              26Item
                  1A.
              
              
              Risk
                  Factors
              
              
              26Item
                  2.
              
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              
              26Item
                  3.
              
              
              Defaults
                  Upon Senior Securities
              
              
              26Item
                  4.
              
              
              Submission
                  of Matters to a Vote of Security Holders
              
              
              27Item
                  5.
              
              
              Other
                  Information
              
              
              27Item
                  6
              
              
              Exhibits
              
              
              27**SIGNATURES**
              
              
              
              
              
              28











**"SAFE
      HARBOR" STATEMENT UNDER**


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





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





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





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









**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**





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


**Condensed
      Consolidated Balance Sheets (Unaudited)**


**(In
      thousands, except par value)**




**September
                30,**
            
            **December
                31,****2008**
            
            **2007****Assets****Current
                assets:**Cash
                and cash equivalents
            
            $
            1,038
            
            $
            405Accounts
                receivable
            
            
            325
            
            
            72Inventories
            
            
            35
            
            
            —Prepaid
                expenses
            
            
            309
            
            
            105**Total
                current assets**
            
            
            1,707
            
            
            582Restricted
                certificate of deposit
            
            
            87
            
            
            87Notes
                receivable
            
            
            154
            
            
            154Property
                and equipment, net
            
            
            721
            
            
            663Assets
                held for sale, net
            
            
            90
            
            
            406Goodwill
            
            
            1,832
            
            
            1,832Patents,
                net
            
            
            3,520
            
            
            3,764Long-term
                investment
            
            
            667
            
            
            667Other
                assets
            
            
            29
            
            
            19**Total
                assets**
            
            $
            8,807
            
            $
            8,174**Liabilities
                and Stockholders' (Deficit) Equity****Current
                liabilities**Accounts
                payable
            
            $
            603
            
            $
            709Current
                portion of long term debt
            
            
            2,946
            
            
            1,172Accrued
                liabilities
            
            
            3,303
            
            
            521**Total
                current liabilities**
            
            
            6,852
            
            
            2,402Long-term
                debt, less current portion
            
            
            —
            
            
            2,531Deferred
                tax liabilities
            
            
            1,403
            
            
            1,499**Total
                liabilities**
            
            
            8,255
            
            
            6,431**Stockholders'
                equity:**Convertible
                preferred stock, $1.00 par value, cumulative 7% dividend:1,000
                shares authorized; 11 issued and outstandingat
                September 30, 2008 and December 31, 2007(Liquidation
                preference of $1.2 million at September 30, 2008 and December 31,
                2007
            
            
            11
            
            
            11Common
                stock, $0.33 par value: 25,000 shares authorized;16,673
                shares issued and outstanding at September 30, 2008;
                12,055shares
                issued and outstanding at December 31, 2007
            
            
            5,502
            
            
            3,978Additional
                paid-in capital
            
            
            35,408
            
            
            34,320Accumulated
                deficit
            
            
            (40,369
            )
            
            (36,567
            )**Total
                stockholders' (deficit) equity**
            
            
            552
            
            
            1,743**Total
                liabilities and stockholders' equity**
            
            $
            8,807
            
            $
            8,174




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




1




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


**Condensed
        Consolidated Statements of Operations (Unaudited)**
 **(In
        thousands, except per share data)**
  **For
                  The Three Months Ended September 30,**
              
              **For
                  The Nine Months Ended September
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007****Revenues**
              
              $
              880
              
              $
              213
              
              $
              1,937
              
              $
              834**Cost
                  of revenue**
              
              
              622
              
              
              112
              
              
              1,342
              
              
              514**Gross
                  profit**
              
              
              258
              
              
              101
              
              
              595
              
              
              320**Operating
                  expenses:**Research
                  and development
              
              
              87
              
              
              39
              
              
              168
              
              
              91Sales
                  and marketing
              
              
              662
              
              
              418
              
              
              1,796
              
              
              1,090General
                  and administrative
              
              
              958
              
              
              764
              
              
              3,680
              
              
              2,790Total
                  operating expenses
              
              
              1,707
              
              
              1,221
              
              
              5,644
              
              
              3,971**Operating
                  loss**
              
              
              (1,449
              )
              
              (1,120
              )
              
              (5,049
              )
              
              (3,651
              )**Other
                  income (expenses):**Interest
                  expense
              
              
              (79
              )
              
              (810
              )
              
              (254
              )
              
              (1,414
              )Change
                  in fair value of warrant liability
              
              
              1,683
              
              
              —
              
              
              1,515
              
              
              —Realized
                  gain (loss) assets held for sale, net
              
              
              —
              
              
              —
              
              
              (25
              )
              
              22Unrealized
                  loss on assets held for sale, net
              
              
              —
              
              
              —
              
              
              (65
              )
              
              —Other
                  income
              
              
              36
              
              
              —
              
              
              35
              
              
              —Total
                  other income (expense)
              
              
              1,640
              
              
              (810
              )
              
              1,206
              
              
              (1,392
              )**Income
                  (loss) from continuing operations before income
                  taxes**
              
              
              191
              
              
              (1,931
              )
              
              (3,843
              )
              
              (5,043
              )Income
                  tax provision
              
              
              33
              
              
              29
              
              
              98
              
              
              88**Income
                  (loss) from continuing operations**
              
              
              224
              
              
              (1,901
              )
              
              (3,744
              )
              
              (4,955
              )**Loss
                  from discontinued operations**
              
              
              —
              
              
              (19
              )
              
              —
              
              
              (166
              )**Net
                  income (loss)**
              
              
              224
              
              
              (1,920
              )
              
              (3,745
              )
              
              (5,121
              )**Preferred
                  dividends**
              
              
              (19
              )
              
              (19
              )
              
              (57
              )
              
              (57
              )**Net
                  income (loss) applicable to common shareholders**
              
              $
              205
              
              $
              (1,940
              )
              $
              (3,802
              )
              $
              (5,178
              )**Basic
                  net income (loss) per common share****Continuing
                  operations**
              
              $
              0.01
              
              $
              (0.18
              )
              $
              (0.28
              )
              $
              (0.53
              )**Discontinued
                  operations**
              
              $
              —
              
              $
              (0.00
              )
              $
              —
              
              $
              (0.02
              )**Net
                  income (loss)**
              
              $
              0.01
              
              $
              (0.18
              )
              $
              (0.28
              )
              $
              (0.55
              )**Diluted
                  net income (loss) per common share****Continuing
                  operations**
              
              $
              0.01
              
              $
              (0.18
              )
              $
              (0.28
              )
              $
              (0.53
              )**Discontinued
                  operations**
              
              $
              0
              
              $
              0.00
              
              $
              —
              
              $
              (0.02
              )**Net
                  income (loss)**
              
              $
              0.01
              
              $
              (0.18
              )
              $
              (0.28
              )
              $
              (0.55
              )**Weighted
                  average common shares outstanding:**Basic
              
              
              15,615
              
              
              10,626
              
              
              13,588
              
              
              9,501Diluted
              
              
              29,005
              
              
              19,788
              
              
              26,978
              
              
              18,663
  The
        accompanying notes are an integral part of these condensed consolidated interim
        financial statements.




2




**PATIENT
        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARY**
 **Condensed
        Consolidated Statements of Cash Flows (Unaudited)**
 **(In
        thousands)**
  **For
                  The Nine Months Ended September 30,****2008**
              
              **2007****Operating
                  activities:**Net
                  loss
              
              $
              (3,745
              )
              $
              (5,121
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              261
              
              
              133Amortization
                  of patents
              
              
              244
              
              
              244Non-cash
                  interest
              
              
              145
              
              
              1,045Non-cash
                  payments
              
              
              568
              
              
              —Realized
                  loss on assets held for sale, net
              
              
              25
              
              
              —Realized
                  loss (gain) on sale of property and equipment
              
              
              —
              
              
              (33
              )Unrealized
                  loss on assets held for sale, net
              
              
              65
              
              
              —Stock-based
                  compensation to employees and directors
              
              
              1,229
              
              
              900Change
                  in fair value of warrant derivative liability
              
              
              (1,515
              )
              
              —Income
                  tax benefit
              
              
              (98
              )
              
              (86
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (253
              )
              
              2Inventories
              
              
              (35
              )
              
              15Prepaid
                  expenses
              
              
              30
              
              
              402Other
                  current assets
              
              
              (10
              )
              
              —Assets
                  held for sale, net
              
              
              —
              
              
              22Accounts
                  payable
              
              
              (105
              )
              
              (453
              )Accrued
                  liabilities
              
              
              151
              
              
              345Net
                  cash used in operating activities
              
              
              (3,043
              )
              
              (2,585
              )**Investing
                  activities:**Purchase
                  of property and equipment
              
              
              (319
              )
              
              (387
              )Proceeds
                  from sale of property and equipment
              
              
              —
              
              
              43Proceeds
                  from sale of assets held for sale, net
              
              
              226
              
              
              3,178Net
                  cash provided by (used in) investing activities
              
              
              (93
              )
              
              2,834**Financing
                  activities:**Proceeds
                  from issuance of common stock and warrants
              
              
              3,877
              
              
              3,051Proceeds
                  from notes payable
              
              
              500
              
              
              100Payments
                  and decrease on notes payable
              
              
              (551
              )
              
              (3,301
              )Payments
                  of preferred dividends
              
              
              (57
              )
              
              (19
              )Net
                  cash provided by (used in) financing activities
              
              
              3,769
              
              
              (169
              )Net
                  increase in cash and cash equivalents
              
              
              633
              
              
              80Cash
                  and cash equivalents at beginning of period
              
              
              405
              
              
              4Cash
                  and cash equivalents at end of period
              
              $
              1,038
              
              $
              84Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for interest
              
              $
              49
              
              $
              222Non
                  cash investing and financing activities:Issuance
                  of common stock in payment of accrued liabilities
              
              $
              185
              
              $
              —Dividends
                  accrued
              
              $
              —
              
              $
              38Issuance
                  of common stock in connection with contingent payment with Surgicount
                  acquisition
              
              $
              —
              
              $
              75Issuance
                  of common stock in payment of notes payable, accrued and prepaid
                  interest
              
              $
              859
              
              $
              580Issuance
                  of common stock for inventory
              
              $
              700
              
              $
              500Payment
                  of accrued liability with long-term investments
              
              $
              —
              
              $
              11Reclassification
                  of accrued interest to notes payable, less current portion -
                  net
              
              $
              —
              
              $
              349Reclassification
                  of additional paid in capital to warrant derivative
                  liability
              
              $
              4,350
              
              $
              —




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




3




**Patient
        Safety Technologies, Inc. and Subsidiary**
 **Notes
        to Unaudited Condensed Consolidated Financial Statements**
  **1.
        DESCRIPTION OF BUSINESS**
 
 Patient
        Safety Technologies, Inc. ( ***"PST"*** or the ***"Company"*** )
        is a
        Delaware corporation. The Company’s operations are conducted at its wholly-owned
        operating subsidiary, SurgiCount Medical, Inc. ( ***“SurgiCount”*** ),
        a
        California corporation.
 
 The
        Company’s primary focus is development, manufacturing and distribution of
        products and services focused primarily in the health care and medical products
        field, particularly the patient safety markets. SurgiCount is a developer
        and
        manufacturer of patient safety products and services. The SurgiCount
        Safety-Sponge  System
        is
        a patented turn-key array of modified surgical sponges, line-of-sight scanning
        SurgiCounters, and printPAD printers integrated together to form a comprehensive
        counting and documentation system.
 
 Until
        June 29, 2007, the Company also operated a car wash through Automotive Services
        Group, Inc. ( ***“Automotive
        Services Group”*** ),
        which
        held the Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
        its
        wholly-owned subsidiary. As discussed in Note 4, during 2007 the Company
        completed the sale of the assets held in ASG. In addition, the Company holds
        other unrelated investments including an investment in real estate and in
        a
        financial services company, which it is in the process of liquidating as
        part of
        a strategic plan adopted during 2006 to dispose of all of the Company’s non
        patient safety related assets.
 
 **2.
        LIQUIDITY AND GOING CONCERN**
 
 The
        accompanying unaudited consolidated interim financial statements have been
        prepared assuming that the Company will continue as a going concern. At
        September 30, 2008, the Company has an accumulated deficit of approximately
        $40.4 million and a working capital deficit of approximately $5.1 million.
        For
        the nine months ended September 30, 2008, the Company incurred a loss of
        approximately $3.8 million and has used approximately $3.0 million in cash
        in
        its operations. Further, the Company has just begun to generate a material
        amount of revenues from sales of the Company’s patient safety products. These
        conditions raise substantial doubt about the Company’s ability to continue as a
        going concern. The Company has relied on liquidating investments and short-term
        debt financings to fund a large portion of its operations. In order to ensure
        the continued viability of the Company, additional financing must be obtained
        and profitable operations must be achieved in order to repay the existing
        short-term debt and to provide a sufficient source of operating capital.
        No
        assurances can be made that the Company will be successful obtaining a
        sufficient amount of additional financing to continue to fund its operations
        or
        that the Company will achieve profitable operations and positive cash flow
        from
        its patient safety products. The consolidated interim financial statements
        do
        not include any adjustments that might result from the outcome of this
        uncertainty.
 
 **3.
        BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**
 
 **Basis
        of Presentation**
 
 The
        accompanying unaudited consolidated interim financial statements have been
        prepared in accordance with the instructions to Form 10-Q and Article 8-03
        of
        Regulation S-X and do not include all the information and disclosures required
        by accounting principles generally accepted in the United States of America.
        The
        consolidated interim financial information is unaudited but reflects all
        normal
        adjustments that are, in the opinion of management, necessary to provide
        a fair
        statement of results for the interim periods presented. The consolidated
        interim
        financial statements should be read in conjunction with the consolidated
        financial statements in the Company’s Annual Report on Form 10-K for the year
        ended December 31, 2007. Results of the nine months ended September 30, 2008
        are
        not necessarily indicative of the results to be expected for the full year
        ending December 31, 2008.
  4
  **Revenue
        Recognition**
  The
        Company complies with SEC Staff Accounting Bulletin ( ***“SAB”*** )
        101, *Revenue
        Recognition in Financial Statements* ,
        amended
        by SAB 104, *Revenue
        Recognition* .
        Revenues from sales of the Safety-Sponge TM System
        are recorded upon shipment.
 
 **Goodwill
        and Intangible Assets**
 
 In
        accordance with SFAS No. 142, *Goodwill
        and Intangible Assets* ,
        goodwill is tested for impairment at the reporting unit level (operating
        segment
        or one level below an operating segment) on an annual basis in the Company’s
        fourth fiscal quarter or more frequently if indicators of impairment
        exist.  The performance of the test involves a two-step process.  The
        first step of the impairment test involves comparing the fair value of the
        Company’s reporting units with each respective reporting unit’s carrying amount,
        including goodwill.  The fair value of reporting units is generally
        determined using the income approach.  If the carrying amount of a
        reporting unit exceeds the reporting unit’s fair value, the second step of the goodwill impairmenttest is
        performed to determine the amount of any impairment loss.  The second step
        of the goodwill impairmenttest
        involves comparing the implied fair value of the reporting unit’s goodwill with
        the carrying amount of that goodwill.
 
 **Long-Lived
        Assets**
 
 The
        Company evaluates long-lived assets for impairment in accordance with SFAS
        No. 144, *Accounting
        for the Impairment or Disposal of Long-Lived Assets,* which
        requires impairment evaluation on long-lived assets used in operations when
        indicators of impairment are present.  Reviews are performed to determine
        whether the carrying value of an asset is impaired, based on a comparison
        to
        undiscounted expected future cash flows.  If this comparison indicates that
        there is impairment, the impaired asset is written down to fair value, which
        is
        typically calculated using discounted expected future cash flows and a discount
        rate based upon the Company’s weighted average cost of capital adjusted for
        risks associated with the related operations.  Impairment is based on the
        excess of the carrying amount over the fair value of those assets.
 
 **Stock-Based
        Compensation** ******
 
 The
        Company accounts for stock-based compensation pursuant to SFAS No. 123(R), *Share-Based
        Payment* .
        During
        the three and nine months ended September 30, 2008, the Company recorded
        total
        stock-based compensation expense of $185 thousand and $1.2 million,
        respectively, related to issuances to the Company’s employees and directors. The
        total amount of stock-based compensation for the nine months ended September
        30,
        2008 of $1.2 million included expenses related to restricted stock grants
        valued
        at $35 thousand and stock $572 thousand, respectively. During the three and
        nine
        months ended September 30, 2007, the Company had stock-based compensation
        expense, from issuances to the Company’s employees and directors, included in
        reported net loss of $207 thousand and $843 thousand, respectively. The total
        amount of stock-based compensation for the nine months ended September 30,
        2007,
        of $843 thousand, included expenses relate to restricted stock grants of
        $421
        thousand and stock options of $422 thousand.
 
 During
        the three and nine months ended September 30, 2008, the Company had stock-based
        compensation expense from issuances of warrants to employees, directors and
        consultants of the Company included in reported net loss of nil and $532
        thousand, respectively. During the three and nine months ended September
        30,
        2007, the Company had stock-based compensation expense from issuances of
        restricted stock and warrants to consultants of the Company of nil and
        $57
        thousand, respectively.
 
 A
        summary
        of stock option activity for the nine months ended September 30, 2008 is
        presented below *(in
        thousand, except per share data):*
  5
  **Outstanding
                  Options****Shares
                  Available for Grant**
              
              **Number
                  of Shares**
              
              **Weighted
                  Average Exercise Price**
              
              **Weighted
                  Average Remaining Contractual Life (years)**
              
              **Aggregate
                  Intrinsic Value****December
                  31, 2007**
              
              
              **1**
              
              
              **1,650**
              
              **$**
              **3.49**
              
              
              **8.43**Grants
              
              
              (550
              )
              
              550
              
              $
              1.25
              
              
              9.70Cancellations
              
              
              793
              
              
              (793
              )
              $
              4.07
              
              
              7.60**September
                  30, 2008**
              
              
              **244**
              
              
              **1,407**
              
              **$**
              **2.28**
              
              
              **8.71**
              
              **$**
              **—**Options
                  exercisable at:December
                  31, 2007
              
              
              
              
              
              783
              
              $
              4.40
              
              
              7.83
              
              $
              —September
                  30, 2008
              
              
              
              
              
              962
              
              $
              2.65
              
              
              8.49
              
              $
              —
 
 The
        aggregate intrinsic value in the table above represents the total pretax
        intrinsic value (i.e., the difference between our closing stock price on
        September 30, 2008 and the exercise price, times the number of shares) that
        would have been received by the option holders had all option holders exercised
        their options on September 30, 2008. There have not been any options exercised
        during the nine months ended September 30, 2008 or year ended December 31,
        2007.
 
 All
        options that the Company granted during the nine months ended September 30,
        2008
        and 2007 were granted at the per share fair market value on the grant date.
        Vesting of options differs based on the terms of each option. The Company
        utilized the Black-Scholes option pricing model and the assumptions used
        for
        each period are as follows:
  **Nine
                  Months ended September 30,****2008**
              
              
              **2007**Weighted
                  average risk free interest rate
              
              
              3.50
              %
              
              4.50
              %Weighted
                  average life (in years)
              
              
              5.00
              
              
              5.00Volatility
              
              
              106
              %
              
              98
                  - 100
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %Weighted
                  average grant-date fair value per share of options granted
              
              $
              0.93
              
              $
              1.22
 
 A
        summary
        of the changes in the Company’s nonvested options during the nine months ended
        September 30, 2008 is as follows:
 
 **Nonvested
                  Shares**
              
              **Shares**
              
              **Weighted
                  Average Grant Date Fair Value**Nonvested
                  at December 31, 2007
              
              
              867
              
              $
              1.75Granted
              
              
              550
              
              $
              1.40Vested
              
              
              (566
              )
              $
              1.56Cancelled
                  and forfeited
              
              
              (407
              )
              $
              2.23Nonvested
                  at September 30, 2008
              
              
              445
              
              $
              1.12
  6
  As
        of
        September 30, 2008, total unrecognized compensation costs related to unvested
        stock options was $283 thousand. Which is expected to be recognized over
        a
        weighted average period of 1.37 years.
 
 **Beneficial
        Conversion Feature of Convertible Notes Payable**
 
 The
        convertible feature of certain notes payable provides for a rate of conversion
        that is below market value. Such feature is normally characterized as a
        Beneficial Conversion Feature ( ***“BCF”*** ).
        Pursuant to EITF Issue No. 98-5, *Accounting
        for Convertible Securities with Beneficial Conversion Features or Contingently
        Adjustable Conversion Ratio,* EITF No.
        00-27, *Application
        of EITF Issue No. 98-5 To Certain Convertible Instruments* and APB
        14, *Accounting
        for Convertible Debt and Debt Issued with Stock Purchase
        Warrants* ,
        the
        estimated fair value of the BCF is recorded in the consolidated financial
        statements as a discount from the face amount of the notes. Such discounts
        are
        amortized to accretion of convertible debt discount over the term of the
        notes
        (or conversion of the notes, if sooner).
 
 **Warrant
        Derivative Liability**
 
 The
        Company accounts for warrants issued in connection with financing arrangements
        in accordance with EITF Issue No. 00-19, *Accounting
        for Derivative Financial Instruments Indexed to, and Potentially Settled
        in, a
        Company’s Own Stock (“EITF 00-19”).* Pursuant
        to EIFT 00-19, an evaluation of specifically identified conditions is made
        to
        determine whether warrants issued are required to be classified as either
        equity
        or a liability. If the classification required under EITF 00-19 changes as
        a
        result of events during a reporting period, the instrument is reclassified
        as of
        the date of the event that caused the reclassification. In the event that
        this
        evaluation results in a partial reclassification, our policy is to first
        reclassify warrants with the latest date of issuance. The estimated fair
        value
        of warrants classified as derivative liabilities is determined using the
        Black-Scholes option pricing model. The fair value of warrants classified
        as
        derivative liabilities is adjusted for changes in fair value at each reporting
        period, and the corresponding non-cash gain or loss is recorded in current
        period earnings. There is no limit on the number of times a contract may
        be
        reclassified.
 
 **Earnings
        (Loss) per Common Share**
 
 Earnings
        (loss) per common share is based on the weighted average number of common
        shares
        outstanding. The Company complies with SFAS No. 128, *Earnings
        Per Share,* which
        requires dual presentation of basic and diluted earnings per share on the
        face
        of the consolidated statements of operations. Basic loss per common share
        excludes dilution and is computed by dividing loss available to common
        stockholders by the weighted-average common shares outstanding for the period.
        Diluted loss per common share reflects the potential dilution that could
        occur
        if convertible preferred stock or debentures, options and warrants were to
        be
        exercised or converted or otherwise resulted in the issuance of common stock
        that then shared in the earnings of the entity.
 
 The
        following sets forth the number of shares of common stock underlying outstanding
        options, warrants, convertible preferred stock and convertible debt as of
        September 30, 2008 and 2007 ( *in
        thousands* ):
  **September
                  30, 2008**
              
              
              **September
                  30, 2007**Warrants
              
              
              10,680
              
              
              4,758Stock
                  options
              
              
              1,407
              
              
              1,491Convertible
                  promissory notes
              
              
              1,057
              
              
              2,667Convertible
                  preferred stock
              
              
              246
              
              
              24613,390
              
              
              9,162
 
 **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the amounts reported in the financial
        statements and accompanying notes. The actual results may differ from
        management’s estimates.
  7
  **Reclassifications**
 
 Certain
        prior year amounts have been reclassified to conform to the 2008
        presentation. These
        reclassifications had no effect on previously reported results of operations
        or
        accumulated deficit.
 
 **Recent
        Accounting Pronouncements**
 
 In
        September 2006, the Financial Accounting Standards Board known
        as
        FASB issued
        Statement of Financial Accounting Standards No. 157, *Fair
        Value Measurements.* SFAS 157
        does not require new fair value measurements but rather defines fair value,
        establishes a framework for measuring fair value and expands disclosure of
        fair
        value measurements. SFAS 157 is effective for fiscal years beginning after
        November 15, 2007 and interim periods within those fiscal years. T he
        Company adopted SFAS 157 on January 1, 2008 and i n
        connection with its adoption, there was no impact on the Company’s consolidated
        financial statements.
  In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159, *The
        Fair Value Option for Financial Assets and Financial Liabilities - Including
        an
        amendment to FASB Statement No. 115* .
        This
        statement permits companies to choose to measure many financial instruments
        and
        other items at fair value. The objective is to improve financial reporting
        by
        providing entities with the opportunity to mitigate volatility in reported
        earnings caused by measuring related assets and liabilities differently without
        having to apply complex hedge accounting provisions. This statement is expected
        to expand the use of fair value measurement of accounting for financial
        instruments. The fair value option established by this statement permits
        all
        entities to measure eligible items at fair value at specified election dates
        with the resulting unrealized gains and losses, if any, reported in earnings.
        T he
        Company adopted SFAS 159 on January 1, 2008 and i n
        connection with its adoption, there was no impact on the Company’s consolidated
        financial statements.
 
 Staff
        Accounting Bulletin 110 issued by the SEC was effective for the Company
        beginning in the first quarter of 2008. SAB 110 amends the SEC’s views discussed
        in Staff Accounting Bulletin 107 regarding the use of the simplified method
        in
        developing estimates of the expected lives of share options in accordance
        with
        SFAS No. 123(R), *Share-Based
        Payment* .
        The
        Company will continue to use the simplified method until we have the historical
        data necessary to provide reasonable estimates of expected lives in accordance
        with SAB 107, as amended by SAB 110.
 
 In
        December 2007, the FASB issued Statement
        of Financial Accounting Standards No.
        141(R), *Business
        Combinations* .
        This
        statement requires
        the acquiring entity in a business combination to record all assets acquired
        and
        liabilities assumed at their respective acquisition-date fair values, changes
        the recognition of assets acquired and liabilities assumed arising from
        contingencies, changes the recognition and measurement of contingent
        consideration, and requires the expensing of acquisition-related costs as
        incurred. SFAS 141(R) also requires additional disclosure of information
        surrounding a business combination, such that users of the entity's financial
        statements can fully understand the nature and financial impact of the business
        combination. The Company will implement SFAS No. 141(R) on January 1, 2009 and
        will
        apply prospectively to business combinations completed on or after that
        date .
        The
        Company does not expect that the adoption of this standard will have a material
        impact on our financial position or results of operations.
 
 In
        December 2007, the FASB issued Statement
        of Financial Accounting Standards No. 160, *Noncontrolling
        Interests in Consolidated Financial Statements* *an
        amendment of ARB 51* .
        SFAS
        160 establishes
        accounting and reporting standards for ownership interests in subsidiaries
        held
        by parties other than the parent, the amount of consolidated net income
        attributable to the parent and to the noncontrolling interest, changes in
        a
        parent's ownership interest and the valuation of retained noncontrolling
        equity
        investments when a subsidiary is deconsolidated. SFAS 160 also established
        reporting requirements that provide sufficient disclosures that clearly identify
        and distinguish between the interests of the parent and the interests of
        the
        noncontrolling owner. The Company will implement SFAS No. 160 on January
        1,
        2009. As of September 30, 2008, the Company did not have any minority interests.
        Therefore, the Company does not expect the adoption of this standard to have
        a
        material impact on our income statement, financial position or cash flows.
 
 In
        March 2008, the FASB issued Statement of Financial Accounting Standards
        No. 161, *Disclosures
        about Derivative Instruments and Hedging Activities—an amendment of FASB
        Statement No. 133* .
        The
        standard requires additional quantitative disclosures (provided in tabular
        form)
        and qualitative disclosures for derivative instruments. The required disclosures
        include how derivative instruments and related hedged items affect an entity’s
        financial position, financial performance, and cash flows; relative volume
        of
        derivative activity; the objectives and strategies for using derivative
        instruments; the accounting treatment for those derivative instruments formally
        designated as the hedging instrument in a hedge relationship; and the existence
        and nature of credit-related contingent features for derivatives. SFAS
        No. 161 does not change the accounting treatment for derivative
        instruments. SFAS No. 161 is effective for the Company in the first quarter
        of fiscal year 2009. The Company does not expect that the adoption of this
        standard will have a material impact on our financial position or results
        of
        operations.
  8
  In
        May 2008, the FASB issued FSP APB 14-1, Accounting for *Convertible
        Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
        Cash Settlement)* .
        FSP APB
        14-1 requires recognition of both the liability and equity components of
        convertible debt instruments with cash settlement features. The debt component
        is required to be recognized at the fair value of a similar instrument that
        does
        not have an associated equity component. The equity component is recognized
        as
        the difference between the proceeds from the issuance of the note and the
        fair
        value of the liability. FSP APB 14-1 also requires an accretion of the resulting
        debt discount over the expected life of the debt. Retrospective application
        to
        all periods presented is required and a cumulative-effect adjustment is
        recognized as of the beginning of the first period presented. This standard
        is
        effective for us in the first quarter of fiscal year 2009. We are currently
        evaluating the impact of FSP APB 14-1.
 
 In
        May
        2008, the FASB issued Statement of Financial Accounting Standards No. 162. *The
        Hierarchy of Generally Accepted Accounting Policies* ,
        which
        reorganizes the GAAP hierarchy. The purpose of the new standard is to improve
        financial reporting by providing a consistent framework for determining what
        accounting principles should be used when preparing the U.S. GAAP financial
        statements. The standard is effective 60 days after the SEC’s approval of the
        PCAOB’s amendments to AU Section 411. The adoption of SFAS 162 will not have an
        impact on our financial position or results of operations.
 
 In
        June
        2008, the FASB issued FSP No. EITF 03-6-1, *Determining
        Whether Instruments Granted in Share-Based Payment Transactions Are
        Participating Securities* ,
        which
        requires entities to apply the two-class method of computing basic and diluted
        earnings per share for participating securities that include awards that
        accrue
        cash dividends (whether paid or unpaid) any time common shareholders received
        dividends and those dividends do not need to be returned to the entity if
        the
        employee forfeits the award. FSP EITF 03-6-1 will be effective for the Company
        on January 1, 2009 and will require retroactive disclosure. We are currently
        evaluating the impact of adopting FSP EITF 03-6-1 on our consolidated financial
        position, cash flows and results of operations.
  
 **4.
        DISCONTINUED OPERATIONS**
 
 As
        part
        of a strategic plan to dispose of all the Company’s non-patient safety related
        assets, during the fourth quarter of 2006 the Company began marketing for
        sale the assets of ASG, located
        in Alabama. The Company completed the sale of one operating car wash on June
        29,
        2007 and the remaining two parcels of undeveloped land during the nine months
        ended September 30, 2007. The assets of ASG met the
“held for sale” and “discontinued operations” criteria in accordance with SFAS
        144.
  The
        following sets forth the discontinued operations for the nine months ended
        September 30, 2008 and 2007 related to the held for sale assets of
        Automotive Services Group ( *in
        thousands* ) :
  **Nine
                  Months Ended September 30,****2008**
              
              
              **2007**Operating
                  revenues
              
              $
              —
              
              $
              309Operating
                  expenses
              
              
              —
              
              
              (262
              )Depreciation
                  and amortization
              
              
              —
              
              
              (22
              )Interest
                  expense
              
              
              —
              
              
              (201
              )Gain
                  on sale of assets
              
              
              —
              
              
              10Loss
                  from discontinued operations
              
              $
              —
              
              $
              (166
              )
  9
  **Assets
        held for sale**
 
 Assets
        held for sale as of September 30, 2008 consist of a parcel of land located
        in
        Tennessee and has a book value of $90 thousand. The land is currently in
        escrow and the Company expects the sale to be completed prior to
        year-end.
 
 **5.
        PATENTS**
 
 Patents,
        net, as of September 30, 2008 and December 31, 2007 are composed of patents
        ( *in
        thousands* ):
  **September
                  30, 2008**
              
              
              **December
                  31, 2007**Patents
              
              $
              4,685
              
              $
              4,685Accumulated
                  amortization
              
              
              (1,165
              )
              
              (921
              )$
              3,520
              
              $
              3,764
 
 **6.
        LONG-TERM INVESTMENTS**
 
 Long-term
        investments at September 30, 2008 and December 31, 2007 are comprised of
        the
        Company’s investment in Alacra Corporation ( ***“Alacra”*** ).
        The
        investment represents 221 thousand shares of Series F convertible preferred
        stock of Alacra Corporation, recorded at its cost of $667 thousand, and
        classified as an available-for-sale investment. The Company has the right,
        to
        the extent that Alacra has sufficient available capital, to have the Series
        F
        convertible preferred stock redeemed by Alacra for face value plus accrued
        dividends beginning on December 31, 2006. During the year ended December
        31,
        2007, Alacra redeemed one-third of the Series F convertible preferred stock.
        Alacra, based in New York, is a global provider of business and financial
        information.
 
 **7.
        OTHER ASSETS**
 
 At
        September 30, 2008 and December 31, 2007, the Company had other assets of
        approximately $29 thousand and $19 thousand respectively, consisting primarily
        of security deposits.
 
 **8.
        NOTES PAYABLE**
 
 Notes
        payable at September 30, 2008 and December 31, 2007 are comprised of the
        following *(in
        thousands* ):
  Related
                  Party Notes:
              
              
              **September
                  30,**
                **2008**
              
              
              **December
                  31, 2007**Notes
                  payable to Ault Glazer Capital Partners, LLC (a)
              
              $
              1,775
              
              $
              2,531Notes
                  payable to Herb Langsam (b)
              
              
              600
              
              
              600Note
                  payable to Catalysis Offshore, Ltd (c)
              
              
              250
              
              
              —Note
                  payable to Catalysis Partners, LLC (c)
              
              
              250
              
              
              —Sub-total,
                  Related Party Notes
              
              
              2,875
              
              
              3,131Note
                  payable to Charles Kalina III (d)
              
              
              —
              
              
              400Other
                  notes payable (e)
              
              
              71
              
              
              172Total
                  notes payable
              
              
              2,946
              
              
              3,703Less:
                  current portion
              
              
              (2,946
              )
              
              (1,172
              )Notes
                  payable - long-term portion
              
              $
              —
              
              $
              2,531
  10
  Aggregate
        future required principal payments on these notes during the twelve month
        period
        subsequent to September 30, 2008 are $2.9 million.
  (a)
              Effective
                  June 1, 2007, the entire unpaid principal and interest due under
                  note
                  payable agreements previously entered into with Ault Glazer Capital
                  Partners, LLC (formerly AGB Acquisition Fund) (the***“Fund”***)
                  a
                  related party, were restructured into a new Convertible Secured
                  Promissory
                  Note (the***"AG
                  Partners Convertible Note"***)in
                  the principal amount of $2.5 million. The Fund is controlled by
                  Milton
                  “Todd” Ault III, a former director of the Company and its former Chairman
                  and Chief Executive Officer and Louis Glazer, a director of the
                  Company,
                  both of whom currently have a significant beneficial ownership
                  interest in
                  the Company’s common and preferred stock.The
                  AG Partners Convertible Note bears interest at the rate of 7% per
                  annum
                  and is due on the earlier of December 31, 2010, or the occurrence
                  of an
                  event of default. In the event that the average closing price of
                  the
                  Company’s common stock is in excess of $5.00 per share for thirty (30)
                  consecutive trading days, the Company will have the right to redeem
                  the
                  promissory note in shares or in cash. In the event of redemption
                  in
                  shares, the principal is convertible into shares of the Company’s common
                  stock at a conversion price of $2.50. The promissory note is secured
                  by
                  all of the Company’s assets. Should the Company raise up to $2 million in
                  a new credit facility, including any replacement credit facilities,
                  the
                  Fund is required to subordinate its security interest in favor
                  of the new
                  credit facility. During the three and nine months ended September
                  30,
                  2008, the Company incurred interest expense of $38 thousand and
                  $127
                  thousand, respectively, on the AG Partners Convertible Note. During
                  the
                  three and nine months ended September 30, 2007, the Company incurred
                  interest expense of $44 thousand and $59 thousand, respectively,
                  on the AG
                  Partners Convertible Note.
 
 In
                  connection with the Ault Glazer Partners, LLC Note agreement, the
                  Company
                  issued 153,150 shares of its common stock in July 2008, with an
                  agreed
                  upon value of $1.50 per share, to pay past due interest owed by
                  the
                  Company from the first and second quarter of 2008 and current interest
                  owed for the third quarter of 2008 totaling approximately $127
                  thousand,
                  and to prepay future interest related to the outstanding note balance.
                  The
                  prepaid interest balance, which is included in prepaid expenses
                  at
                  September 30, 2008 is approximately $103
                  thousand.
 
 On September
                  5, 2008 an amendment was entered into between Ault Glazer Partners
                  LLC and
                  the Company. The Amendment and Early Conversion of Secured Convertible
                  Promissory Note (the “AG Amendment”) replaces the Secured Convertible
                  Promissory Note, effective June 1, 2007 in the principal amount
                  of $2.5
                  million, described above. The terms of the AG Amendment stipulate
                  the
                  Company will pay the lender $450 thousand in cash and convert the
                  remaining balance of the note to 1.3 million shares of common stock
                  upon
                  satisfactory completion of certain conditions, as specified in
                  the
                  amendment. The lender is currently in possession of several pieces
                  of
                  office equipment that is leased under the Company’s name. One of the
                  stipulations of the amendment is to transfer the leases into the
                  lenders’
                  name. The equipment is not carried on the Company’s book and does not pay
                  the monthly lease payment. The lender may transfer or sell the
                  Early
                  Conversion Shares according to the following schedule: 400 thousand
                  shares
                  may be sold or transferred within the first 90 days after closing
                  and up
                  to 125 thousand shares may be sold or transferred during each calendar
                  month beginning 90 days after closing. As of September 30, 2008
                  the
                  Company has paid $450 thousand in cash and issued 300 thousand
                  shares of
                  common stock as partial settlement under the AG Amendment. In November
                  2008, the Company issued 250 thousand additional shares of its
                  common
                  stock pursuant to the Amendment. The Company expects the remaining
                  750
                  thousand shares of common stock to be issued in
                  2009.
 
 (b)
              On
                  May 1, 2006, Herbert Langsam, a Class II Director of the Company,
                  loaned
                  the Company $500 thousand. The loan is documented by a $500 thousand
                  Secured Promissory Note (the***“Langsam
                  Note”***)
                  payable to the Herbert Langsam Irrevocable Trust. The Langsam Note
                  accrues
                  interest at the rate of 12% per annum and had a maturity date of
                  November
                  1, 2006. This note was not repaid by the scheduled maturity and
                  to date
                  has not been extended, therefore the Langsam Note is recorded in
                  current
                  liabilities. Accordingly, the note is currently in default and
                  therefore
                  accruing interest at the rate of 16% per annum. Pursuant to the
                  terms of a
                  Security Agreement dated May 1, 2006, the Company granted the Herbert
                  Langsam Revocable Trust a security interest in all of the Company’s assets
                  as collateral for the satisfaction and performance of the Company’s
                      obligations pursuant to the Langsam
                  Note.
  11
  On
                  November 13, 2006, Mr. Langsam, loaned the Company an additional
                  $100
                  thousand. The loan is documented by a $100 thousand Secured Promissory
                  Note (the***“Second
                  Langsam Note”***)
                  payable to the Herbert Langsam Irrevocable Trust. The Second Langsam
                  Note
                  accrues interest at the rate of 12% per annum and had a maturity
                  date of
                  May 13, 2007. The Company is in the process of restructuring the
                  debt that
                  is owed to Mr. Herbert Langsam. Mr. Langsam received warrants to
                  purchase
                  50 thousand shares of the Company’s common stock at an exercise price of
                  $1.25 per share as additional consideration for entering into the
                  loan
                  agreement. The Company recorded debt discount in the amount of
                  $17
                  thousand as the estimated value of the warrants. The debt discount
                  was
                  amortized as non-cash interest expense over the term of the debt
                  using the
                  effective interest method. During the nine months ended September
                  30, 2008
                  and 2007, interest expense of nil and $12 thousand, respectively,
                  was
                  recorded from the debt discount amortization. Pursuant to the terms
                  of a
                  Security Agreement dated November 13, 2006, the Company granted
                  the
                  Herbert Langsam Revocable Trust a security interest in all of the
                  Company’s assets as collateral for the satisfaction and performance of
                  the
                  Company’s obligations pursuant to the Second Langsam Note.
 
 During
                  the three and nine months ended September 30, 2008, the Company
                  incurred
                  interest expense, excluding amortization of debt discount, of $24
                  thousand
                  and $72 thousand, respectively, on the Langsam Notes. During the
                  three and
                  nine months ended September 30, 2007, the Company incurred interest
                  expense, excluding amortization of debt discount, of $18 thousand
                  and $64
                  thousand, respectively. At September 30, 2008 and December 31,
                  2007
                  accrued interest on the Langsam Notes totaled $186 thousand and
                  $138
                  thousand, respectively.
 
 (c)
              Between
                  February 28, 2008 and March 20, 2008, Catalysis Offshore, Ltd.
                  and
                  Catalysis Partners, LLC (collectively***“Catalysis”***),
                  related parties, each loaned $250 thousand to the Company. As
                  consideration for the loans, the Company issued Catalysis promissory
                  notes
                  in the aggregate principal amount of $500 thousand (the***“Catalysis
                  Notes”***).
                  The Catalysis Notes accrue interest at the rate of 8% per annum
                  and had
                  maturity dates of May 31, 2008. The managing partner of Catalysis
                  is
                  Francis Capital Management, LLC (***“Francis
                  Capital”***),
                  an investment management firm. John Francis, a director of the
                  Company and
                  President of Francis Capital, has voting and investment control
                  over the
                  securities held by Catalysis. Francis Capital, including shares
                  directly
                  held by Catalysis, beneficially owns 1.3 million shares of the
                  Company’s
                  common stock and warrants for purchase of 763 thousand shares of
                  the
                  Company’s common stock.During the three and nine months ended September 30, 2008, the
                  Company
                  incurred interest expense of $14 thousand and $27 thousand, respectively,
                  on the Catalysis Notes. At September 30, 2008 accrued interest
                  on the
                  Catalysis Notes totaled $27
                  thousand.
 
 (d)
              On
                  July 12, 2006 the Company, executed a Convertible Promissory Note
                  in the
                  principal amount of $250 thousand in favor of Charles J. Kalina,
                  III, an
                  existing shareholder of the Company. On November 3, 2006 the balance
                  due
                  under the $250 thousand Convertible Promissory Note was added to
                  a new
                  Convertible Promissory Note in the principal amount of $400 thousand
                  (the***“Kalina
                  Note”***),
                  pursuant to which the Company received proceeds of approximately
                  $150
                  thousand. The Kalina Note accrued interest at the rate of 12% per
                  annum
                  and was due on January 31, 2008. On May 20, 2008, the principal
                  and
                  accrued interest on the Kalina Note, in the aggregate amount of
                  $426
                  thousand, was exchanged for equity in the Company. Mr. Kalina received
                  341
                  thousand shares of the Company’s common stock and a warrant to purchase
                  205 thousand shares of the Company’s common stock at $1.40 per share.
                  During the three and nine months ended September 30, 2008, the
                  Company
                  incurred interest expense, excluding amortization of debt discount
                  of $12
                  thousand and $34 thousand, respectively, on the Kalina Note. At
                  December
                  31, 2007 accrued interest on the Kalina Note totaled $8
                  thousand.
 
 (e)
              On
                  November 1, 2006 we entered into a Convertible Promissory Note
                  with
                  Michael G. Sedlak in the principal amount of $71 thousand (the***“Sedlak
                  Note”***).
                  The Sedlak Note, which was not paid by its scheduled maturity date,
                  January 31, 2008, accrues interest at the rate of 12% per
                  annum.
 
 **9.
        ACCRUED LIABILITIES**
 
 Accrued
        liabilities at September 30, 2008 and December 31, 2007 are comprised of
        the
        following ( *in
        thousands* ):
  12
  **September
                  30, 2008**
              
              
              **December
                  31, 2007**Accrued
                  interest
              
              $
              213
              
              $
              169Accrued
                  dividends on preferred stock
              
              
              134
              
              
              134Accrued
                  salaries and director fees
              
              
              123
              
              
              212Warrant
                  derivative liability
              
              
              2,825
              
              
              —Other
              
              
              8
              
              
              6$
              3,303
              
              $
              521
 
 **10.
        EQUITY TRANSACTIONS**
 
 Between
        May 20, 2008 and June 19, 2008, the Company sold, in a private placement
        exempt
        from the registration requirements of the Securities Act, 2.1 million shares
        of
        the Company’s common stock at $1.25 price per share and issued five-year
        warrants to purchase 1.3 million shares of common stock at an exercise price
        of
        $1.40 per share, pursuant to a Securities Purchase Agreement entered into
        with
        several accredited investors. The investors paid a total of $1.5 million
        in
        cash, $700 thousand in prepaid inventory, and agreed to the extinguishment
        of
        debt and accrued interest totaling $426 thousand owed by the
        Company.
 
 Between
        August 1, 2008 and August 30, 2008, the Company sold, in a private placement
        exempt from the registration requirements of the Securities Act, 2.0 million
        shares of the Company’s common stock at $1.25 price per share and issued
        five-year warrants to purchase 1.3 million shares of common stock at an exercise
        price of $1.40 per share, pursuant to a Securities Purchase Agreement entered
        into with several accredited investors. The investors paid a total of $2.4
        million in cash, and agreed to extinguishment of existing accrued liabilities
        totaling $83 thousand owed by the Company.
 
 **11.
        WARRANTS AND WARRANT DERIVATIVE LIABILITY**
 
 During
        the three and nine months ended September 30, 2008, a total of 1.3 million
        and
        4.6 million warrants, at an average exercise price of $1.39 per share were
        issued primarily in connection with the various subscription agreements entered
        into by the Company as well as payment for services and accrued interest.
        The
        warrants were valued using the Black-Scholes valuation model assuming expected
        dividend yield, risk-free interest rate, expected life and volatility of
        0%,
        3.50%, five years and 103% - 106%, respectively. Warrants granted during
        the
        year ended December 31, 2007 were valued using an expected dividend yield,
        risk-free interest rate, expected life and volatility of 0%, 4.50%, five
        years
        and 63% - 101%, respectively. As of September 30, 2008, a total of 10.7 million
        warrants, at exercise prices ranging from $1.25 to $6.05 remain outstanding.
        Of
        the 10.7 million warrants outstanding, 1.2 million warrants are
        unvested.
 
 As
        discussed in Note 2, EITF 00-19 requires analysis of criteria which must
        be met
        in order to classify warrants issued in a Company’s own stock as either equity
        or liabilities. Evaluation of these criteria as of September 30, 2008 resulted
        in the determination that certain outstanding warrants should be classified
        as
        derivative liabilities.
 
 Based
        on
        this analysis, 5.3 million warrants have been classified as warrant derivative
        liabilities. As of September 30, 2008, the total fair value of the warrant
        derivative liabilities is $2.8 million, which is included as a component
        of
        accrued liabilities. Based on the change in fair value of the warrant derivative
        liability, the Company recorded a non-cash gain of $1.7 million and $1.5
        million during the three and nine months ended September 30, 2008,
        respectively.
  **12.
        FAIR VALUE MEASUREMENTS**
 
 We
        adopted SFAS 157 effective January 1, 2008 for financial assets and liabilities
        measured on a recurring basis. SFAS 157 defines fair value, establishes a
        framework for measuring fair value and generally accepted accounting principles
        and expands disclosures about fair value measurements. This standard applies
        in
        situations where other accounting pronouncements either permit or require
        fair
        value measurements. SFAS 157 does not require any new fair value
        measurements.
  13
  Fair
        value is defined in SFAS 157 as the price that would be received to sell
        an
        asset or paid to transfer a liability in an orderly transaction between market
        participants at the measurement date. Fair value measurements are to be
        considered from the perspective of a market participant that holds the assets
        or
        owes the liability. SFAS 157 also establishes a fair value hierarchy which
        required an entity to maximize the use of observable inputs and minimize
        the use
        of unobservable inputs when measuring fair value.
 
 The
        standard describes three levels of inputs that may be used to measure fair
        value:
 
 Level
        1:
        Quoted prices in active markets for identical or similar assets and
        liabilities.
 
 Level
        2:
        Quoted prices for identical or similar assets and liabilities in markets
        that
        are not active or observable inputs other than quoted prices in active markets
        for identical or similar assets and liabilities.
 
 Level
        3:
        Unobservable inputs that are supported by little or no market activity and
        that
        are significant to the fair value of the assets or liabilities.
 
 At
        September 30, 2008 we had outstanding warrants to purchase common shares
        of our
        stock that are classified as warrant derivative liabilities with a fair value
        of
        $2.8 million. The warrants are valued using Level 3 inputs because there
        are
        significant unobservable inputs associated with them.
 
 
 **13.
        RELATED PARTY TRANSACTIONS**
 
 *Rent*
 
 During
        the nine months ended September 30, 2007 the Company paid approximately $26
        thousand of the base rent on the corporate offices and The Ault Glazer Group,
        Inc. ( ***"Ault
        Glazer"*** )
        paid
        the remaining base rent based upon their respective usage of the facilities.
        Together, Milton “Todd” Ault III, our former Chairman and Chief Executive
        Officer of the Company, and Louis Glazer, a Class I Director of the Company,
        and
        Melanie Glazer, the former Manager of our real estate segment, (together,
        the ***“Glazers”*** )
        own a
        controlling interest in the outstanding capital stock of Ault Glazer. As
        of
        September 30, 2008 and December 31, 2007, Ault Glazer, Mr. Ault and the Glazers
        had a significant beneficial ownership interest in the outstanding common
        and
        preferred stock of the Company.
 
 *Notes
        Payable*
 
 As
        of
        September 30, 2008 and December 31, 2007, the Company has notes payable
        agreements issued to related parties with aggregate outstanding principal
        balances of $2.9 million and $3.1 million, respectively (See Note
        8).
 
 *ASG*
 
 During
        the period from June 29, 2007 to August 13, 2007, Automotive Services Group
        sold
        its express car wash and underlying
        real estate and a parcel of undeveloped land located in Birmingham, Alabama
        to Charles
        H. Dellaccio and Darrell Grimsley. Mr. Grimsley was the Chairman of the Board
        and Chief Executive Officer of Automotive Services Group.
 
 *A
        Plus International, Inc.*
 
 The
        Company recorded cost of goods sold of $514 thousand and $100 thousand for
        the
        three months ended September 30, 2008 and 2007, respectively, in connection
        with
        surgical sponges provided by A Plus. During the nine months ended September
        30,
        2008 and 2007, the Company recorded cost of goods sold of $1.1 million and
        $352
        thousand, respectively, in connection with surgical sponges provided by A
        Plus.
        As part of the May 2008 financing, the Company recorded $700 thousand in
        prepaid
        expenses to be used against inventory ordered from A Plus. As of September
        30,
        2008 there was $133 thousand remaining in prepaid expenses. Wenchen Lin,
        a
        director and significant beneficial owner of the Company is a founder and
        significant owner of A Plus.
  14
  *Health
        West Marketing Inc.*
 
 During
        the three and nine months ended September 30, 2008, Health West Marketing
        Incorporated received payments for consulting services, of $60 thousand and
        $180
        thousand, respectively, from A Plus International, Inc. William Adams the
        Company’s Chief Executive Officer is the Chief Executive Officer and President
        of Health West Marketing Inc. For the three and nine months ended September
        30,
        2007, Health West Marketing Incorporated received payments for consulting
        services of $60 thousand and $180 thousand, respectively. The consulting
        arrangement between A Plus and Health West has been an ongoing agreement
        between
        the respective parties. The Company does not recognize this income or expense
        on
        their financial statements.
 
 
 **14.
        COMMITMENTS AND CONTINGENCIES**
 
 *Legal
        Proceedings*
 
 On
        October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
        filed a lawsuit (the ***“Leve
        Lawsuit”*** )
        against
        the Company, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
        and
        four other defendants affiliated with Winstar Communications, Inc. ( ***“Winstar”*** ).
        On
        February 25, 2003, the case against the Company and Sunshine was dismissed,
        however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
        Partnership, L.P. exercised their right to appeal. The initial lawsuit alleged
        that the Winstar defendants conspired to commit fraud and breached their
        fiduciary duty to the plaintiffs in connection with the acquisition of the
        plaintiff's radio production and distribution business. The complaint further
        alleged that the Company and Sunshine joined the alleged conspiracy. On June
        1,
        2005, the United States Court of Appeals for the Second Circuit affirmed
        the
        February 25, 2003 judgment of the district court dismissing the claims against
        the Company.
 
 On
        July
        28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed
        a new
        lawsuit (the ***“new
        Leve Lawsuit”*** )
        against
        the Company, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
        and
        four other defendants affiliated with Winstar Communications, Inc. ( ***“Winstar”*** ).
        The
        new Leve Lawsuit attempts to collect a federal default judgment of $5.0 million
        entered against only two entities, i.e., Winstar Radio Networks, LLC and
        Winstar
        Global Media, Inc., by attempting to enforce the judgment against a number
        of
        additional entities who are not judgment debtors. Further, the new Leve Lawsuit
        attempts to enforce the plaintiffs default judgment against entities who
        were
        dismissed on the merits from the underlying action in which plaintiffs obtained
        their default judgment. An unfavorable outcome in the lawsuit may have a
        material adverse effect on the Company's business, financial condition and
        results of operations. The Company believes the lawsuit is without merit
        and
        intends to vigorously defend itself. These consolidated interim financial
        statements do not include any adjustments for the possible outcome of this
        uncertainty.
 
 As
        of
        September 30, 2008 final arguments were being prepared by the respective
        parties. No decision has been rendered by the Court.
 
 
 **15.
        SUBSEQUENT EVENTS**
 
 On
        October 10, 2008, the Company’s former principal accounting officer, tendered
        his resignation as Chief Financial Officer and Secretary of the Company and
        as
        an officer and director of the Company’s subsidiary, SurgiCount Medical, Inc.,
        effective October 13, 2008. The resignation arose from his desire to spend
        more
        time with his family and to pursue other career opportunities.
 
 To
        fill
        the vacancy created by the resignation, Mary Lay was appointed Interim Chief
        Financial Officer and principal accounting officer, effective October 13,
        2008.
  15


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





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





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





**Overview**





Patient
      Safety Technologies, Inc. (referred to in this report as the ***“Company,”***  ***“we,”
      “us,”*** and ***“our”*** )
      was
      incorporated on March 31, 1987, under the laws of the state of Delaware.
      Currently we conduct our operations through a single wholly-owned operating
      subsidiary: SurgiCount Medical, Inc. ( ***“SurgiCount”*** ),
      a
      California corporation. Beginning in July 2005 through August 2007, the
      Company’s wholly-owned subsidiary, Automotive Services Group, Inc., a Delaware
      corporation, held the Company’s investment in Automotive Services Group, LLC
      ( ***“ASG”*** ),
      its
      wholly-owned express car wash subsidiary. During the period from June 29, 2007
      to August 13, 2007, Automotive Services Group sold all the assets held by
      ASG.





The
      Company is engaged in the acquisition of controlling interests in companies
      and
      research and development of products and services focused primarily in the
      health care and medical products field, particularly the patient safety markets.
      SurgiCount is a developer and manufacturer of patient safety products and
      services. In 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 a
      result of our prior focus on the financial services and real estate industries,
      we continue to hold various other unrelated investments. We are in the process
      of liquidating these few remaining non-patient safety related assets (the
“ *non-core
      assets* ”).
      The
      non-core assets are recorded on the Company’s balance sheet in “long-term
      investments” and “assets held for sale, net”.





**SurgiCount**





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




16




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





**Critical
      accounting policies and estimates**





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





**Warrant
      Derivative Liability**





The
      Company accounts for warrants issued in connection with financing arrangements
      in accordance with EITF Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock (“EITF 00-19”).* Pursuant
      to EIFT 00-19, an evaluation of specifically identified conditions is made
      to
      determine whether warrants issued are required to be classified as either equity
      or a liability. If the classification required under EITF 00-19 changes as
      a
      result of events during a reporting period, the instrument is reclassified
      as of
      the date of the event that caused the reclassification. In the event that this
      evaluation results in a partial reclassification, our policy is to first
      reclassify warrants with the latest date of issuance. The estimated fair value
      of warrants classified as derivative liabilities is determined using the
      Black-Scholes option pricing model. The fair value of warrants classified as
      derivative liabilities is adjusted for changes in fair value at each reporting
      period, and the corresponding non-cash gain or loss is recorded in current
      period earnings. There is no limit on the number of times a contract may be
      reclassified.





**Valuation
      of Intangible Assets**





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





**Stock-Based
      Compensation**





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




17




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








**New
      Accounting Pronouncements**





In
      September 2006, the FASB ***,***  issued
      Statement of Financial Accounting Standards No. 157, *Fair
      Value Measurements* .
      SFAS
      157 does not require new fair value measurements but rather defines fair value,
      establishes a framework for measuring fair value and expands disclosure of
      fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. We adopted
      SFAS 157 on January 1, 2008 and i n
      connection with its adoption, there was no impact on our consolidated financial
      statements.




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





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





In
      December 2007, the FASB issued Statement
      of Financial Accounting Standards No.
      141(R), *Business
      Combinations* .
      This
      statement requires
      the acquiring entity in a business combination to record all assets acquired
      and
      liabilities assumed at their respective acquisition-date fair values, changes
      the recognition of assets acquired and liabilities assumed arising from
      contingencies, changes the recognition and measurement of contingent
      consideration, and requires the expensing of acquisition-related costs as
      incurred. SFAS 141(R) also requires additional disclosure of information
      surrounding a business combination, such that users of the entity's financial
      statements can fully understand the nature and financial impact of the business
      combination. We will implement SFAS No. 141(R) on January 1, 2009 and
      will
      apply prospectively to business combinations completed on or after that
      date .
      The
      Company does not expect an impact on our financial position or results of
      operations.





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




18




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





In
      April
      2008, the FASB issued FSP FAS 142-3 *,
      Determination of Useful Life of Intangible Assets* .
      FSP FAS
      14203 amends the factors that should be considered in developing the renewal
      or
      extension assumptions used to determine the useful life of a recognized
      intangible asset under FAS 142, “Goodwill and Other Intangible Assets.” FSP FAS
      142-3 also requires expanded disclosure related to the determination of
      intangible asset useful lives. FSP FAS 142-3 is effective for fiscal years
      beginning after December 15, 2008. Earlier adoption is not permitted. We do
      not
      expect FSP FAS 142-3 will have a material impact on our financial
      statements.





In
      May
      2008, the FASB issued FASB Staff Position APB 14-1, *Accounting
      for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
      (Including Partial Cash Settlement)* .
      FSP APB
      14-1 requires recognition of both the liability and equity components of
      convertible debt instruments with cash settlement features. The debt component
      is required to be recognized at the fair value of a similar instrument that
      does
      not have an associated equity component. The equity component is recognized
      as
      the difference between the proceeds from the issuance of the note and the fair
      value of the liability. FSP APB 14-1 also requires an accretion o the resulting
      debt discount over the expected life of the debt. Retrospective application
      to
      all periods presented is required and a cumulative-effect adjustment is
      recognized as of the beginning of the first period presented. This standard
      is
      effective for us in the first quarter of fiscal year 2009. We are currently
      evaluating the impact of FSP APB 14-1.





In
      May
      2008, the FASB issued Statement of Financial Accounting Standards No. 162. *The
      Hierarchy of Generally Accepted Accounting Policies* ,
      which
      reorganizes the GAAP hierarchy. The purpose of the new standard is to improve
      financial reporting by providing a consistent framework for determining what
      accounting principles should be used when preparing the U.S. GAAP financial
      statements. The standard is effective 60 days after the SEC’s approval of the
      PCAOB’s amendments to AU Section 411. The adoption of SFAS 162 will not have an
      impact on our financial position or results of operations.





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








**Results
      of Operations**





*Revenue
      and Expense Components*





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





*Revenues.* We
      derive our revenue primarily from the sale of our SurgiCount sponges and the
      related hardware. Our revenues are generated by our direct sales force and
      independent distributors. Our products are ordered directly by the hospitals
      through our distributors and shipped and billed directly. Although hardware
      sales are not considered a recurring item, we expect that once an institution
      adopts our system, they will be committed to its use and therefore provide
      a
      recurring source of revenues for sales of the safety sponge




19




*Cost
      of revenues* .
      Cost of
      revenues consist of direct product costs billed from our contract manufacturer.





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





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





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





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





*Revenues*





We
      recognized revenues of $880 thousand and $213 thousand during the three months
      ended September 30, 2008 and 2007, respectively. Revenues during the three
      months ended September 30, 2008 consisted of sales from the Safety-Sponge of
      $737 thousand and sales from hardware and supplies of $142 thousand. Revenues
      during the three months ended September 30, 2007 consisted of sales from the
      Safety-Sponge of $1.6 million and sales from hardware and supplies of $314
      thousand. Although hardware sales are not considered a recurring item, we expect
      that once an institution adopts our system, they will be committed to its use
      and therefore provide a recurring source of revenues for sales of the safety
      sponge.





We
      recognized revenues of $1.9 million and $834 thousand during the nine months
      ended September 30, 2008 and 2007, respectively. Revenues during the nine months
      ended September 30, 2008 consisted of sales from the Safety-Sponge of $212
      thousand and sales from hardware and supplies of $1 thousand, respectively.
      Revenues during the nine months ended September 30, 2007 consisted of sales
      from
      the Safety-Sponge of $710 thousand and sales from hardware and supplies of
      $123
      thousand.





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





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




*Cost
      of revenues*





Cost
      of
      revenues increased $510 thousand, or 455% to $622 thousand for the three months
      ended September 30, 2008 from $112 thousand for the same period in 2007. This
      reflects an increase in sales of our Safety-Sponge TM System.




20




Cost
      of
      revenues increased $828 thousand, or 161% to $1.3 million for the nine months
      ended September 30, 2008 compared to $514 thousand for the nine months ended
      September 30, 2007. This reflects an increase in sales of our
      Safety-Sponge TM System
      and an inventory write down for obsolete inventory returned from a distributor
      of $87 thousand.





*Gross
      profit*





During
      the three months ended September 30, 2008, our gross profit increased $157
      thousand or 155%, to $258 thousand from $101 thousand for the same period in
      2007. Our gross margin percentage was 29% for the three months ended September
      30, 2008 compared to 47% for the same period in 2007. The decrease in gross
      margin percentage was primarily as a result of a write off for obsolete
      inventory and discounts provided in connection with hardware sales.





Our
      gross
      profit increased $275 thousand or 86%, to $595 thousand during the nine months
      ended September 30, 2008 from $320 thousand for the same period in 2007. Our
      gross margin percentage was 31% compared to 38% for the same period in 2007.
      The
      decrease in gross margin was primarily as a result of a write off for obsolete
      inventory and discounts provided in connection with hardware sales.





*Research
      and development*





Research
      and development costs were $87 thousand and $39 thousand, for the three months
      ended September 30, 2008 and 2007, respectively. During the nine months ended
      September 30, 2008 we had research and development costs of $168 thousand,
      compared to $91 thousand for the same period last year. The increase is
      primarily due to an increase in software development costs associated with
      our
      system hardware.





*Sales
      and marketing*





We
      had
      sales and marketing expenses of $662 thousand and $418 thousand for the three
      months ended September 30, 2008 and 2007, respectively. For the nine months
      ended September 30, 2008 and 2007, respectively, we had sales and marketing
      expenses of $1.8 million and $1.1 million. The increase is primarily due to
      the
      addition of sales representatives in the field and the associated benefit costs
      and travel expenses.





*General
      and administrative*





General
      and administrative costs were $959 thousand and $765 thousand for the three
      months ended September 30, 2008 and 2007, respectively. Our general and
      administrative costs for the nine months ended September 30, 2008 were $3.7
      million compared to $2.8 million for the same period in the prior year. The
      increase is primarily due to an increase in stock based compensation to
      employees, increased legal and audit fees as well as an increase in employee
      benefit costs.





*Total
      other income (expense), net*





Total
      other income increased to income of $1.6 million from an expense of $810
      thousand for the three months ended September 30, 2008 and 2007 respectively.
      This increase was mainly due to a decrease in the fair market value of our
      warranty derivative liability resulting in a gain of $1.7 million in the three
      months ended September 30, 2008 and a decrease of interest expense of $731
      thousand, as described below.





For
      the
      nine months ended September 30, 2008 other income (expense), net increased
      to
      income of $1.2 million from an expense of $1.4 million for the nine months
      ended
      September 30, 2007. This increase is mainly due to the decrease in the fair
      market value of our warranty derivative liability resulting in a gain of $1.5
      million, a decrease in interest expense and a decrease in debt discount
      amortization associated with our short term financing as well as a realized
      loss
      on assets held for sale of $25 thousand and an unrealized loss on assets held
      for sale of $65 thousand, net.




21


*Interest
        expense*
  We
        had
        interest expense of $79 thousand and $810 thousand for the three months ended
        September 30, 2008 and 2007, respectively. The decrease in interest expense
        for
        the three months ended September 30, 2008 when compared to September 30,
        2007 is
        primarily attributable to the non-cash interest charges incurred in the 2007
        period as a result of the debt discount amortization associated with our
        short-term debt financings. During the three months ended September 30, 2008
        and
        2007, we recorded nil and $392 thousand, respectively, in non-cash interest
        charges. These charges resulted from the issuance of debt that either had
        conversion prices on the date of issuance that were below the fair market
        value
        of the underlying common stock or required the issuance of warrants to purchase
        shares of our common stock, which required us to record an expense based
        on the
        estimated fair value of the warrants.





We
      had
      interest expense of $254 thousand and $1.4 million for the nine months ended
      September 30, 2008 and 2007, respectively. The decrease in interest expense
      for
      the nine months ended September 30, 2008 when compared to September 30, 2007
      is
      primarily attributable to the non-cash interest charges incurred in the 2007
      period as a result of the debt discount amortization associated with our
      short-term debt financings. During the nine months ended September 30, 2008
      and
      2007, we recorded $127 thousand and $1.0 million, respectively, in non-cash
      interest charges. These charges resulted from the issuance of debt that either
      had conversion prices on the date of issuance that were below the fair market
      value of the underlying common stock or required the issuance of warrants to
      purchase shares of our common stock, which required us to record an expense
      based on the estimated fair value of the warrants.





*Realized
      gains (losses) on investments, net*





During
      the nine months ended September 30, 2008 we realized a net loss of $25 thousand
      compared to a net gain of $22 thousand during the nine months ended September
      30, 2007. Realized loss during the nine months ended September 30, 2008 reflects
      the sale of approximately 8.5 acres of undeveloped land in Heber Springs,
      Arkansas. Realized gain of $51 thousand during the nine months ended September
      30, 2007 reflects the sale of our operating car wash for a gain of $29 thousand,
      which is reported in our consolidated statements of operations in loss from
      discontinued operations, combined with the sale of certain non-operating assets
      for a gain of $22 thousand.





*Loss
      from discontinued operations*





During
      the nine months ended September 30, 2007, we recorded a loss from our
      discontinued car wash segment of $166 thousand. Consistent
      with our decision to focus our business exclusively on the patient safety
      medical products field, we completed the divestiture of ASG in August 2007.
      Thus, we did not incur a loss from the discontinued car wash segment during
      the
      three or nine months ended September 30, 2008.







**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      and cash equivalents balance was $1.0 million at September 30, 2008, versus
      $405
      thousand at December 31, 2007. Total current liabilities were $6.9 million
      at
      September 30, 2008, versus $2.4 million at December 31, 2007. As of September
      30, 2008 we had a working capital deficit of approximately $5.1 million. Since
      we continue to have recurring losses, we have relied upon private placements
      of
      equity and debt securities. Our existing cash and cash equivalents balance,
      combined with the proceeds received from out August 2008 equity financing,
      are
      not expected to be sufficient to meet our anticipated funding requirements
      during the next twelve months.





In
      order
      to ensure the continued viability of the Company, additional financing must
      be
      obtained and profitable operations must be achieved in order to repay the
      existing short-term debt and to provide a sufficient source of operating
      capital.





As
      of
      September 30, 2008, other than our office lease and employment agreements with
      key executive officers, we had no commitments other than the liabilities
      reflected in our consolidated financial statements.




22




Cash
      increased by $632 thousand to $1.0 million during the nine months ended
      September 30, 2008, compared to an increase of $80 thousand during the nine
      months ended September 30, 2007, primarily as a result of financing activities
      during 2008 as described below.




*Operating
      activities*





Operating
      activities used $3.0 million of cash during the nine months ended September
      30,
      2008, compared to $2.6 million during the nine months ended September 30,
      2007.




Operating
      activities for the nine months ended September 30, 2008, exclusive of changes
      in
      operating assets and liabilities, used $2.8 million of cash, as the Company's
      net cash used in operating activities of $3.0 million included non-cash charges
      for change in fair value of warrant derivative liability of $1.5 million,
      depreciation and amortization of $508 thousand and stock based compensation
      of
      $1.2 million.





For
      the
      nine months ended September 30, 2007, operating activities, exclusive of changes
      in operating assets and liabilities, used $2.9 million of cash, as the Company's
      net cash used in operating activities of $2.6 million included non-cash charges
      for depreciation and amortization of $377 thousand, debt discount of $1.0
      million and stock based compensation of $900 thousand.





Changes
      in operating assets and liabilities provided cash of $224 thousand during
      the nine months ended September 30, 2008, principally due to increases in
      accrued liabilities associated with the warrant derivative liability partially
      offset by increases in prepaid expenses and a decrease in accounts payable.





Changes
      in operating assets and liabilities used cash of $333 thousand during the nine
      months ended September 30, 2007, principally due to decreases in the level
      of
      accounts payable which were partially offset by an increase in accrued
      liabilities and a decrease in prepaid expenses.





*Investing
      activities*





The
      principal factor in the $93 thousand of cash used in investing activities during
      the nine months ended September 30, 2008 was capitalized costs of $264 thousand,
      of which $251 thousand related to the ongoing development of purchased software
      related to our Safety-Sponge  System. This was
      offset by the
      sale
      of our undeveloped land in Alabama for $226 thousand.





The
      principal factor in the $1.3 million of cash provided by investing activities
      during the nine months ended September 30, 2007 was due to the
      sale
      of the express car wash and underlying real estate in Birmingham, Alabama for
      $1.5 million. This was
      partially offset by capitalized costs of $160 thousand related to the ongoing
      development of purchased software related to our Safety-Sponge  System.





*Financing
      activities*





Cash
      provided by financing activities during the nine months ended September 30,
      2008
      of $3.8 million resulted from the net proceeds from the issuance of common
      stock
      and warrants of $3.9 million and short-term debt financings of $500 thousand.
      The net proceeds from the issuance of securities was offset by the repayment
      of
      a promissory note of $551 thousand and the payment of preferred dividends of
      $57
      thousand.





Cash
      used
      by financing activities during the nine months ended September 30, 2007 of
      $169
      thousand resulted primarily from repayment of promissory notes in the amount
      of
      $3.3 million offset by net proceeds from the issuance of common stock and
      warrants of $3.1 million.








**2008
      Private Placements**





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




23




Between
      May 20, 2008 and June 19, 2008, the Company entered into a securities purchase
      agreement with several accredited investors, in a private placement exempt
      from
      the registration requirements of the Securities Act. The Company issued and
      sold
      to these investors an aggregate of 2.1 million shares of its common stock and
      warrants to purchase an additional 1.3 million shares of its common
      stock.





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








**2007
      Private Placements**





During
      2007 we sold to accredited investors in our private placements, as reflected
      below, $5.3 million in equity securities.




Between
      January 29, 2007 and June 8, 2007, we entered into various subscription
      agreements with accredited investors in private placements exempt from the
      registration requirements of the Securities Act. We issued and sold to these
      accredited investors an aggregate of 3.0 million shares of our common stock
      and
      warrants to purchase an additional 1.4 million shares of our common stock.





On
      October 17, 2007, we entered into a securities purchase agreement with Francis
      Capital Management, LLC, an accredited investor, in a private placement exempt
      from the registration requirements of the Securities Act. We issued and sold
      to
      Francis Capital an aggregate of 1.3 million shares of our common stock and
      warrants to purchase an additional 763 thousand shares of our common stock.





**Promissory
      Notes**





In
      addition to our private placements, we have also received a significant amount
      of funding from Ault Glazer Capital Partners, LLC (the ***“Fund”*** ).
      AG
      Management is the managing member of the Fund. The managing member of AG
      Management is The Ault Glazer Group, Inc. ( ***“The
      AG Group”*** ).
      The
      Company’s former Chairman and former Chief Executive Officer, Milton “Todd”
Ault, III, is Chairman, Chief Executive Officer and President of The AG Group.
      At September 30, 2008 the outstanding principal balance of the loan that we
      entered into with the Fund was $1.8 million.





At
      September 30, 2008 we had additional outstanding promissory notes in the
      aggregate principal amount of $1.2 million. Between February 28, 2008 and March
      20, 2008, Catalysis Offshore, Ltd. and Catalysis Partners, LLC (collectively ***“Catalysis”*** ),
      which
      are parties related to one another, loaned us an aggregate of $500 thousand.
      As
      consideration for the loans, we issued Catalysis promissory notes in the
      aggregate principal amount of $500 thousand (the ***“Catalysis
      Notes”*** ).
      The
      Catalysis Notes accrue interest at the rate of 8% per annum and has maturity
      dates of October 31, 2008. The other outstanding promissory notes were entered
      into during 2006.








**Investments**





Our
      investments are illiquid, which will make it difficult to dispose of the
      securities quickly. Since we may be forced to liquidate some or all of the
      investments on an accelerated timeline, the proceeds of such liquidation may
      be
      significantly less than the value at which we acquired the investments. The
      following is a discussion of our most significant investments at September
      30,
      2008.





*Alacra
      Corporation*





At
      September 30, 2008, we had an investment in Alacra Corporation, valued at $667
      thousand, which represents 7.7% of our total assets. On April 20, 2000, we
      purchased $1.0 million worth of Alacra Series F Convertible Preferred Stock.
      We
      have the right, subject to Alacra having the available cash, to have the
      preferred stock redeemed by Alacra over a period of three years for face value
      plus accrued dividends beginning on December 31, 2006. Pursuant to this right,
      in December 2006 we informed management of Alacra that we were exercising our
      right to put back one-third of our preferred stock. Alacra had a sufficient
      amount of cash to redeem our preferred stock and in December 2007 completed
      the
      initial redemption of one-third of our preferred stock. We received proceeds
      of
      $333 thousand which accounted for the entire amount of the decrease in value
      of
      our Alacra investment. We continue to maintain our right to put back our
      remaining preferred stock to Alacra and expect an additional redemption of
      one-third of our preferred stock in December 2008.




24




*Real
      Estate Investments*





At
      September 30, 2008, we had one real estate investment, valued at $90 thousand.
      The real estate investment, consisting of 0.61 acres of undeveloped land in
      Springfield, Tennessee, is currently being marketed for sale. In March 2008,
      we
      completed the sale of approximately 8.5 acres of undeveloped land in Heber
      Springs, Arkansas for net proceeds of $226 thousand, which resulted in a
      realized loss of $25 thousand. In March 2008 we wrote down the value of our
      one
      remaining parcel in Springfield, Tennessee to $90 thousand. We recognized an
      unrealized loss of $90 thousand as a result of this write-down. We anticipate
      consummating the sale of the undeveloped land in Tennessee during the quarter
      ended December 31, 2008.








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





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





**Item
      4T. Controls and Procedures.**





**Limitations
      on the Effectiveness of Controls**





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





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





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




25




**Changes
      in Internal Control over Financial Reporting**





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











**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





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





**Item
      1A. Risk Factors.**





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





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





Between
      August 1, 2008 and August 29, 2008, the Company entered into a securities
      purchase agreement with several accredited investors (the ***“Investors”*** ),
      in a
      private placement exempt from the registration requirements of the Securities
      Act. The Company issued and sold to the Investors an aggregate of 2.0 million
      shares of its common stock and warrants to purchase an additional 1.3 million
      shares of its common stock. The warrants are exercisable for a period of five
      years at an exercise price equal to $1.40 per share. These issuances resulted
      in
      aggregate gross proceeds to the Company of $2.3 million in cash and the
      extinguishment of $83 thousand in accrued liabilities. We are required to file
      a
      registration statement within 180 calendar days from August 4, 2008 (the ***“Filing
      Date”*** )
      and to
      use our best efforts to cause the registration statement to become effective
      within 120 calendar days from the Filing Date or, in the event of a full review
      by the Securities and Exchange Commission, within 150 calendar days from the
      Filing Date (collectively the ***“Effectiveness
      Date”*** ).
      We
      intend to use the net proceeds from this private placement transaction primarily
      for general corporate purposes and repayment of existing liabilities. These
      securities were sold in reliance upon the exemption provided by Section 4(2)
      of
      the Securities Act and the safe harbor of Rule 506 under Regulation D
      promulgated under the Securities Act. No advertising or general solicitation
      was
      employed in offering the securities, the sales were made to a limited number
      of
      persons, all of whom represented to the Company that they are accredited
      investors, and transfer of the securities is restricted in accordance with
      the
      requirements of the Securities Act.





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





On
      May 1,
      2006, the Company entered into a secured promissory note with Herbert Langsam,
      a
      Class II Director of the Company, in the principal amount of $500 thousand.
      This
      note was due to be repaid on November 1, 2006. The Company is in the process
      of
      attempting to restructuring the debt that is owed to Mr. Herbert
      Langsam.





On
      November 13, 2006, the Company entered into a secured promissory note with
      Mr.
      Langsam in the principal amount of $100 thousand. This note was due to be repaid
      on May 13, 2007. The Company is in the process of attempting to restructuring
      the debt that is owed to Mr. Herbert Langsam.





On
      November 1, 2006 the Company entered into a convertible promissory note with
      Michael G. Sedlak in the principal amount of $71 thousand. This note was due
      to
      be repaid on January 31, 2008. The Company intends to pay this note in full
      prior to year-end.




26




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





None.





**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





**Exhibit**
              **Number**
            
            **Description**10.01
            
            Form
                of Securities Purchase Agreement entered into May 20, 2008 between
                Patient
                Safety Technologies, Inc. and several accredited investors (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on June 2, 2008)10.02
            
            Form
                of Registration Rights Agreement entered into May 20, 2008 between
                Patient
                Safety Technologies, Inc. and several accredited investors (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on June 2, 2008)10.03
            
            Form
                of Warrant Agreement entered into May 20, 2008 between Patient Safety
                Technologies, Inc. and several accredited investors (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on June 2, 2008)10.04
            
            Form
                of Securities Purchase Agreement entered into August 1, 2008 between
                Patient Safety Technologies, Inc. and several accredited investors
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 14,
                2008)10.05
            
            Form
                of Registration Rights Agreement entered into August 1, 2008 between
                Patient Safety Technologies, Inc. and several accredited investors
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 14,
                2008)10.06
            
            Form
                of Warrant Agreement entered into August 1, 2008 between Patient
                Safety
                Technologies, Inc. and several accredited investors (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on August 14, 2008)31.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(a) or Rule
                15d-14(a)31.2*
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(a) or Rule
                15d-14(a)32.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(b) or Rule 15d-14(b)
                and Section 1350 of Chapter 63 of Title 18 of the United States
                Code32.2*
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b)
                and Section 1350 of Chapter 63 of Title 18 of the United States
                Code





*
      Filed
      herewith.




27




**SIGNATURES**





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





PATIENT
                SAFETY TECHNOLOGIES, INC.Date:
                November 14, 2008
            By:
            /s/ William
              AdamsWilliam
              AdamsChief
                Executive Officer


Date:
                November 14, 2008
            By:
            /s/ Mary
              A.
              LayMary
              A. LayInterim
                Chief Financial Officer and
              Principal
                Accounting Officer




28