**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**










**FORM
      10-Q**





(Mark
      One)





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





FOR
      THE
      QUARTERLY PERIOD ENDED JUNE 30, 2007




**OR**





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





FOR
      THE
      TRANSITION PERIOD
      FROM                TO




COMMISSION
      FILE NUMBER





**PATIENT
      SAFETY TECHNOLOGIES, INC.**


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





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




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





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





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




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


Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx





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





There
      were 10,643,686 shares of the registrant's common stock outstanding as of August
      17, 2007.











**PATIENT
      SAFETY TECHNOLOGIES, INC.**





**FORM
      10-Q FOR THE QUARTER**


**ENDED
      JUNE 30, 2007**





**TABLE
      OF CONTENTS**




**Page****PART
                  I - FINANCIAL INFORMATION**Item
                  1.
              Financial
                  Statements
              1Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              17Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              28Item
                  4.
              Controls
                  and Procedures
              28**PART
                  II - OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              28Item
                  1A.
              Risk
                  Factors
              28Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              29Item
                  3.
              Defaults
                  Upon Senior Securities
              30Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              30Item
                  5.
              Other
                  Information
              30Item
                  6.
              Exhibits
              30**SIGNATURES**
              31










**"SAFE
      HARBOR" STATEMENT UNDER**


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





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





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





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











**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**


**PATIENT
                    SAFETY TECHNOLOGIES, INC. AND
                    SUBSIDIARIES**
  **Consolidated
        Balance Sheets (Unaudited)**


**June
                  30,**
              
              **December
                  31,****2007**
              
              **2006****ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              173,225
              
              $
              3,775Restricted
                  cash
              
              
              228,059
              
              
              —Accounts
                  receivable
              
              
              216,859
              
              
              65,933Inventories
              
              
              28,955
              
              
              42,825Prepaid
                  expenses
              
              
              271,068
              
              
              78,834Assets
                  held for sale, net
              
              
              1,696,945Other
                  current assets
              
              
              13,420
              
              
              13,125**TOTAL
                  CURRENT ASSETS**
              
              
              2,628,531
              
              
              204,492Restricted
                  certificate of deposit
              
              
              87,500
              
              
              87,500Notes
                  receivable
              
              
              153,668
              
              
              153,668Property
                  and equipment, net
              
              
              457,882
              
              
              328,202Assets
                  held for sale, net
              
              
              —
              
              
              3,189,674Goodwill
              
              
              1,762,527
              
              
              1,687,527Patents,
                  net
              
              
              3,926,379
              
              
              4,088,850Long-term
                  investments
              
              
              1,430,564
              
              
              1,441,533**TOTAL
                  ASSETS**
              
              $
              10,447,051
              
              $
              11,181,446**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Notes
                  payable, current portion - net
              
              $
              2,061,928
              
              $
              3,517,149Accounts
                  payable
              
              
              763,843
              
              
              1,295,849Accrued
                  liabilities
              
              
              433,845
              
              
              824,466**TOTAL
                  CURRENT LIABILITIES**
              
              
              3,259,616
              
              
              5,637,464Notes
                  payable, less current portion - net
              
              
              2,530,558
              
              
              2,527,562Deferred
                  tax liabilities
              
              
              1,414,576
              
              
              1,473,066**COMMITMENTS
                  AND CONTINGENCIES****STOCKHOLDERS'
                  EQUITY**Convertible
                  preferred stock, $1.00 par value, cumulative 7% dividend:1,000,000
                  shares authorized; 10,950 issued and outstandingat
                  June 30, 2007 and December 31, 2006(Liquidation
                  preference of $1,229,138 at June 30, 2007 and $1,190,813
                  atDecember
                  31, 2006)
              
              
              10,950
              
              
              10,950Common
                  stock, $0.33 par value: 25,000,000 shares authorized;10,598,686
                  shares issued and outstanding as of June 30, 2007;
                  7,489,026shares
                  issued and 6,874,889 shares outstanding at December 31,
                  2006
              
              
              3,497,566
              
              
              2,471,379Additional
                  paid-in capital
              
              
              32,437,230
              
              
              29,654,341Accumulated
                  deficit
              
              
              (32,703,445
              )
              
              (29,483,910
              )3,242,301
              
              
              2,652,760Less:
                  614,137 shares of treasury stock, at cost, at December 31,
                  2006
              
              
              —
              
              
              (1,109,406
              )**TOTAL
                  STOCKHOLDERS' EQUITY**
              
              
              3,242,301
              
              
              1,543,354**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              10,447,051
              
              $
              11,181,446





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




1


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


**Consolidated
        Statements of Operations and Comprehensive Loss
        (Unaudited)**







**For
                      The Three Months Ended June 30,**
                  
                  **For
                      The Six Months Ended June 30,****2007**
                  
                  **2006**
                  
                  **2007**
                  
                  **2006****REVENUES**
                  
                  $
                  313,461
                  
                  $
                  48,882
                  
                  $
                  620,619
                  
                  $
                  103,875**OPERATING
                      EXPENSES**Cost
                      of sales
                  
                  
                  187,460
                  
                  
                  —
                  
                  
                  401,670
                  
                  
                  —Salaries
                      and employee benefits
                  
                  
                  792,783
                  
                  
                  500,947
                  
                  
                  1,291,063
                  
                  
                  2,886,197Professional
                      fees
                  
                  
                  166,532
                  
                  
                  515,714
                  
                  
                  470,005
                  
                  
                  1,128,021Rent
                  
                  
                  7,788
                  
                  
                  30,775
                  
                  
                  46,370
                  
                  
                  64,062Insurance
                  
                  
                  57,760
                  
                  
                  45,577
                  
                  
                  100,532
                  
                  
                  72,936Taxes
                      other than income taxes
                  
                  
                  37,743
                  
                  
                  22,424
                  
                  
                  64,901
                  
                  
                  53,669Amortization
                      of patents
                  
                  
                  81,236
                  
                  
                  81,236
                  
                  
                  162,471
                  
                  
                  162,471General
                      and administrative
                  
                  
                  391,438
                  
                  
                  338,316
                  
                  
                  595,120
                  
                  
                  562,254**Total
                      operating expenses**
                  
                  
                  1,722,740
                  
                  
                  1,534,989
                  
                  
                  3,132,132
                  
                  
                  4,929,610**Operating
                      loss**
                  
                  
                  (1,409,279
                  )
                  
                  (1,486,107
                  )
                  
                  (2,511,513
                  )
                  
                  (4,825,735
                  )**OTHER
                      INCOME (EXPENSES)**Interest,
                      dividend income and other
                  
                  
                  —
                  
                  
                  15
                  
                  
                  4,287
                  
                  
                  1,109Realized
                      gain (loss) on investments, net
                  
                  
                  22,349
                  
                  
                  86,109
                  
                  
                  22,349
                  
                  
                  (50,153
                  )Interest
                      expense
                  
                  
                  (340,355
                  )
                  
                  (955,514
                  )
                  
                  (607,939
                  )
                  
                  (990,197
                  )Unrealized
                      gain (loss) on marketable securities, net
                  
                  
                  —
                  
                  
                  (32,332
                  )
                  
                  —
                  
                  
                  44,583**Loss
                      from continuing operations before income taxes**
                  
                  
                  (1,727,240
                  )
                  
                  (2,387,829
                  )
                  
                  (3,092,771
                  )
                  
                  (5,820,393
                  )**Income
                      tax benefit**
                  
                  
                  29,245
                  
                  
                  29,245
                  
                  
                  58,490
                  
                  
                  58,489**Loss
                      from continuing operations**
                  
                  
                  (1,697,995
                  )
                  
                  (2,358,584
                  )
                  
                  (3,034,281
                  )
                  
                  (5,761,904
                  )**Loss
                      from discontinued operations**
                  
                  
                  (58,162
                  )
                  
                  (559,149
                  )
                  
                  (146,929
                  )
                  
                  (729,361
                  )**Net
                      loss**
                  
                  
                  (1,756,157
                  )
                  
                  (2,917,733
                  )
                  
                  (3,181,210
                  )
                  
                  (6,491,265
                  )**Preferred
                      dividends**
                  
                  
                  (19,162
                  )
                  
                  (19,162
                  )
                  
                  (38,325
                  )
                  
                  (38,325
                  )**Loss
                      available to common shareholders**
                  
                  $
                  (1,775,319
                  )
                  $
                  (2,936,895
                  )
                  $
                  (3,219,535
                  )
                  $
                  (6,529,590
                  )**Basic
                      and diluted net loss per common share****Continuing
                      operations**
                  
                  $
                  (0.17
                  )
                  $
                  (0.38
                  )
                  $
                  (0.34
                  )
                  $
                  (0.94
                  )**Discontinued
                      operations**
                  
                  $
                  (0.01
                  )
                  $
                  (0.09
                  )
                  $
                  (0.02
                  )
                  $
                  (0.12
                  )**Net
                      loss**
                  
                  $
                  (0.18
                  )
                  $
                  (0.47
                  )
                  $
                  (0.36
                  )
                  $
                  (1.06
                  )**Weighted
                      average common shares outstanding - basic and
                      diluted**
                  
                  
                  10,057,303
                  
                  
                  6,266,890
                  
                  
                  8,929,707
                  
                  
                  6,135,725**Comprehensive
                      loss:****Net
                      loss**
                  
                  $
                  (1,756,157
                  )
                  $
                  (2,917,733
                  )
                  $
                  (3,181,210
                  )
                  $
                  (6,491,265
                  )**Other
                        comprehensive (loss) gain, unrealized gain (loss) on available-for-sale
                        investments****available-for-sale
                        investments**
                  
                  
                  —
                  
                  
                  (1,486,728
                  )
                  
                  —
                  
                  
                  (2,232,443
                  )**Total
                      comprehensive loss**
                  
                  $
                  (1,756,157
                  )
                  $
                  (4,404,461
                  )
                  $
                  (3,181,210
                  )
                  $
                  (8,723,708
                  )







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




2


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





**For
                  The Six Months Ended June 30,****2007**
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (3,181,210
              )
              $
              (6,491,265
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              74,069
              
              
              27,334Amortization
                  of patents
              
              
              162,471
              
              
              162,471Non-cash
                  interest
              
              
              407,920
              
              
              1,047,276Goodwill
                  impairment
              
              
              —
              
              
              357,008Realized
                  (gain) loss on investments, net
              
              
              (51,483
              )
              
              50,153Unrealized
                  gain on marketable securities
              
              
              —
              
              
              (44,583
              )Stock-based
                  compensation to employees and directors
              
              
              635,849
              
              
              2,124,768Stock-based
                  compensation to consultants
              
              
              57,249
              
              
              548,787Income
                  tax benefit
              
              
              (58,490
              )
              
              (58,489
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (150,926
              )
              
              901,428Marketable
                  securities, net
              
              
              —
              
              
              796,050Inventories
              
              
              13,870
              
              
              15,000Prepaid
                  expenses
              
              
              307,766
              
              
              (6,915
              )Other
                  current assets
              
              
              (295
              )
              
              (16,178
              )Assets
                  held for sale, net
              
              
              21,818
              
              
              —Accounts
                  payable
              
              
              (532,006
              )
              
              268,816Accrued
                  liabilities
              
              
              116,855Due
                  to broker
              
              
              —
              
              
              (660,200
              )Net
                  cash used in operating activities
              
              
              (2,176,543
              )
              
              (978,539
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (223,955
              )
              
              (2,277,804
              )Proceeds
                  from sale of property and equipment
              
              
              42,600Proceeds
                  from sale of assets held for sale, net
              
              
              1,500,000
              
              
              138,909Net
                  cash provided by (used in) investing activities
              
              
              1,318,645
              
              
              (2,138,895
              )Cash
                  flows from financing activities:Proceeds
                  from issuance of common stock and warrants
              
              
              3,051,100
              
              
              —Proceeds
                  from notes payable
              
              
              10,000
              
              
              4,832,857Payments
                  and decrease on notes payable
              
              
              (1,805,693
              )
              
              (1,784,943
              )Restricted
                  cash
              
              
              (228,059
              )
              
              —Net
                  cash provided by financing activities
              
              
              1,027,348
              
              
              3,047,914Net
                  increase (decrease) in cash
              
              
              169,450
              
              
              (69,520
              )Cash
                  at beginning of period
              
              
              3,775
              
              
              79,373Cash
                  at end of period
              
              $
              173,225
              
              $
              9,853




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




3


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


**For
                  The Six Months Ended June 30,****2007**
              
              **2006**Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for interest
              
              $
              189,127
              
              $
              96,458Supplemental
                  schedule of non cash investing and financing activities:Dividends
                  accrued
              
              $
              38,325
              
              $
              37,375Issuance
                  of common stock in connection with prepaid asset
              
              $
              —
              
              $
              50,000Issuance
                  of common stock in connection with contingent payment with Surgicount
                  acquisition
              
              $
              75,000
              
              $
              —Issuance
                  of common stock in payment of notes payable and accrued
                  interest
              
              $
              579,801
              
              $
              —Payment
                  of accrued liability with long-term investments
              
              $
              10,969
              
              $
              —Reclassification
                  of accrued interest to notes payable, less current portion -
                  net
              
              $
              348,614
              
              $
              —Purchase
                  of the remaining 50% interest in ASG, through issuance of common
                  stock,
                  resulting in the following asset acquired and liabilities assumed
                  during
                  the quarter ended March 31, 2006 as follows:Goodwill
              
              
              
              
              $
              357,008Common
                  stock issued
              
              
              
              
              $
              (610,000
              )Minority
                  interest
              
              
              
              
              $
              252,992Liabilities
                  assumed
              
              
              
              
              $
              —


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




4
 
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited**
 **June
          30, 2007**
  **1.
        DESCRIPTION OF BUSINESS**
 
 Patient
        Safety Technologies, Inc. ( ***"PST"*** or the ***"Company"*** )
        is a
        Delaware corporation. Until March 31, 2005, the Company was a Business
        Development Company ( ***“BDC”*** )
        under
        the Investment Company Act of 1940, as amended. On March 30, 2005, stockholder
        approval was obtained to withdraw the Company’s election to be treated as a BDC
        and on March 31, 2005, the Company filed an election to withdraw its election
        with the Securities and Exchange Commission ( ***“SEC”*** ).
        The
        Company’s principal operations are conducted at its wholly-owned operating
        subsidiary, SurgiCount Medical, Inc. ( ***“SurgiCount”*** ),
        a
        California corporation.
 
 The
        Company’s primary focus is development, manufacturing and distribution of
        products and services focused primarily in the health care and medical products
        field, particularly the patient safety markets. SurgiCount is a developer
        and
        manufacturer of patient safety products and services. The SurgiCount
        Safety-Sponge TM System
        is
        a patented turn-key array of modified surgical sponges, line-of-sight scanning
        SurgiCounters, and printPAD printers integrated together to form a comprehensive
        counting and documentation system.
 
 Until
        June 29, 2007, the Company also operated a car wash through Automotive Services
        Group, Inc. ( ***“Automotive
        Services Group”*** ),
        which
        held the Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
        its
        wholly-owned subsidiary. As discussed in Note 4, during the fourth quarter
        of
        2006 the Company began marketing the assets held in ASG for sale and on June
        29,
        2007, the sale of ASG’s one operating car wash was completed. In addition, the
        Company holds various other unrelated investments including investments in
        real
        estate and in a financial services company, which it is in the process of
        liquidating as part of a strategic plan adopted during 2006 to dispose of
        all of
        the Company’s non patient safety related assets.
 
 **2.
        LIQUIDITY AND GOING CONCERN**
 
 The
        accompanying unaudited consolidated interim financial statements have been
        prepared assuming that the Company will continue as a going concern. At June
        30,
        2007, the Company has an accumulated deficit of approximately $32.7 million
        and
        a working capital deficit of approximately $631,000. For the six months ended
        June 30, 2007, the Company incurred a loss of approximately $3.2 million
        and has
        utilized approximately $2.2 million in cash in its operations. Further, as
        of
        June 30, 2007, the Company has only generated minimal revenues from its medical
        products and healthcare solutions segments. These conditions raise substantial
        doubt about the Company’s ability to continue as a going concern. The Company
        has relied on liquidating investments and short-term debt financings to fund
        a
        large portion of its operations. In order to ensure the continued viability
        of
        the Company, equity financing and profitable operations must be obtained
        in
        order to repay the existing short-term debt and to provide a sufficient source
        of operating capital. Although the Company has received equity financing
        during
        the six months ended June 30, 2007, the Company is currently seeking additional
        financing and believes that it will be successful. However, no assurances
        can be
        made that it will be successful obtaining a sufficient amount of equity
        financing to continue to fund its operations or that the Company will achieve
        profitable operations and positive cash flow from its medical products segment.
        The consolidated financial statements do not include any adjustments that
        might
        result from the outcome of this uncertainty.
 
 **3.
        BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES**
 
 **Basis
        of Presentation**
 
 The
        accompanying unaudited consolidated interim financial statements have been
        prepared in accordance with the instructions to Form 10-Q and Article 10
        of
        Regulation S-X and do not include all the information and disclosures required
        by accounting principles generally accepted in the United States of America.
        The
        consolidated interim financial information is unaudited but reflects all
        normal
        adjustments that are, in the opinion of management, necessary to provide
        a fair
        statement of results for the interim periods presented. The consolidated
        balance
        sheet as of December 31, 2006 was derived
        from the Company’s audited financial statements. The consolidated interim
        financial statements should be read in conjunction with the consolidated
        financial statements in the Company’s Annual Report on Form 10-K for the year
        ended December 31, 2006. Results of the six months ended June 30, 2007 are
        not
        necessarily indicative of the results to be expected for the full year ending
        December 31, 2007. All intercompany transactions have been eliminated in
        consolidation.


5
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
 **Revenue
        Recognition**
  The
        Company complies with SEC Staff Accounting Bulletin ( ***“SAB”*** )
        101, *Revenue
        Recognition in Financial Statements* ,
        amended
        by SAB 104, *Revenue
        Recognition* .
        Consulting service contract revenue is recognized when the service is performed.
        Consequently, the recognition of such consulting service contract revenue
        is
        deferred until each phase of the contract is complete. Revenues generated
        by the
        Company’s previously owned automated car wash subsidiary, Automotive Services
        Group are recognized at the time of service. Revenues from sales of the
        Safety-Sponge TM System
        are recorded upon shipment.
 
 **Goodwill
        and Intangible Assets**
 
 In
        accordance with SFAS No. 142, *Goodwill
        and Intangible Assets* ,
        goodwill is tested for impairment at the reporting unit level (operating
        segment
        or one level below an operating segment) on an annual basis in the Company’s
        fourth fiscal quarter or more frequently if indicators of impairment
        exist.  The performance of the test involves a two-step process.  The
        first step of the impairment test involves comparing the fair value of the
        Company’s reporting units with each respective reporting unit’s carrying amount,
        including goodwill.  The fair value of reporting units is generally
        determined using the income approach.  If the carrying amount of a
        reporting unit exceeds the reporting unit’s fair value, the second step of the goodwill impairmenttest is
        performed to determine the amount of any impairment loss.  The second step
        of the goodwill impairmenttest
        involves comparing the implied fair value of the reporting unit’s goodwill with
        the carrying amount of that goodwill.
  **Long-Lived
        Assets**
  The
        Company evaluates long-lived assets for impairment in accordance with SFAS
        No. 144, *Accounting
        for the Impairment or Disposal of Long-Lived Assets,* which
        requires impairment evaluation on long-lived assets used in operations when
        indicators of impairment are present.  Reviews are performed to determine
        whether the carrying value of assets is impaired, based on a comparison to
        undiscounted expected future cash flows.  If this comparison indicates that
        there is impairment, the impaired asset is written down to fair value, which
        is
        typically calculated using discounted expected future cash flows and a discount
        rate based upon the Company’s weighted average cost of capital adjusted for
        risks associated with the related operations.  Impairment is based on the
        excess of the carrying amount over the fair value of those assets.
  **Stock-Based
        Compensation** ******
 
 The
        Company adopted SFAS No. 123(R), *Share-Based
        Payment* ,
        as of
        January 1, 2005 using the modified retrospective application method as provided
        by SFAS 123(R) and accordingly, financial statement amounts for the prior
        periods in which the Company granted employee stock options have been restated
        to reflect the fair value method of expensing prescribed by SFAS 123(R).
        During
        the three and six months ended June 30, 2007, the Company had stock-based
        compensation expense of $250,000 and $636,000, respectively, related to
        issuances to the Company’s employees and directors, included in reported net
        losses for these periods. The total amount of stock-based compensation for
        the
        six months ended June 30, 2007 of $636,000 included expenses related to
        restricted stock grants valued at $359,000 and stock options valued at $277,000.
        During the three and six months ended June 30, 2006, the Company had stock-based
        compensation expense, from issuances to the Company’s employees and directors,
        included in reported net loss, of $189,000 and $2,125,000. The total amount
        of
        stock-based compensation for the six months ended June 30, 2006, of $2,125,000,
        included restricted stock grants valued at $1,092,000 and stock options valued
        at $1,033,000.
  6
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
  During
        the three and six months ended June 30, 2007, the Company had stock-based
        compensation expense from issuances of restricted stock and warrants to
        consultants of the Company of $45,000 and $57,000, respectively. During the
        three and six months ended June 30, 2006, the Company had stock-based
        compensation expense, from issuances of restricted stock and warrants to
        consultants of the Company included in reported net loss of $549,000.
        Additionally, during the three and six months ended June 30, 2006, the Company
        issued restricted stock valued at $50,000 for prepaid legal
        expenses.
 
 A
        summary
        of stock option activity for the six months ended June 30, 2007 is presented
        below:
 
 **Outstanding
                  Options****Shares
                  Availablefor Grant**
              
              **Number
                  of Shares**
              
              **Weighted
                  Average Exercise Price**
              
              **Weighted
                  Average Remaining Contractual Life (years)**
              
              **Aggregate
                  Intrinsic Value****December
                  31, 2006**
              
              
              **26,026**
              
              
              **1,704,000**
              
              **$**
              **4.50**
              
              
              **8.73**Restricted
                  Stock Awards
              
              
              (79,032
              )Grants
              
              
              (125,000
              )
              
              125,000
              
              $
              1.66
              
              
              9.73Cancellations
              
              
              339,000
              
              
              (339,000
              )
              $
              4.41
              
              
              8.28**June
                  30, 2007**
              
              
              **160,994**
              
              
              **1,490,000**
              
              **$**
              **4.30**
              
              
              **8.45**
              
              **$**
              **—**Options
                  exercisable at:December
                  31, 2006
              
              
              
              
              
              832,625
              
              $
              4.90
              
              
              8.54
              
              $
              —June
                  30, 2007
              
              
              
              
              
              719,375
              
              $
              4.89
              
              
              8.12
              
              $
              —
 
 The
        aggregate intrinsic value in the table above represents the total pretax
        intrinsic value (i.e., the difference between our closing stock price on
        June
        30, 2007 and the exercise price, multiplied by the number of shares) that
        would
        have been received by the option holders had all option holders exercised
        their
        options on June 30, 2007. There have not been any options exercised during
        the
        six months ended June 30, 2007 or year ended December 31, 2006.
 
 All
        options that the Company granted during the six months ended June 30, 2007
        and
        2006 were granted at the per share fair market value on the grant date. Vesting
        of options differs based on the terms of each option. The Company utilized
        the
        Black-Scholes option pricing model and the assumptions used for each period
        are
        as follows:
 
 **Six
                  Months ended June30,****2007**
              
              **2006**Weighted
                  average risk free interest rate
              
              
              4.50
              %
              
              3.75
              %Weighted
                  average life (in years)
              
              
              5.00
              
              
              3.00Volatility
              
              
              98
                - 100
              %
              
              87
                - 89
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %Weighted
                  average grant-date fair value per share of options granted
              
              $
              1.22
              
              $
              2.50
 
 As
        of
        June 30, 2007, total unrecognized compensation cost related to unvested stock
        options was $817,000. This cost is expected to be recognized over a weighted
        average period of 1.44 years.
 
 7
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
 
 **Beneficial
        Conversion Feature of Convertible Notes Payable**
 
 The
        convertible feature of certain notes payable provides for a rate of conversion
        that is below market value. Such feature is normally characterized as a
        Beneficial Conversion Feature ( ***“BCF”*** ).
        Pursuant to EITF Issue No. 98-5, *Accounting
        for Convertible Securities with Beneficial Conversion Features or Contingently
        Adjustable Conversion Ratio,* EITF No.
        00-27, *Application
        of EITF Issue No. 98-5 To Certain Convertible Instruments* and APB
        14, *Accounting
        for Convertible Debt and Debt Issued with Stock Purchase
        Warrants* ,
        the
        estimated fair value of the BCF is recorded in the consolidated financial
        statements as a discount from the face amount of the notes. Such discounts
        are
        amortized to accretion of convertible debt discount over the term of the
        notes
        (or conversion of the notes, if sooner).
 
 **Earnings
        per Common Share**
 
 Loss
        per
        common share is based on the weighted average number of common shares
        outstanding. The Company complies with SFAS No. 128, *Earnings
        Per Share,* which
        requires dual presentation of basic and diluted earnings per share on the
        face
        of the consolidated statements of operations. Basic loss per common share
        excludes dilution and is computed by dividing income (loss) available to
        common
        stockholders by the weighted-average common shares outstanding for the period.
        Diluted loss per common share reflects the potential dilution that could
        occur
        if convertible preferred stock or debentures, options and warrants were to
        be
        exercised or converted or otherwise resulted in the issuance of common stock
        that then shared in the earnings of the entity.
 
 Since
        the
        effects of outstanding options, warrants and the conversion of convertible
        preferred stock and convertible debt are anti-dilutive in all periods presented,
        shares of common stock underlying these instruments have been excluded from
        the
        computation of loss per common share.
 
 **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the amounts reported in the financial
        statements and accompanying notes. The actual results may differ from
        management’s estimates.
 
 **Recent
        Accounting Pronouncements**
 
 In
        June 2006, the FASB  issued
        FASB Interpretation Number 48 ( ***“FIN
        48”*** ), *Accounting
        for Uncertainty in Income Taxes—an interpretation of FASB Statement
        No. 109* .
        FIN 48
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position that an entity takes
        or
        expects to take in a tax return. Additionally, FIN 48 provides guidance on
        de-recognition, classification, interest and penalties, accounting in interim
        periods, disclosure, and transition.  Under FIN 48, an entity may only
        recognize or continue to recognize tax positions that meet a “more likely than
        not” threshold. FIN 48 was e ffective
        for the Company beginning January 1, 2007. In
        connection with the adoption of FIN 48, no liability for unrecognized income
        tax
        benefits was recorded and no interest and penalties related to uncertain
        tax
        positions was recognized. The tax years 2003 - 2006 remain open to examination
        by the major taxing jurisdictions.
 
 **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. The assets of ASG met the
“held for sale” and “discontinued operations” criteria in accordance with SFAS
        144.
  8
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
  The
        following sets forth the discontinued operations for the six months ended
        June
        30, 2007 and 2006 related to the held for sale assets of
        Automotive Services Group :
 
 **Six
                  Months Ended June 30,****2007**
              
              **2006**Operating
                  revenues
              
              $
              309,455
              
              $
              131,616Operating
                  expenses
              
              
              262,323
              
              
              596,215Depreciation
                  and amortization
              
              
              21,819
              
              
              10,423Interest
                  expense
              
              
              201,331
              
              
              254,339Gain
                  on sale of assets
              
              
              29,089
              
              
              —Loss
                  from discontinued operations
              
              $
              (146,929
              )
              $
              (729,361
              )
 
 The
        following sets forth the assets that are held for sale that are related to
        the
        discontinued operations:
 
 **June
                  30,**
              
              **December
                  31,****2007**
              
              **2006**Property
                  and equipment, net
              
              $
              1,696,945
              
              $
              3,189,674Goodwill
              
              
              —
              
              
              —Other
                  assets
              
              
              —
              
              
              —Total
                  assets of discontinued operations
              
              $
              1,696,945
              
              $
              3,189,674
 
 On
        June
        29, 2007, ASG completed the sale of its express car wash and underlying real
        estate in Birmingham, Alabama for $1,500,000, which
        resulted in a realized gain of $29,000. The purchase of the express car wash
        and
        underlying real estate was made by Charles H. Dellaccio and Darrell Grimsley.
        Mr. Grimsley is the Chairman of the Board and Chief Executive Officer of
        Automotive Services Group.
 
 **5.
        OTHER CURRENT ASSETS**
 
 At
        June
        30, 2007 and December 31, 2006, the Company had other current assets of $13,000
        consisting primarily of security deposits.
 
 **6.
        GOODWILL AND PATENTS**
 
 The
        Company’s goodwill relates to its SurgiCount subsidiary. As discussed in Note
        10, the Company recorded an additional $75,000 of goodwill as a result of
        the
        issuance of 50,000 shares of the Company’s common stock to the SurgiCount
        founders. Identifiable intangible assets, net, as of June 30, 2007 and December
        31, 2006 are composed of patents:
 
 **June
                  30, 2007**
              
              **December
                  31, 2006**Patents
              
              $
              4,684,576
              
              $
              4,684,576Accumulated
                  amortization
              
              
              (758,197
              )
              
              (595,726
              )$
              3,926,379
              
              $
              4,088,850
 
 9
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
 
 **7.
        LONG-TERM INVESTMENTS**
 
 Long-term
        investments at June 30, 2007 and December 31, 2006 are comprised of the
        following:
 
 **June
                  30, 2007**
              
              **December
                  31, 2006**Alacra
                  Corporation
              
              $
              1,000,000
              
              $
              1,000,000Investments
                  in Real Estate
              
              
              430,563
              
              
              430,563Digicorp
              
              
              —
              
              
              10,970$
              1,430,563
              
              $
              1,441,533
 
 *Alacra
        Corporation*
 
 At
        June
        30, 2007, the Company had an investment in shares of Series F convertible
        preferred stock of Alacra Corporation ( ***“Alacra”*** ),
        recorded at its cost of $1,000,000, and classified as an available-for-sale
        investment. The Company has the right, to the extent that Alacra has sufficient
        available capital, to have the Series F convertible preferred stock redeemed
        by
        Alacra for face value plus accrued dividends beginning on December 31, 2006.
        Alacra, based in New York, is a global provider of business and financial
        information.
 
 *Investments
        in Real Estate*
 
 At
        June
        30, 2007, the Company had several real estate investments, recorded at their
        cost of $430,563. The Company’s real estate investments consist of approximately
        8.5 acres of undeveloped land in Heber Springs, Arkansas and 0.61 acres of
        undeveloped land in Springfield, Tennessee.
 
 **8.
        NOTES PAYABLE**
 
 Notes
        payable at June 30, 2007 and December 31, 2006 are comprised of the
        following:
  **June
                  30, 2007**
              
              **December
                  31, 2006**Note
                  payable to Winstar Radio Networks, LLC (a)
              
              $
              —
              
              $
              450,000Notes
                  payable to Ault Glazer Capital Partners, LLC (b)
              
              
              2,530,558
              
              
              2,575,528Note
                  payable to Steven J. Caspi (c)
              
              
              —
              
              
              1,000,000Note
                  payable to Steven J. Caspi (d)
              
              
              1,495,281
              
              
              1,495,281Notes
                  payable to Herb Langsam (e)
              
              
              600,000
              
              
              600,000Note
                  payable to Charles Kalina III (f)
              
              
              400,000
              
              
              400,000Other
                  notes payable
              
              
              242,539
              
              
              598,232Total
                  notes payable
              
              
              5,268,378
              
              
              7,119,041Less:
                  debt discount on beneficial conversion feature
              
              
              (675,892
              )
              
              (1,074,330
              )4,592,486
              
              
              6,044,711Less:
                  current portion
              
              
              (2,061,928
              )
              
              (3,517,149
              )Notes
                  payable - long-term portion
              
              $
              2,530,558
              
              $
              2,527,562
 
 10
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
 
 Aggregate
        future required principal payments on these notes during the twelve month
        period
        subsequent to June 30, 2007 are as follows:
 
 2007
              
              $
              671,2402008
              
              
              2,066,5792009
              
              
              —2010
              
              
              2,530,558$
              5,268,378
 
 (a)
              On
                  August 28, 2001, the Company made an investment in Excelsior Radio
                  Networks, Inc. (***“Excelsior”***)
                  which was completely liquidated during 2005. As part of the purchase
                  price
                  paid by the Company for its investment in Excelsior, the Company
                  issued a
                  $1,000,000 note to Winstar Radio Networks, LLC, a Delaware limited
                  liability company (***“Winstar”***).
                  This note was due February 28, 2002 with interest at 3.54% per
                  annum but
                  in accordance with the agreement has a right of offset against
                  certain
                  representations and warranties made by Winstar. The Company applied
                  offsets of $215,000 against the principal balance of the note reflected
                  in
                  the accompanying consolidated interim financial statements relating
                  to
                  legal fees attributed to our defense of the lawsuits filed against
                  us. The
                  Company has consistently asserted that the due date of the note
                  is
                  extended until the lawsuit discussed in Note 13 is settled. However,
                  on
                  February 3, 2006, Winstar Global Media, Inc. (***“WGM”***)
                  filed a lawsuit against the Company in an attempt to collect upon
                  the
                  $1,000,000 note between the Company and Winstar. On September 5,
                  2006, the
                  Company reached a settlement agreement with WGM whereas the Company
                  agreed
                  to pay Winstar $750,000, pursuant to an agreed upon payment schedule,
                  on
                  or before July 2, 2007. On November 7, 2006, The United States
                  Bankruptcy
                  Court for the District of Delaware, approved the Company’s settlement
                  agreement with WGM. Pursuant to the settlement agreement, the Company
                  made
                  payments of $300,000 during 2006 and the remaining $450,000 during
                  the
                  three months ended March 31, 2007. The Company recorded a gain
                  during 2006
                  of $191,000 on the elimination of principal and interest in excess
                  of the
                  settlement amount which is included in gain on debt extinguishment
                  in the
                  accompanying statement of
                  operations.
 
 (b)
              On
                  February 8, 2006, Ault Glazer Capital Partners, LLC (formerly AGB
                  Acquisition Fund) (the***“Fund”***),
                  a related party, loaned $687,000 to ASG. As consideration for the
                  loan,
                  ASG issued the Fund a secured promissory note in the principal
                  amount of
                  $687,000 (the***“ASG
                  Note”***)
                  and granted a real estate mortgage in favor of the Fund relating
                  to
                  certain real property located in Jefferson County, Alabama (the***“ASG
                  Property”***).
                  The ASG Note, as amended, had an interest rate of 10% per annum
                  and was
                  due on September 15, 2006. The Fund received warrants to purchase
                  20,608
                  shares of the Company’s common stock at an exercise price of $3.86 per
                  share as additional consideration for entering into the loan agreement.
                  The Company recorded debt discount in the amount of $44,000 as
                  the
                  estimated value of the warrants. The debt discount was amortized
                  as
                  non-cash interest expense over the initial term of the debt using
                  the
                  effective interest method. The entire amount of the debt discount
                  was
                  amortized as interest expense. As security for the performance
                  of ASG’s
                  obligations pursuant to the ASG Note, ASG had granted the Fund
                  a security
                  interest in all personal property and fixtures located at the ASG
                  Property. During the six months ended June 30, 2007 and 2006, the
                  Company
                  incurred interest expense, excluding amortization of debt discount,
                  of
                  $28,000 and $27,000, respectively, on the ASG
                  Note.
 
 As
        of
        December 31, 2006, the Fund loaned $1,495,000 to ASG in addition to the ASG
        Note. The loans were advanced to ASG, pursuant to the terms of a Real Estate
        Note dated July 27, 2005, as amended (the ***"Real
        Estate Note"*** ).
        The
        Real Estate Note had an interest rate of 3% above the Prime Rate as published
        in
        the Wall Street Journal (8.25% at June 30, 2007). All unpaid principal, interest
        and charges under the Real Estate Note were due in full on July 31, 2010.
        The
        Real Estate Note was collateralized by a mortgage on certain real estate
        owned
        by ASG pursuant to the terms of a Future Advance Mortgage Assignment of Rents
        and Leases and Security Agreement dated July 27, 2005 between ASG and the
        Fund.
        During the six months ended June 30, 2007 and 2006, the Company incurred
        interest expense of $70,000 and $74,000, respectively, on the Real Estate
        Note.
  11
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
  Effective
        June 1, 2007, the entire unpaid principal and interest under the ASG Note
        and
        Real Estate Note were restructured into a new Convertible Secured Promissory
        Note (the ***"AG
        Partners Convertible Note"*** ) in
        the
        principal amount of $2,530,558 with an effective date of June 1, 2007. The
        AG
        Partners Convertible Note bears interest at the rate of 7% per annum and
        is due
        on the earlier of December 31, 2010, or the occurrence of an event of default.
        In the event that the average closing price of the Company’s common stock is in
        excess of $5.00 per share for thirty (30) consecutive trading days, the Company
        will have the right to redeem the promissory note in shares or in cash. In
        the
        event of redemption in shares, the principal is convertible into shares of
        the
        Company’s common stock at a conversion price of $2.50. The promissory note is
        secured by all of the Company’s assets. Should the Company raise up to
        $2,000,000 in a new credit facility, including any replacement credit
        facilities, the Fund is required to subordinate its security interest in
        favor
        of the new credit facility. During the six months ended June 30, 2007, the
        Company incurred interest expense of $14,000 on the AG Partners Convertible
        Note.
 
 From
        March 7, 2006 through October 16, 2006, the Fund loaned the Company a total
        of
        $524,000, of which $130,000 was repaid during 2006. The loans were advanced
        to
        the Company pursuant to a Revolving Line of Credit Agreement (the ***“Revolving
        Line of Credit”*** )
        entered
        into with the Fund on March 7, 2006. The Revolving Line of Credit allowed
        the
        Company to request advances of up to $500,000 from the Fund. Each advance
        under
        the Revolving Line of Credit was evidenced by a secured promissory note and
        a
        security agreement. The secured promissory notes issued pursuant to the
        Revolving Line of Credit required repayment with interest at the Prime Rate
        plus
        1% within 60 days from issuance. The outstanding principal balance of $394,000
        and accrued interest of $28,000, which
        was
        in default, was converted into 337,439 shares of the Company’s common stock at a
        conversion price of $1.25 per share. During
        the six months ended June 30, 2007 and 2006, the Company incurred interest
        expense of $15,000 and $2,000, respectively, on the Revolving Line of Credit.
 
 (c)
              On
                  January 12, 2006, Steven J. Caspi loaned $1,000,000 to ASG. As
                  consideration for the loan, ASG issued Mr. Caspi a promissory note
                  in the
                  principal amount of $1,000,000 (the***“Caspi
                  Note”***)
                  and granted Mr. Caspi a mortgage on certain real estate owned by
                  ASG and a
                  security interest on all personal property and fixtures located
                  on such
                  real estate as security for the obligations under the Caspi Note.
                  In
                  addition, the Company entered into an agreement guaranteeing ASG’s
                  obligations pursuant to the Caspi Note and Mr. Caspi received warrants
                  to
                  purchase 30,000 shares of the Company’s common stock at an exercise price
                  of $4.50 per share. The Company recorded debt discount in the amount
                  of
                  $92,000 based on the estimated fair value of the warrants. The
                  debt
                  discount was amortized as non-cash interest expense over the initial
                  term
                  of the debt using the effective interest method. The entire amount
                  of the
                  debt discount was amortized as interest expense. The Caspi Note
                  initially
                  accrued interest at the rate of 10% per annum, which together with
                  principal, was due to be repaid on July 13, 2006. The Caspi Note
                  was not
                  repaid until June 29, 2007. During the period of time that the
                  Caspi Note
                  was in default interest accrued at the rate of 18% per annum. During
                  the
                  six months ended June 30, 2007 and 2006, the Company incurred interest
                  expense of $89,000 and $46,000, respectively, on the Caspi Note.
 
 (d)
              From
                  September 8, 2006 through September 19, 2006, Mr. Caspi loaned
                  the Company
                  a total of $1,495,281, all of which is outstanding at June 30,
                  2007. As
                  consideration for the loan, the Company issued Mr. Caspi a Convertible
                  Promissory Note in the principal amount of $1,495,281 (the***“Second
                  Caspi Note”***).
                  The Second Caspi Note bears interest at the rate of 12% per annum
                  and is
                  due upon the earlier of March 31, 2008 or, the occurrence of an
                  event of
                  default. As security for the performance of the Company’s obligations
                  pursuant to the Second Caspi Note, the Company granted Mr. Caspi
                  a
                  security interest in certain real property. Mr. Caspi received
                  warrants to
                  purchase 250,000 shares of the Company’s common stock at an exercise price
                  of $1.25 per share as additional consideration for entering into
                  the loan
                  agreement. During the six months ended June 30, 2007, the Company
                  had
                  incurred interest expense, excluding amortization of debt discount,
                  of
                  $89,000 on the Second Caspi Note. At June 30, 2007 and December
                  31, 2006
                  accrued interest on the Second Caspi Note totaled $11,000 and $56,000,
                  respectively.
 
 As
        the
        effective conversion price of the Second Caspi Note on the date of issuance
        was
        below the fair market value of the underlying common stock, the Company recorded
        debt discount in the amount of $769,000 based on the intrinsic value of the
        beneficial conversion feature of the note.
  12
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
  The
        warrant issued to Mr. Caspi in conjunction with the Second Caspi Note will
        expire after September 8, 2011. The Company recorded debt discount in the
        amount
        of $231,000 based on the estimated fair value of the warrants. The debt discount
        as a result of the beneficial conversion feature of the note and the estimated
        fair value of the warrants will be amortized as non-cash interest expense
        over
        the term of the debt using the effective interest method. During the six
        months
        ended June 30, 2007, interest expense of $280,000 has been recorded from
        the
        debt discount amortization.
 
 (e)
              On
                  May 1, 2006, Herbert Langsam, a Class II Director of the Company,
                  loaned
                  the Company $500,000. The loan is documented by a $500,000 Secured
                  Promissory Note (the***“Langsam
                  Note”***)
                  payable to the Herbert Langsam Irrevocable Trust. The Langsam Note
                  accrues
                  interest at the rate of 12% per annum and had a maturity date of
                  November
                  1, 2006. This note was not repaid by the scheduled maturity and
                  to date
                  has not been extended, therefore the Langsam Note is recorded in
                  current
                  liabilities. Accordingly, the note is currently in default and
                  therefore
                  accruing interest at the rate of 16% per annum. Pursuant to the
                  terms of a
                  Security Agreement dated May 1, 2006, the Company granted the Herbert
                  Langsam Revocable Trust a security interest in all of the Company’s assets
                  as collateral for the satisfaction and performance of the Company’s
                  obligations pursuant to the Langsam
                  Note.
 
 On
        November 13, 2006, Mr. Langsam, loaned the Company an additional $100,000.
        The
        loan is documented by a $100,000 Secured Promissory Note (the ***“Second
        Langsam Note”*** )
        payable
        to the Herbert Langsam Irrevocable Trust. The Second Langsam Note accrues
        interest at the rate of 12% per annum and has a maturity date of May 13,
        2007.
        Mr. Langsam received warrants to purchase 50,000 shares of the Company’s common
        stock at an exercise price of $1.25 per share as additional consideration
        for
        entering into the loan agreement. The Company recorded debt discount in the
        amount of $17,000 as the estimated value of the warrants. The debt discount
        will
        be amortized as non-cash interest expense over the term of the debt using
        the
        effective interest method. During the six months ended June 30, 2007, interest
        expense of $12,000 has been recorded from the debt discount amortization.
        Pursuant to the terms of a Security Agreement dated November 13, 2006, the
        Company granted the Herbert Langsam Revocable Trust a security interest in
        all
        of the Company’s assets as collateral for the satisfaction and performance of
        the Company’s obligations pursuant to the Second Langsam Note.
 
 During
        the six months ended June 30, 2007 and 2006, the Company incurred interest
        expense, excluding amortization of debt discount, of $40,000 and $9,000,
        respectively, on the Langsam Notes. At June 30, 2007 and December 31, 2006
        accrued interest on the Langsam Notes totaled $90,000 and $50,000,
        respectively.
 
 (f)
              On
                  July 12, 2006 the Company, executed a Convertible Promissory Note
                  in the
                  principal amount of $250,000 (the***“Kalina
                  Note”***)
                  and a warrant for the purchase of 85,000 Shares of the Company’s Common
                  Stock (the***“Kalina
                  Warrant”***)
                  in favor of Charles J. Kalina, III, an existing shareholder of
                  the
                  Company. The Kalina Note accrued interest at the rate of 12% per
                  annum
                  throughout the term of the loan. The principal amount of the Kalina
                  Note
                  and any accrued but unpaid interest was due to be paid on October
                  10,
                  2006. Principal and interest on the Kalina Note was convertible
                  into
                  shares of the Company’s common stock at a conversion price of $3.00 per
                  share.
 
 The
        Kalina Warrant has an exercise price of $ 2.69 per share and will expire
        on July
        11, 2011. The Company recorded debt discount in the amount of $161,000 based
        on
        the estimated fair value of the Kalina Warrants. The debt discount was amortized
        as non-cash interest expense over the initial term of the debt using the
        effective interest method.
 
 On
                  November 3, 2006 the balance due under the Kalina Note was added
                  to a new
                  Convertible Promissory Note in the principal amount of $400,000
                  (the***“Second
                  Kalina Note”***),
                  pursuant to which the Company received proceeds of approximately
                  $150,000.
                  The Second Kalina Note bears interest at the rate of 12% per annum
                  and is
                  due on January 31, 2008 or, the occurrence of an event of default.
                  Mr.
                  Kalina received warrants to purchase 250,000 shares of the Company’s
                  common stock at an exercise price of $1.25 per share as additional
                  consideration for entering into the loan agreement. During the
                  six months
                  ended June 30, 2007, the Company incurred interest expense, excluding
                  amortization of debt discount of $24,000 on the Second Kalina Note.
                  At
                  June 30, 2007 and December 31, 2006 accrued interest on the Second
                  Kalina
                  Note totaled $10,000.
  13
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
  As
        the
        effective conversion price of the Second Kalina Note on the date of issuance
        was
        below the fair market value of the underlying common stock, the Company recorded
        debt discount in the amount of $77,000 based on the intrinsic value of the
        beneficial conversion feature of the note.
 
 The
        warrant issued to Mr. Kalina in conjunction with the Second Kalina Note will
        expire after November 3, 2011. The Company recorded debt discount in the
        amount
        of $29,000 based on the estimated fair value of the warrants. The debt discount
        as a result of the beneficial conversion feature of the note and the estimated
        fair value of the warrants will be amortized as non-cash interest expense
        over
        the term of the debt using the effective interest method. During the six
        months
        ended June 30, 2007, interest expense of $46,000 has been recorded from the
        debt
        discount amortization.
 
 **9.
        ACCRUED LIABILITIES**
 
 Accrued
        liabilities at June 30, 2007 and December 31, 2006 are comprised of the
        following:
 
 **June
                  30, 2007**
              
              **December
                  31, 2006**Accrued
                  interest
              
              $
              177,698
              
              $
              520,114Accrued
                  professional fees
              
              
              —
              
              
              10,000Accrued
                  dividends on preferred stock
              
              
              134,138
              
              
              95,812Accrued
                  salaries
              
              
              83,190
              
              
              197,495Other
              
              
              48,819
              
              
              1,045$
              443,845
              
              $
              824,466
 
 **10.
        EQUITY TRANSACTIONS**
 
 On
        January 29, 2007, the Company entered into a subscription agreement with
        A Plus,
        pursuant to which the Company sold to A Plus 800,000 shares of its common
        stock
        and warrants to purchase an additional 300,000 shares of its common stock.
        The
        Company received gross proceeds of $500,000 in cash and will receive $500,000
        in
        product over the course of the next twelve (12) months. The Warrant shall
        have a
        term of five (5) years and an exercise price equal to $2.00 per share.
 
 Between
        January 29, 2007 and June 7, 2007, the Company entered into a subscription
        agreement with several accredited investors in a private placement exempt
        from
        the registration requirements of the Securities Act of 1933, as amended (the ***“Securities
        Act”*** ).
        The
        Company issued and sold to the investors an aggregate of 2,152,000 shares
        of its
        common stock and warrants to purchase an additional 1,076,000 shares of its
        common stock. The warrants are exercisable for a period of three to five
        years,
        have an exercise price equal to $2.00, and 50% of the warrants are callable
        upon
        the occurrence of any one of a number of specified events when, after any
        such
        specified occurrence, the average closing price of the Company’s common stock
        during any period of five consecutive trading days exceeds $4.00 per share.
        These issuances resulted in aggregate gross proceeds to the Company of
        $2,690,000.
 
 Pursuant
        to the February 2005 Agreement and Plan of Merger and Reorganization (the
        “Merger”) between the Company and SurgiCount, in the event that prior to the
        fifth anniversary of the closing of the Merger the cumulative gross revenues
        of
        SurgiCount exceed $500,000, the Company is obligated to issue an additional
        50,000 shares of the Company’s common stock to certain SurgiCount founders.
        Should the cumulative gross revenues exceed $1,000,000 during the five-year
        period ended February 2010, the additional shares would be increased by 50,000,
        for a total of 100,000 additional shares. During the quarter ended June 30,
        2007, cumulative gross revenues of SurgiCount exceeded $500,000 and as such
        the
        Company issued 50,000 shares to the SurgiCount founders. The Company recorded
        $75,000 of goodwill as a result of these issuances.
  14
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
  **11.
        WARRANTS**
 
 During
        the six months ended June 30, 2007, a total of 1,483,920 warrants, at an
        exercise price of $2.00 per share were issued primarily in connection with
        the
        various subscription agreements entered into by the Company as well as payment
        for services and accrued interest. The warrants were valued using the
        Black-Scholes valuation model assuming expected dividend yield, risk-free
        interest rate, expected life and volatility of 0%, 4.50%, five years and
        63% -
        97%, respectively. Warrants granted during the year ended December 31, 2006
        were
        valued using an expected dividend yield, risk-free interest rate, expected
        life
        and volatility of 0%, 3.75% - 4.50%, three to five years and 63% - 88%,
        respectively. As of June 30, 2007, a total of 4,758,441 warrants, at exercise
        prices ranging from $1.25 to $6.05 remain outstanding.
 
 **12.
        RELATED PARTY TRANSACTIONS**
 
 During
        the three months ended March 31, 2007 and year ended December 31, 2006, the
        Company paid approximately 25% of the base rent on the corporate offices
        and The
        Ault Glazer Group, Inc. ( ***"Ault
        Glazer"*** )
        paid
        the remaining base rent based upon their respective usage of the facilities.
        Together, Milton “Todd” Ault III, our former Chairman and Chief Executive
        Officer of the Company, and Louis Glazer, a Class I Director of the Company,
        and
        Melanie Glazer, the former Manager of our real estate segment, (together,
        the ***“Glazers”*** )
        own a
        controlling interest in the outstanding capital stock of Ault Glazer. As
        of June
        30, 2007 and December 31, 2006, Ault Glazer, Mr. Ault and the Glazers indirectly
        beneficially own or control approximately 26% and 40%, respectively, of the
        outstanding common stock of the Company and beneficially own approximately
        98.2%
        of the outstanding preferred stock of the Company.
 
 *IPEX,
        Inc.*
 
 During
        the three and six months ended June 30, 2006, the Company recognized revenue
        of
        $49,000 and $104,000, respectively, in connection with consulting services
        provided to IPEX. The Company’s former Chairman and Chief Executive Officer and
        significant beneficial owner of the Company served as a director of IPEX
        during
        that period. Further, the Chief Executive Officer of ASG served as an IPEX
        director and member of IPEX’s Audit Committee from August 2005 through January
        2006.
 
 *Digicorp*
 
 At
        December 31, 2006, the Company had an investment in Digicorp recorded in
        long-term investments. The Company’s Chief Executive Officer and Chief Financial
        Officer was also Chief Financial Officer of Digicorp and remains a director
        of
        the Company. Further, certain Company officers and directors, both past and
        present, served in various management and director roles at Digicorp.
 
 *Loans*
 
 During
        the six months ended June 30, 2007 and the year ended December 31, 2006,
        the
        Company received loans from Ault Gazer Capital Partners, LLC (the ***“Fund”*** ).
        Ault
        Glazer & Company Investment Management, LLC ( ***“AG
        & Company IM”*** )
        is the
        managing member of the Fund. The managing member of AG & Company IM is Ault
        Glazer. Mr. Ault is Chairman, Chief Executive Officer and President of Ault
        Glazer. Until June 8, 2006, the Company’s current Chief Executive Officer, Chief
        Financial Officer and Director was also Chief Financial Officer of Ault
        Glazer.
 
 **13.
        COMMITMENTS AND CONTINGENCIES**
 
 *Legal
        Proceedings*
 
 On
        October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
        filed a lawsuit (the ***“Leve
        Lawsuit”*** )
        against
        the Company, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
        and
        four other defendants affiliated with Winstar Communications, Inc. ( ***“Winstar”*** ).
        On
        February 25, 2003, the case against the Company and Sunshine was dismissed,
        however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
        Partnership, L.P. exercised their right to appeal. The initial lawsuit alleged
        that the Winstar defendants conspired to commit fraud and breached their
        fiduciary duty to the plaintiffs in connection with the acquisition of the
        plaintiff's radio production and distribution business. The complaint further
        alleged that the Company and Sunshine joined the alleged conspiracy. On June
        1,
        2005, the United States Court of Appeals for the Second Circuit affirmed
        the
        February 25, 2003 judgment of the district court dismissing the claims against
        the Company.
  15
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**
  On
        July
        28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed
        a new
        lawsuit (the ***“new
        Leve Lawsuit”*** )
        against
        the Company, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
        and
        four other defendants affiliated with Winstar Communications, Inc. ( ***“Winstar”*** ).
        The
        new Leve Lawsuit attempts to collect a federal default judgment of $5,014,000
        entered against only two entities, i.e., Winstar Radio Networks, LLC and
        Winstar
        Global Media, Inc., by attempting to enforce the judgment against a number
        of
        additional entities who are not judgment debtors. Further, the new Leve Lawsuit
        attempts to enforce the plaintiffs default judgment against entities who
        were
        dismissed on the merits from the underlying action in which plaintiffs obtained
        their default judgment. An unfavorable outcome in the lawsuit, may have a
        material adverse effect on the Company's business, financial condition and
        results of operations. The Company believes the lawsuit is without merit
        and
        intends to vigorously defend itself. These consolidated interim financial
        statements do not include any adjustments for the possible outcome of this
        uncertainty.
 
 **14.
        SEGMENT REPORTING**
 
 The
        Company reports segment information in accordance with SFAS No. 131, *Disclosures
        about Segments of an Enterprise and Related Information.* The
        segment information previously provided reflected the three distinct lines
        of
        business within the Company’s past organizational structure: medical
        products, financial services and real estate, and
        car
        wash services .
        The
        Company has restructured its operations such that its only continuing operations
        are related to the medical products segment. Accordingly, since the Company
        only
        operates within a single industry, segment information is no longer
        reported.
 
 **15.
        SUBSEQUENT EVENTS**
 
 On
        July
        3, 2007, ASG completed the sale of real property located in Tuscaloosa, Alabama
        (the “Tuscaloosa Undeveloped Land”) to Twin Properties, LLC. Pursuant to the
        agreement, ASG was responsible for obtaining title insurance, all required
        taxes
        related to the transaction and providing a marketable title in fee simple
        to
        Twin Properties, LLC. ASG sold the Tuscaloosa Undeveloped Land for a purchase
        price of $965,000.
 On
        August
        13, 2007, ASG completed the sale of real property located in Birmingham,
        Alabama, to Charles H. Dellaccio and D.W. Grimsley, Jr. Mr. Grimsley is the
        Chairman of the Board and Chief Executive Officer of Automotive Services
        Group.
        The purchase price for the property is $750,000 .
        The
        sales of the Tuscaloosa and Birmingham Land represent the remaining assets
        held
        for sale by ASG (See Note 4).
 
 16




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





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





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





**Overview**





Until
      March 31, 2005, Patient Safety Technologies, Inc., a Delaware corporation
      (referred to herein as the ***“Company,”
      “we,” “us,”*** and ***“our”*** ),
      elected to be a Business Development Company ( ***“BDC”*** ) under
      the Investment Company Act of 1940, as amended (the ***“1940
      Act”*** ). On
      March 30, 2005, stockholder approval was obtained to withdraw our election
      to be
      treated as a BDC and on March 31, 2005 we filed an election to withdraw our
      election with the Securities and Exchange Commission. At June 30, 2007,
      9.57% of our assets, consisting primarily of our investment in Alacra
      Corporation, on a consolidated basis with subsidiaries were comprised of
      investment securities within the meaning of the 1940 Act ( ***“Investment
      Securities”*** ). We
      continue to evaluate ways in which we can dispose of these Investment Securities
      so that we can direct our efforts to our fundamental business strategy of equity
      growth through creating, building and operating companies
      in the patient safety medical products industry.





As
      a
      result of the sale of our operating car wash, which occurred on June 29, 2007,
      our operating activities are conducted within a single wholly-owned operating
      subsidiary; SurgiCount Medical, Inc., a California corporation.





We
      are
      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,
      however, on March 29, 2006, our Board of Directors determined to focus our
      business on the patient safety medical products field. Automotive Services
      Group, Inc. ( ***“Automotive
      Services Group”*** ),
      our
      wholly-owned subsidiary, holds the Company’s investment in Automotive Services
      Group, LLC ( ***“ASG”*** ),
      its
      wholly-owned express car wash subsidiary. As a result of the June 29, 2007
      sale
      of the operating car wash, these assets consist of two parcels of vacant land
      located in Alabama. On August 13, 2007 Automotive Services Group sold it’s the
      final parcel of land. In addition to the assets that are held in Automotive
      Services Group, we hold various other unrelated investments which we are in
      the
      process of liquidating. The unrelated investments are included in a separate
      segment, financial services and real estate.





SurgiCount’s
      Safety-SpongeTM 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 TM System
      is
      a patented turn-key array of modified surgical sponges, line-of-sight scanning
      SurgiCounters, and printPAD printers integrated together to form a comprehensive
      counting and documentation system. 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
      in
      the surgical dressings 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.




17




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





**Critical
      accounting policies and estimates**





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





**Valuation
      of Non-Marketable Equity Securities**





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





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





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





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




18




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





**Valuation
      of Intangible Assets**





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





**Stock-Based
      Compensation**





We
      have
      adopted the provisions of SFAS No. 123(R), *Share-Based
      Payment* ,
      effective January 1, 2005 using
      the
      modified retrospective application method as provided by SFAS 123(R) and
      accordingly, financial statement amounts for the prior periods in which the
      Company granted employee stock options have been restated to reflect the fair
      value method of expensing prescribed by SFAS 123(R). The
      fair
      value of each option grant, nonvested stock award and shares issued under the
      employee stock purchase plan were estimated on the date of grant using the
      Black-Scholes option pricing model and various inputs to the model. Expected
      volatilities were based on historical volatility of our stock. The expected
      term
      represents the period of time that grants and awards are expected to be
      outstanding. The risk-free interest rate approximates the U.S. treasury
      rate corresponding to the expected term of the option, and dividends were
      assumed to be zero. These inputs are based on our assumptions, which include
      complex and subjective variables. Other reasonable assumptions could result
      in
      different fair values for our stock-based awards.





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





**New
      Accounting Pronouncements**





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




19





**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      and marketable securities were $173,000 at June 30, 2007, versus $4,000 at
      December 31, 2006. Total current liabilities were $3,260,000 at June 30, 2007,
      versus $5,637,000 at December 31, 2006. Included in current liabilities at
      December 31, 2006 is a note payable to Winstar Communications, Inc.
      ( **“Winstar”** )
      in the
      amount of $450,000, which was repaid during 2007.





We
      had a
      working capital deficit of approximately $631,000 at June 30, 2007 and we
      continue to have recurring losses. In the past we have relied upon private
      placements of equity and debt securities and we may rely on private placements
      to fund our capital requirements in the future. We have received a significant
      amount of funding from Ault Glazer Capital Partners, LLC (formerly AGB
      Acquisition Fund) (the ***“Fund”*** ).
      AG
      Management is the managing member of the Fund. The managing member of AG
      Management is The Ault Glazer Group, Inc. ( ***“The
      AG Group”*** )
      (f/k/a
      Ault Glazer Bodnar & Company, Inc.). The Company’s former Chairman and
      former Chief Executive Officer, Milton “Todd” Ault, III, is Chairman, Chief
      Executive Officer and President of The AG Group. At June 30, 2007 the
      outstanding principal balance of loans that we have entered into with the Fund
      was $2,531,000. At June 30, 2007 we also had outstanding promissory notes
      primarily to three additional lenders in the principal amount of
      $2,495,000.





From
      September 8, 2006 through September 19, 2006, Caspi loaned the Company a total
      of $1,495,000, all of which is outstanding at June 30, 2007. As consideration
      for the loan, the Company issued Caspi a Convertible Promissory Note in the
      principal amount of $1,495,000 (the ***“Caspi
      Note”*** ).
      The
      Caspi Note bears interest at the rate of 12% per annum and is due upon the
      earlier of March 31, 2008 or, the occurrence of an event of default, and is
      convertible into shares of the Company’s common stock at $1.25 per share. As
      security for the performance of the Company’s obligations pursuant to the Second
      Caspi Note, the Company granted Caspi a security interest in certain real
      property.





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





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





Pursuant
      to the terms of Security Agreements dated May 1, 2006 and November 13, 2006,
      the
      Company granted the Herbert Langsam Revocable Trust a security interest in
      all
      of the Company’s assets as collateral for the satisfaction and performance of
      the Company’s obligations under the terms of the Langsam Note and the Second
      Langsam Note.





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





Between
      August 17, 2006 and April 5, 2007, the Company entered into various subscription
      agreements with accredited investors in private placements exempt from the
      registration requirements of the Securities Act. The Company issued and sold
      to
      these accredited investors an aggregate of 3,342,000 shares of its common stock
      and warrants to purchase an additional 1,471,000 shares of its common stock.
      The
      warrants are exercisable for a period of three to five years with an exercise
      price equal to $2.00. These issuances resulted in aggregate gross proceeds
      to
      the Company of $4,178,000, of which $3,678,000 was in cash and $500,000 was
      in
      product which the Company will receive over the course of a twelve (12) month
      period. We used the net proceeds from these private placement transactions
      primarily for general corporate purposes and repayment of existing
      liabilities




20




On
      June
      7, 2007, the Company entered into a subscription agreement with two accredited
      investors, one of which is an employee and the other a director of the Company,
      in a private placement exempt from the registration requirements of the
      Securities Act. The Company issued and sold to these accredited investors an
      aggregate of 48,000 shares of its common stock and warrants to purchase an
      additional 24,000 shares of its common stock. The warrants are exercisable
      for a
      period of five years, have an exercise price equal to $2.00, and 50% of the
      warrants are callable upon the occurrence of any one of a number of specified
      events when, after any such specified occurrence, the average closing price
      of
      the Company’s common stock during any period of five consecutive trading days
      exceeds $4.00 per share. These issuances resulted in aggregate gross proceeds
      to
      the Company of $60,000. We intend to use the net proceeds from this private
      placement transaction primarily for general corporate purposes.





On
      June
      29, 2007, ASG completed the sale of its express car wash and underlying real
      estate in Birmingham, Alabama for $1,500,000 .
      In
      addition, on July 3, 2007, the ASG completed the sale of approximately 1 acre
      of
      undeveloped land located in Tuscaloosa, Alabama for $965,000 and on August
      13,
      2007 the sale of approximately 5 acres of undeveloped land located in
      Birmingham, Alabama for $750,000. The purchases of the express car wash and
      undeveloped land in Birmingham, Alabama were made by Charles H. Dellaccio and
      Darrell Grimsley. Mr. Grimsley is the Chairman of the Board and Chief Executive
      Officer of Automotive Services Group (“ASG”).
      These sales complete the liquidation of all assets held by ASG. The majority
      of
      the proceeds from the sales will be used to repay existing debt. By selling
      these assets the Company has positioned itself to aggressively pursue the market
      for surgical sponges in the United States and Europe, which we believe
      represents a market opportunity equal to or in excess of $650 million in annual
      sales.





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





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





Cash
      increased by $169,000 to $173,000 during the six months ended June 30, 2007,
      compared to a decrease of $70,000 during the six months ended June 30, 2006.




Operating
      activities used $2,177,000 of cash during the six months ended June 30, 2007,
      compared to $979,000 during the six months ended June 30, 2006.




Operating
      activities for the six months ended June 30, 2007, exclusive of changes in
      operating assets and liabilities, used $1,954,000 of cash, as the Company's
      net
      cash used in operating activities of $2,177,000 included non-cash charges for
      depreciation and amortization of $237,000, debt discount of $408,000 and stock
      based compensation of $693,000. For the six months ended June 30, 2006,
      operating activities, exclusive of changes in operating assets and liabilities,
      used $2,277,000 of cash, as the Company's net cash used in operating activities
      of $979,000 included non-cash charges for depreciation, amortization and
      interest of $1,237,000, realized losses of $50,000 and stock based compensation
      of $2,674,000.





Changes
      in operating assets and liabilities used cash of $223,000 during the six months
      ended June 30, 2007, principally due to decreases in the level of accounts
      payable which were partially offset by an increase in accrued liabilities and
      a
      decrease in prepaid expenses. During the six months ended June 30, 2006, changes
      in operating assets and liabilities produced cash of $1,298,000 during the
      six
      months ended June 30, 2006, principally due to net proceeds received from
      marketable securities, decreases in our receivables from investments and
      increases in the level of accounts payable and accrued liabilities which were
      partially offset by decreases in the and amounts due to our broker. The amount
      due to our broker was directly attributable to purchases of marketable
      investment securities that were purchased on margin or to securities that were
      margined subsequent to their purchase. During the three months ended March
      31,
      200,6 we invested our cash balances in the public equity and debt markets in
      an
      attempt to maximize the short-term return on such assets. The amount due to
      our
      broker varied throughout the year depending upon the aggregate amount of
      marketable investment securities held by us and the level of borrowing against
      our available-for-sale securities. The actual amount of marketable investment
      securities held was influenced by several factors, including but not limited
      to,
      our expectations of potential returns available from what we considered to
      be
      mispriced securities as well as the cash needs of our operating activities.
      During times when we were heavily invested in marketable investment securities,
      our liquidity position was significantly reduced. We no longer make a practice
      of investing in marketable investment securities.




21




The
      principal factor in the $1,318,000 of cash used in investing activities during
      the six months ended June 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 $160,000 related to the ongoing
      development of purchased software related to our Safety-Sponge  System.
      The principal factor in the $2,139,000 of cash used in investing activities
      during the six months ended June 30, 2006 was the purchase of land of
      $1,697,000, capitalized construction costs of $383,000 related to ASG, and
      capitalized costs of $148,000 related to the ongoing development of software
      related to our Safety-Sponge  System
      offset by proceeds from the sale of long-term investments of
      $139,000.





Cash
      provided by financing activities during the six months ended June 30, 2007
      of
      $1,027,000 resulted primarily from net proceeds from the issuance of common
      stock and warrants of $3,051,000 offset by the repayment of the Winstar Note
      in
      the amount of $450,000 and other notes in the amount of $1,356,000. Cash
      provided by financing activities for the six months ended June 30, 2006 of
      $3,048,000 resulted from the net proceeds from increases of  notes
      payable.





**Investments**





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





A
      summary
      of our investment portfolio, which is valued at $1,431,000 and represents 13.7%
      of our total assets, is reflected below. Excluding our real estate investments,
      our investment portfolio represents 9.6% of our total assets. The investment
      portfolio is classified as long-term investments.





**June
                30,****2007**Alacra
                Corporation
            
            $
            1,000,000Real
                Estate
            
            
            430,564$
            1,430,564





*Alacra
      Corporation*





At
      June
      30, 2007, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued at $1,000,000, which represents 9.6% of our total assets. On April 20,
      2000, we purchased $1,000,000 worth of Alacra Series F Convertible Preferred
      Stock. Alacra has recorded revenue growth in every year since the Company’s
      original investment. Further, Alacra is forecasting that 2007 revenues will
      be
      approximately $19.2 million, which would represent an increase of 22% over
      2006
      unaudited revenues. At December 31, 2006, Alacra reported in their unaudited
      financial statement total assets of approximately $4.7 million with total
      liabilities of approximately $7.4 million. Deferred revenue, which represents
      subscription revenues that are amortized over the term of the contract, which
      is
      generally one year, represented approximately $3.7 million of the total
      liabilities. We have the right, subject to Alacra having the available cash,
      to
      have the preferred stock redeemed by Alacra over a period of three years for
      face value plus accrued dividends beginning on December 31, 2006. Pursuant
      to
      this right, in December 2006 we informed management of Alacra that we were
      exercising our right to put back one-third of our preferred stock. If Alacra
      has
      a sufficient amount of cash to redeem our preferred stock, we would expect
      the
      redemption to occur in the fourth quarter of 2007. In connection with this
      investment, the Company was granted observer rights on Alacra board of directors
      meetings.




22




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





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





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





*Investments
      in Real Estate*





At
      June
      30, 2007, we had several real estate investments valued at $431,000, which
      represents 4.1% of our total assets. In the past we held our real estate
      investments in Ault Glazer Bodnar Capital Properties, LLC ***(“AGB
      Properties”)*** .
      AGB
      Properties, which was closed during 2006, was a Delaware limited liability
      company and a wholly owned subsidiary. The real estate investments, consisting
      of approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
      0.61 acres of undeveloped land in Springfield, Tennessee, are currently being
      marketed for sale. During the year ended December 31, 2006, we received payment
      on loans that were secured by real estate of $50,000. We expect that any future
      gain or loss recognized on the liquidation of some or all of our real estate
      holdings would be insignificant primarily due to the short period of time that
      the properties were owned combined with the absence of any significant changes
      in property values in the real estate markets where the real estate holdings
      are
      located.




23




**Results
      of Operations**





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





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





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





§
            “Interest,
                dividend income and other, net,” which is the amount we receive from
                interest and dividends from our short term investments and money
                market
                accounts, and our proportionate share of income or losses from investments
                accounted for under the equity method of
                accounting;





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





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




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





**Revenues**





We
      recognized revenues of $313,000 and $49,000 during the three months and $621,000
      and $104,000 during the six months ended June 30, 2007 and 2006, respectively.
      All of the revenues generated during the three and six months ended June 30,
      2007 related to sales of our Safety-Sponge  System.
      Revenues during the three and six months ended June 30, 2007 from sales of
      our
      Safety-Sponge  System
      consisted of sales from the safety sponge of $313,000 and $515,000,
      respectively, and sales from hardware and supplies of $106,000 during the six
      months ended June 30, 20. Although hardware sales are not considered a recurring
      item, we expect that once an institution adopts our system, they will be
      committed to its use and therefore provide a recurring source of revenues for
      sales of the safety sponge.





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





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




24




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





**Expenses**





Operating
      expenses were $1,723,000 and $1,535,000 for the three months and $3,132,000
      and
      $4,930,000 for the six months ended June 30, 2007 and 2006, respectively.





The
      decrease in operating expenses of $1,798,000, for the six months ended June
      30,
      2007 when compared to the six months ended June 30, 2006, was primarily the
      result of salaries and employee benefits, which decreased by $1,595,000. Our
      Compensation Committee, currently comprised of two independent directors,
      determines and recommends to our Board the cash and stock based compensation
      to
      be paid to our executive officers and also reviews the amount of salary and
      bonus for each of our other officers and employees. The most significant
      component of employee compensation is stock based compensation expense.





For
      the
      six months ended June 30, 2007, we recorded $277,000 related to grants of
      nonqualified stock options and $269,000 related to restricted stock awards
      to
      our employees and $90,000 related to restricted stock awards to our non-employee
      directors. During the six months ended June 30, 2006, we recorded $1,033,000
      relating to grants of nonqualified stock options and $1,092,000 related to
      restricted stock awards to our employees and non-employee directors. The
      issuance of stock options and restricted stock awards to our employees and
      non-employee directors, adjusted for the $90,000 in restricted stock awards
      to
      our non-employee directors which is recorded in general and administrative
      expenses, resulted in a decrease in stock based compensation expense of
      $1,579,000 for the six months ended June 30, 2007. Therefore, excluding stock
      based compensation, salaries and employee benefits decreased by $16,000.





At
      June
      30, 2007, four of our executives were covered under employment agreements.
      Our
      Chief Executive Officer, William B. Horne, is covered under a two year
      employment agreement with annual base compensation of $250,000; our Chief
      Executive Officer of SurgiCount Medical, Inc., Bill Adams is covered under
      a
      three year employment agreement with annual base compensation of $300,000;
      our
      President of Sales and Marketing of SurgiCount Medical, Inc., Richard Bertran,
      is covered under a three year employment agreement with annual base compensation
      of $250,000 and; our Director of Manufacturing of SurgiCount Medical, Inc.,
      James Schafer, is covered under a two year employment agreement with annual
      base
      compensation of $100,000. None of our other executives our currently covered
      under an employment agreement, therefore, we are under no financial obligation,
      other than monthly salaries, for our other executive officers. Currently,
      monthly gross salaries for all of our employees are $150,000. We believe, as
      with all our operating expenses, that our existing cash resources, together
      with
      proceeds from investments, anticipated financings and expected revenues from
      our
      operations, should be adequate to fund our salary obligations.





The
      second largest component of our operating expenses is professional fees which
      decreased by $658,000 during the six months ended June 30, 2007 compared to
      the
      amount reported during the six months ended June 30, 2006. This decrease is
      primarily comprised of decreases in stock based compensation to outside
      consultants of $492,000. During the six months ended June 30, 2006, stock based
      compensation expense of $549,000 was the most significant component of
      professional fees. The majority of the $549,000 that was recorded in stock
      based
      compensation related to a consulting agreement that we entered into in February
      2006 with Analog Ventures, LLC ( ***“Analog
      Ventures”*** )
      whereby
      Analog Ventures agreed to consult with us on matters relating primarily to
      the
      divestiture of our non-core assets and assist us in our efforts to focus our
      business exclusively on the patient safety medical products field. As an
      incentive for entering into the agreement, we agreed to issue Analog Ventures
      a
      warrant to purchase 175,000 shares of our common stock at an exercise price
      of
      $3.95, exercisable for 3 years. We recognized an expense of $405,000 related
      to
      these warrants.




25




The
      remaining decrease in professional fees, of $166,000, is attributed to our
      clinical trial agreement with Brigham and Women's Hospital, the teaching
      affiliate of Harvard Medical School, relating to SurgiCount's
      Safety-Sponge  System.
      The clinical trial is the result of an on-going collaboration between Harvard
      and SurgiCount to refine the Safety-Sponge System in a clinical optimization
      study. Under terms of the agreement, Brigham and Women's Hospital collected
      data
      on how the Safety-Sponge System saves time, reduces costs and increases patient
      safety in the operating room. The study also assisted in refining the
      system's technical processes in the operating room to provide clear guidance
      and
      instruction to hospitals, easily integrating the Safety-Sponge  System
      into operating rooms. Brigham and Women's Hospital received a non-exclusive
      license to use the Safety-Sponge  System,
      while we will own all technical innovations and other intellectual properties
      derived from the study. We provided a research grant to Brigham and Women’s
      Hospital over the course of the clinical trial in the aggregate amount of
      $431,000 of which $151,000 was expensed during the six months ended June 30,
      2006. The clinical trials were completed around September 2006.





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





The
      increase in cost of sales of $402,000 reflects a shift in our revenue mix from
      revenue generated primarily through consulting services which do not have any
      costs of sales to that of sales of our Safety-Sponge System.





General
      and administrative expenses experienced an increases of $33,000 during the
      six
      months ended June 30, 2007 over the prior year. As
      discussed above, in Financial Condition, Liquidity and Capital Resources, we
      have a
      working
      capital deficit of $631,000 and have experienced continued losses. These
      financial constraints have required us to be selective in the expenses that
      we
      incur and where possible delay or forego an expense. This overall condition
      has
      resulted in only a slight in general and administrative expense. General and
      administrative expenses is comprised of a combination of a several types of
      expenses, none of which are significant individually.





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





We
      had
      interest income of $4,000 and $1,100 for the six months ended June 30, 2007
      and
      2006, respectively.





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





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





During
      the six months ended June 30, 2007 we realized a net gain of $51,000 compared
      to
      a loss of $50,000 during the six months ended June 30, 2006. Realized gains
      (losses) during the six months ended June 30, 2007 reflect the sale of our
      operating car was for a gain of $29,000 combined with the sale of certain
      non-operating assets for a gain of $32,000. The realized loss during the six
      months ended June 30, 2007 resulted primarily from the sale of 108,200 shares
      of
      Tuxis Corporation.




26




**Interest
      expense**





We
      had
      interest expense of $608,000 and $990,000 for the six months ended June 30,
      2007
      and 2006, respectively.





The
      increase in interest expense for the six months ended June 30, 2007 when
      compared to June 30, 2006 is primarily attributable to the non-cash interest
      charges incurred as a result of the debt discount associated with our short-term
      debt financings. During the six months ended June 30, 2007 and 2006, we recorded
      $408,000 and $1,047,000, respectively, in non-cash interest charges. The
      non-cash interest charges that were incurred during the six months ended June
      30, 2006 included $75,000 that were attributed to our car wash segment and
      recorded in loss from discontinued operations. Thus, non-cash interest charges
      a
      decreased $564,000 and represented the primary cause of the decreasein interest
      expense from 2006 to 2007. These non-cash charges resulted from the issuance
      of
      debt that either had conversion prices on the date of issuance that werebelow
      the fair market value of the underlying common stock or required the issuance
      of
      warrants to purchase shares of our common stock, which required us to record
      an
      expense based on the estimated fair value of the warrants. The remaining
      increase in interest expense is attributable to the overall increased level
      of
      borrowings during the six months ended June 30, 2007 over the prior
      year.





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





During
      the six months ended June 30, 2006, unrealized appreciation of
      investments was $45,000. Due
      to
      the absence of any material amount of marketable securities during the six
      months ended June 30, 2007, the Company did not recognize any unrealized
      appreciation. The increase in unrealized appreciation during the six months
      ended June 30, 2006, was primarily due to the sale of 108,200 shares of Tuxis
      Corporation common stock, which at December 31, 2005 had unrealized depreciation
      of approximately $134,000. When we exit an investment and realize a loss, we
      make an accounting entry to reverse any unrealized depreciation we had
      previously recorded to reflect the depreciated value of the investment. The
      increase in unrealized appreciation related to the sale of our shares of Tuxis
      common stock was partially offset by a decrease in the value of the 95,000
      shares of IPEX common stock held as trading securities. IPEX common stock is
      traded on the OTC Bulletin Board, which reported a closing price, at December
      31, 2005 of $2.38 per share compared with $0.32 per share at June 30, 2006.
      We
      valued our holdings in IPEX at a discount to the closing prices, of $1.19 and
      $0.24 per share at December 31, 2005 and June 30, 2006, respectively, due
      primarily to the limited average number of shares traded on the OTC Bulletin
      Board.





**Loss
      from discontinued car was segment**





The
      loss
      from our discontinued car was segment decreased by $582,000 to
      $147,000 during the six months ended June 30, 2007 from a loss of $729,000
      during the six months ended June 30, 2006. ASG’s
      first site, developed in Birmingham, Alabama, had its grand opening on March
      8,
      2006. Thus, the six months ended June 30, 2007 reflected six full months of
      operations whereas the six months ended June 30, 2006 reflected slightly less
      than four months of operations. Further, a t
      June
      30, 2006, a goodwill impairmentcharge
      of $357,000 was recorded in the car wash services operating segment.  This goodwill impairmentrelated
      to goodwill that resulted from the Company’s acquisitions of ASG in March 2006.During
      the six months ended June 30, 2007, as a result of the full quarter of
      operations, revenues increased by $178,000 and operating costs decreased by
      $334,000. However, excluding goodwill impairment of $357,000, operating costs
      increased by $23,000.





**Accumulated
      other comprehensive income**





Unrealized
      gains (losses) on our investments designated as available-for-sale are recorded
      in accumulated other comprehensive income. At June 30, 2007 and December 31,
      2006, our remaining investments were carried at cost and therefore we did not
      record any unrealized gains (losses) on these investments. At June 30, 2006,
      our
      restricted holdings in IPEX and Digicorp were classified as available-for-sale.
      At June 30, 2006, the unrealized gains (losses) on our restricted holdings
      in
      IPEX and Digicorp amounted to ($1,230,000) and $1,373,000, respectively, whereas
      at December 31, 2005, the unrealized gains (losses) on our restricted holdings
      in IPEX and Digicorp amounted to ($328,000) and $2,703,000, respectively. The
      cumulative decrease in net unrealized gains amounts to $2,232,000.




27




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





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





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





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





**Item
      4. Controls and Procedures.**





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





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





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





**Item
      1A. Risk Factors.**





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




28




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





Between
      May 9, 2007 and June 28, 2007, the Company issued 220,169 shares of Common
      Stock
      to various employees, directors, consultants and creditors. The Common Stock
      was
      issued for services and payment of accrued interest. The Common Stock was valued
      at approximately $392,000. These shares were issued in reliance upon the
      exemption provided by Section 4(2) of the Securities Act.





On
      January 30, 2007, the Company issued 8,320 warrants to purchase shares of common
      stock at $2.00 per share to the Company’s Placement Agent. The warrants vested
      immediately and have a five-year life. The warrants were valued at approximately
      $8,000 and were expensed at the time of issuance. These securities will be
      issued pursuant to Section 4(2) of the Securities Act of 1933. These warrants
      were issued in reliance upon the exemption provided by Section 4(2) of the
      Securities Act.





On
      June
      7, 2007, the Company entered into a subscription agreement with several
      accredited investors in a private placement exempt from the registration
      requirements of the Securities Act. The Company issued and sold to these
      accredited investors an aggregate of 48,000 shares of its common stock and
      warrants to purchase an additional 24,000 shares of its common stock. The
      warrants are exercisable for a period of five years, have an exercise price
      equal to $2.00, and 50% of the warrants are callable upon the occurrence of
      any
      one of a number of specified events when, after any such specified occurrence,
      the average closing price of the Company’s common stock during any period of
      five consecutive trading days exceeds $4.00 per share. These issuances resulted
      in aggregate gross proceeds to the Company of $60,000. We intend to use the
      net
      proceeds from this private placement transaction primarily for general corporate
      purposes. These securities were sold in reliance upon the exemption provided
      by
      Section 4(2) of the Securities Act and the safe harbor of Rule 506 under
      Regulation D promulgated under the Securities Act. No advertising or general
      solicitation was employed in offering the securities, the sales were made to
      a
      limited number of persons, all of whom represented to the Company that they
      are
      accredited investors, and transfer of the securities is restricted in accordance
      with the requirements of the Securities Act.





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





On
      June
      28, 2007, the Company issued 337,439 shares of its common stock to Ault Glazer
      Capital Partners, LLC (formerly AGB Acquisition Fund) (the ***“Fund”*** ).
      The
      shares were issued in satisfaction of the unpaid principal and accrued interest
      of $422,000 owed to the Fund pursuant to a Revolving Line of Credit Agreement
      (the ***“Revolving
      Line of Credit”*** )
      entered
      into with the Fund on March 7, 2006. The amount due under the Revolving Line
      of
      Credit, which
      was
      in default, was converted into shares of the Company’s common stock at a
      conversion price of $1.25 per share.





On
      April
      26, 2007, upon the occurrence of default of Maroon Creek Capital, LP’s
      ( **“Maroon”** ),
      a
      California limited partnership, $81,000 promissory note, the Company issued
      10,000 warrants to purchase shares of common stock at $2.00 per share to Maroon.
      The warrants vested immediately and have a five-year life. The warrants were
      valued at $9,000 and were expensed at the time of issuance. These warrants
      were
      issued in reliance upon the exemption provided by Section 4(2) of the Securities
      Act.





On
      July
      23, 2007, the Company issued 25,000 warrants to purchase shares of common stock
      at $1.75 per share to a consultant. The warrants vested immediately and have
      a
      five-year life. The warrants were valued at $27,000 and were expensed at the
      time of issuance. These warrants were issued in reliance upon the exemption
      provided by Section 4(2) of the Securities Act.




29




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





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





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





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





The
      Company is in the process of restructuring the debt that is owed to Mr. Herbert
      Langsam.





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





None.





**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





**Exhibit
                Number**
            
            **Description**10.1
            
            Secured
                Convertible Note issued August 10, 2007 with an effective date of
                June 1,
                2007 between the Company and Ault Glazer Capital Partners, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 16,
                2007)10.2
            
            Guaranty
                of Payment by Surgicount Medical, Inc. and Patient Safety Technologies,
                Inc., in favor of Ault Glazer Capital Partners, LLC in connection
                with the
                $2,530,558.40 Promissory Note issued August 10, 2007 with an effective
                date of June 1, 2007 by the Company to Ault Glazer Capital Partners,
                LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 16,
                2007)10.3
            
            Security
                Agreement dated August 10, 2007 in favor of Ault Glazer Capital Partners,
                LLC (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 16,
                2007)31.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(a)
                or
                Rule 15d-14(a)32.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(b)
                or
                Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the
                United
                States Code




*
      Filed
      herewith.




30




**SIGNATURES**





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





PATIENT
                SAFETY TECHNOLOGIES, INC.Date: August
              20, 2007
            By:
            /s/ William
              B. HorneWilliam
                B. HorneChief
                Executive and Chief Financial Officer and
              Principal
                Accounting Officer




31