**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**







**FORM
      10-Q**





(Mark
      One)





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





FOR
      THE
      QUARTERLY PERIOD ENDED MARCH 31, 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 9,937,059 shares of the registrant's common stock outstanding as of May
      8,
      2007.








**PATIENT
      SAFETY TECHNOLOGIES, INC.**





**FORM
      10-Q FOR THE QUARTER**


**ENDED
      MARCH 31, 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
            29Item
                4. Controls and Procedures
            29**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            29Item
                1A. Risk Factors
            29Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            29Item
                3. Defaults Upon Senior Securities
            31Item
                4. Submission of Matters to a Vote of Security Holders
            31Item
                5. Other Information
            31Item
                6. Exhibits
            31**SIGNATURES**
            32








**"SAFE
      HARBOR" STATEMENT UNDER**


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





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





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





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








**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**


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




**March
                31,**
            
            **December
                31,****2007**
            
            **2006****ASSETS****CURRENT
                ASSETS**Cash
            
            $
            1,410,705
            
            $
            3,775Accounts
                receivable
            
            
            198,648
            
            
            65,933Inventories
            
            
            42,825
            
            
            42,825Prepaid
                expenses
            
            
            437,640
            
            
            78,834Other
                current assets
            
            
            16,620
            
            
            13,125**TOTAL
                CURRENT ASSETS**
            
            
            2,106,438
            
            
            204,492Restricted
                certificate of deposit
            
            
            87,500
            
            
            87,500Notes
                receivable
            
            
            153,668
            
            
            153,668Property
                and equipment, net
            
            
            375,308
            
            
            328,202Assets
                held for sale, net
            
            
            3,178,765
            
            
            3,189,674Goodwill
            
            
            1,687,527
            
            
            1,687,527Patents,
                net
            
            
            4,007,615
            
            
            4,088,850Long-term
                investments
            
            
            1,441,533
            
            
            1,441,533**TOTAL
                ASSETS**
            
            $
            13,038,354
            
            $
            11,181,446**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES**Notes
                payable, current portion - net
            
            $
            4,279,138
            
            $
            3,517,149Accounts
                payable
            
            
            1,083,540
            
            
            1,295,849Accrued
                liabilities
            
            
            928,974
            
            
            824,466**TOTAL
                CURRENT LIABILITIES**
            
            
            6,291,652
            
            
            5,637,464Notes
                payable, less current portion - net
            
            
            1,495,000
            
            
            2,527,562Deferred
                tax liabilities
            
            
            1,443,821
            
            
            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
                March 31, 2007 and December 31, 2006(Liquidation
                preference of $1,229,139 at March 31, 2007 and $1,209,976 at
              December
                31, 2006, respectively)
            
            
            10,950
            
            
            10,950Common
                stock, $0.33 par value: 25,000,000 shares authorized;9,832,200
                shares issued and outstanding as of March 31, 2007;
                7,489,026shares
                issued and 6,874,889 shares outstanding at December 31,
                2006
            
            
            3,244,626
            
            
            2,471,379Additional
                paid-in capital
            
            
            31,480,431
            
            
            29,654,341Accumulated
                deficit
            
            
            (30,928,126
            )
            
            (29,483,910
            )3,807,881
            
            
            2,652,760Less:
                614,137 shares of treasury stock, at cost, at December 31,
                2006
            
            
            —
            
            
            (1,109,406
            )**TOTAL
                STOCKHOLDERS' EQUITY**
            
            
            3,807,881
            
            
            1,543,354**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            13,038,354
            
            $
            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 March 31,****2007**
            
            **2006****REVENUES**
            
            $
            307,158
            
            $
            54,993**OPERATING
                EXPENSES**Cost
                of sales
            
            
            214,210
            
            
            —Salaries
                and employee benefits
            
            
            498,280
            
            
            2,385,250Professional
                fees
            
            
            303,473
            
            
            612,307Rent
            
            
            38,582
            
            
            33,287Insurance
            
            
            42,772
            
            
            27,359Taxes
                other than income taxes
            
            
            27,158
            
            
            31,245Amortization
                of patents
            
            
            81,235
            
            
            81,235General
                and administrative
            
            
            203,682
            
            
            223,939**Total
                operating expenses**
            
            
            1,409,392
            
            
            3,394,622**Operating
                loss**
            
            
            (1,102,234
            )
            
            (3,339,629
            )**OTHER
                INCOME (EXPENSES)**Interest,
                dividend income and other
            
            
            4,287
            
            
            1,094Realized
                (loss) on investments, net
            
            
            —
            
            
            (136,262
            )Interest
                expense
            
            
            (267,584
            )
            
            (34,683
            )Unrealized
                gain on marketable securities, net
            
            
            —
            
            
            76,915**Loss
                from continuing operations before income taxes**
            
            
            (1,365,531
            )
            
            (3,432,565
            )**Income
                tax benefit**
            
            
            29,245
            
            
            29,245**Loss
                from continuing operations**
            
            
            (1,336,286
            )
            
            (3,403,320
            )**Loss
                from discontinued operations**
            
            
            (88,767
            )
            
            (170,212
            )**Net
                loss**
            
            
            (1,425,053
            )
            
            (3,573,532
            )**Preferred
                dividends**
            
            
            (19,163
            )
            
            (19,163
            )**Loss
                available to common shareholders**
            
            $
            (1,444,216
            )
            $
            (3,592,695
            )**Basic
                and diluted net loss per common share****Continuing
                operations**
            
            $
            (0.17
            )
            $
            (0.57
            )**Discontinued
                operations**
            
            $
            (0.01
            )
            $
            (0.03
            )**Net
                loss**
            
            $
            (0.18
            )
            $
            (0.60
            )**Weighted
                average common shares outstanding - basic and
                diluted**
            
            
            7,789,581
            
            
            6,003,103**Comprehensive
                loss:****Net
                loss**
            
            $
            (1,425,053
            )
            $
            (3,573,532
            )**Other
                comprehensive (loss), unrealized (loss) on available-for-sale
                investments**
            
            
            —
            
            
            (745,715
            )**Total
                comprehensive loss**
            
            $
            (1,425,053
            )
            $
            (4,319,247
            )


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 Three Months Ended March 31,****2007**
            
            **2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,425,053
            )
            $
            (3,573,532
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            31,911
            
            
            8,519Amortization
                of patents
            
            
            81,235
            
            
            81,235Non-cash
                interest
            
            
            169,427
            
            
            75,245Realized loss
                on investments, net
            
            
            —
            
            
            136,262Unrealized
                gain on marketable securities
            
            
            —
            
            
            (76,915
            )Stock-based
                compensation to employees and directors
            
            
            249,900
            
            
            1,935,967Stock-based
                compensation to consultants
            
            
            61,703
            
            
            418,012Income
                tax benefit
            
            
            (29,245
            )
            
            (29,245
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (132,715
            )
            
            900,000Marketable
                securities, net
            
            
            —
            
            
            749,544Prepaid
                expenses
            
            
            141,194
            
            
            (17,873
            )Other
                current assets
            
            
            (3,495
            )
            
            (66
            )Assets
                held for sale, net
            
            
            10,909
            
            
            —Accounts
                payable
            
            
            (212,309
            )
            
            (241,702
            )Accrued
                liabilities
            
            
            85,345
            
            
            167,935Due
                to broker
            
            
            —
            
            
            (526,807
            )Net
                cash (used in) provided by operating activities
            
            
            (971,193
            )
            
            6,579Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (79,017
            )
            
            (2,102,853
            )Proceeds
                from sale of long-term investments
            
            
            —
            
            
            20,508Net
                cash used in investing activities
            
            
            (79,017
            )
            
            (2,082,345
            )Cash
                flows from financing activities:Proceeds
                from issuance of common stock and warrants
            
            
            2,897,140
            
            
            —Proceeds
                from notes payable
            
            
            10,000
            
            
            2,685,893Payments
                and decrease on notes payable
            
            
            (450,000
            )
            
            (631,637
            )Net
                cash provided by financing activities
            
            
            2,457,140
            
            
            2,054,256Net increase
                (decrease) in cash
            
            
            1,406,930
            
            
            (21,510
            )Cash
                at beginning of period
            
            
            3,775
            
            
            79,373Cash
                at end of period
            
            $
            1,410,705
            
            $
            57,863


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 Three Months Ended March 31,****2007**
            
            **2006**Supplemental
                disclosures of cash flow information:Cash
                paid during the period for interest
            
            $
            963
            
            $
            12,946Supplemental
                schedule of non cash investing and financing activities:Dividends
                accrued
            
            $
            19,163
            
            $
            19,163Capitalized
                interest
            
            $
            —
            
            $
            30,453Insuance
              of common stock for prepayment of inventory
            
            $
            500,000
            
            $
            —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:ASGGoodwill
            
            
            
            
            $
            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**


**March
      31, 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 currently has two wholly-owned operating subsidiaries: Surgicount
      Medical, Inc. ( ***“Surgicount”*** ),
      a
      California corporation; and Automotive Services Group, Inc., (formerly known
      as
      Ault Glazer Bodnar Merchant Capital, Inc.) a Delaware 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.





The
      Company also operates a car wash through Automotive Services Group, Inc.
      ( ***“Automotive
      Services Group”*** ),
      which
      holds 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. 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 March
      31, 2007, the Company has an accumulated deficit of approximately $30.9 million
      and a working capital deficit of approximately $4.2 million. For the three
      months ended March 31, 2007, the Company incurred a loss of approximately $1.4
      million and has utilized approximately $1.0 million in cash in its operations.
      Further, as of March 31, 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 three months ended March 31, 2007, the Company is currently
      seeking additional financing and believes that it will be successful. However,
      no assurances can be made that it will be successful obtaining a sufficient
      amount of equity financing to continue to fund its operations or that the
      Company will achieve profitable operations and positive cash flow from its
      medical products segment. The consolidated financial statements do not include
      any adjustments that might result from the outcome of this
      uncertainty.





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





**Basis
      of Presentation**





The
      accompanying unaudited consolidated interim financial statements have been
      prepared in accordance with the instructions to Form 10-Q and Article 10 of
      Regulation S-X and do not include all the information and disclosures required
      by accounting principles generally accepted in the United States of America.
      The
      consolidated interim financial information is unaudited, but reflects all normal
      adjustments that are, in the opinion of management, necessary to provide a
      fair
      statement of results for the interim periods presented. The consolidated balance
      sheet as of December 31, 2006 was derived from the Company’s audited financial
      statements. The consolidated interim financial statements should be read in
      conjunction with the consolidated financial statements in the Company’s Annual
      Report on Form 10-K for the year ended December 31, 2006. Results of the three
      months ended March 31, 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 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. As discussed in Note 5, during the year
      ended December 31, 2006, the Company believed there were indicators of
      impairment present for its car wash services segment and after performing the
      tests described above, recorded impairment charges.




**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 months ended March 31, 2007 and 2006, the Company had stock-based
      compensation expense of $250,000 and $1,936,000, respectively, related to
      issuances to the Company’s employee and directors, included in reported net
      losses for these periods. The total amount of stock-based compensation for
      the
      three months ended March 31, 2007 of $250,000 included expenses related to
      restricted stock grants valued at $192,000 and stock options valued at $58,000.
      The total amount of stock based compensation for the three months ended March
      31, 2006 of $1,936,000 included expenses related to restricted stock grants
      valued at $1,014,000 and stock options valued at $922,000.





During
      the three months ended March 31, 2007 and 2006, the Company had stock-based
      compensation expense, from issuances of restricted stock and warrants to
      consultants of the Company of $62,000 and $418,000, respectively.





6




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


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


A
      summary
      of stock option activity for the three months ended March 31,
      2007 is presented below:





**Outstanding
                Options****Shares
                Available for Grant**
            
            **Number
                of Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life (years)**
            
            **Aggregate
                Intrinsic Value****December
                31, 2006**
            
            
            **26,026**
            
            
            **1,704,000**
            
            **$**
            **4.50**
            
            
            **8.73**Restricted
                Stock Awards
            
            
            (79,032
            )Grants
            
            
            (75,000
            )
            
            75,000
            
            $
            1.60
            
            
            9.91Cancellations
            
            
            189,000
            
            
            (189,000
            )
            $
            5.11
            
            
            8.26**March
                31, 2007**
            
            
            **60,994**
            
            
            **1,590,000**
            
            **$**
            **4.23**
            
            
            **8.35**
            
            **$**
            **—**Options
                exercisable at:December
                31, 2006
            
            
            
            
            
            832,625
            
            $
            4.90
            
            
            8.54
            
            $
            —March
                31, 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 March
      31, 2007 and the exercise price, times the number of shares) that would have
      been received by the option holders had all option holders exercised their
      options on March 31, 2007. There have not been any options exercised during
      the
      three months ended March 31, 2007.





All
      options that the Company granted during the three months ended March 31, 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:




**Three
                Months ended March 31,****2007**
            
            **2006**Weighted
                average risk free interest rate
            
            
            4.50
            %
            
            3.75
            %Weighted
                average life (in years)
            
            
            5.00
            
            
            3.0Volatility
            
            
            100
            %
            
            89
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %Weighted
                average grant-date fair value per share of options granted
            
            $
            1.22
            
            $
            2.51





As
      of
      March 31, 2007, total unrecognized compensation cost related to unvested stock
      options was $975,000. The cost is expected to be recognized over a weighted
      average period of 1.51 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.





8




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


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


**4.
      DISCONTINUED OPERATIONS**





As
      part
      of a strategic plan to dispose of all the Company’s non-patient safety related
      assets, during the fourth quarter of 2006, the Company began marketing for
      sale the assets of Automotive
      Services Group, located
      in Alabama. The Company anticipates operating and generating operating cash
      flow
      from the one operating car wash until its disposition. The assets of Automotive
      Services Group met the
“held for sale” and “discontinued operations” criteria in accordance with SFAS
      144.




The
      following sets forth the discontinued operations for the three months ended
      March 31, 2007 and 2006 related to the held for sale assets of
      Automotive Services Group :




**Three
                Months Ended March 31,****2007**
            
            **2006**Operating
                revenues
            
            $
            159,864
            
            $
            20,767Operating
                expenses
            
            
            134,929
            
            
            93,259Depreciation
                and amortization
            
            
            10,909
            
            
            —Interest
                expense
            
            
            102,793
            
            
            97,720Loss
                from discontinued operations
            
            $
            (88,767
            )
            $
            (170,212
            )





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




**March
                  31,**
              **2007**
            
            **December
                  31,**
              **2006**Property
                and equipment, net
            
            $
            3,178,765
            
            $
            3,189,674Goodwill
            
            
            —
            
            
            —Other
                assets
            
            
            —
            
            
            —Total
                assets of discontinued operations
            
            $
            3,178,765
            
            $
            3,189,674





**5.
      OTHER CURRENT ASSETS**





At
      March
      31, 2007 and December 31, 2006, the Company had other current assets of $17,000
      and $13,000, respectively, consisting primarily of security deposits.





**6.
      GOODWILL AND PATENTS**





The
      Company’s goodwill relates to its SurgiCount subsidiary. Identifiable intangible
      assets, net, as of March 31, 2007 and December 31, 2006 are composed of
      patents:




**March
                31, 2007**
            
            **December
                31, 2006**Patents
            
            $
            4,684,576
            
            $
            4,684,576Accumulated
                amortization
            
            
            (676,961
            )
            
            (595,726
            )$
            4,007,615
            
            $
            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 March 31, 2007 and December 31, 2006 are comprised of the
      following:





Alacra
                Corporation
            
            $
            1,000,000Digicorp
            
            
            10,970Investments
                in Real Estate
            
            
            430,563$
            1,441,533





*Alacra
      Corporation*





At
      March
      31, 2007, the Company had an investment in shares of Series F convertible
      preferred stock of Alacra Corporation ( ***“Alacra”*** ),
      valued
      at $1,000,000, and classified as an available-for-sale investment. The Company
      has the right, to 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.





*Digicorp*





At
      March
      31, 2007, the Company held 96,269 shares of Digicorp common stock valued at
      $10,970. Digicorp's common stock is quoted on the OTC Bulletin Board. During
      the
      three months ended March 31, 2007 the closing prices for Digicorp’s common stock
      ranged between $0.08 and $0.18 per share. At March 31, 2007, the quoted closing
      price was $0.13 per share.





*Investments
      in Real Estate*





At
      March
      31, 2007, the Company had several real estate investments, recorded at their
      cost of $430,563. These investments are included in long-term investments.
      The
      Company holds its real estate investments in AGB Properties. AGB Properties
      real
      estate holdings consist of approximately 8.5 acres of undeveloped land in Heber
      Springs, Arkansas and 0.61 acres of undeveloped land in Springfield, Tennessee.





**8.
      NOTES PAYABLE**





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




**March
                31, 2007**
            
            **December
                31, 2006**Note
                payable to Winstar (a)
            
            $
            —
            
            $
            450,000Notes
                payable to Ault Glazer Capital Partners, LLC (b)
            
            
            2,575,528
            
            
            2,575,528Note
                payable to Steven J. Caspi (c)
            
            
            1,000,000
            
            
            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
            
            
            608,232
            
            
            598,232Total
                notes payable
            
            
            6,679,041
            
            
            7,119,041Less:
                debt discount on beneficial conversion feature
            
            
            (904,903
            )
            
            (1,074,330
            )$
            5,774,138
            
            $
            6,044,711





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 March 31, 2007 are as follows:





2007
            
            $
            5,184,0412008
            
            
            —2009
            
            
            —2010
            
            
            1,495,000$
            6,679,041





(a)
            On
                August 28, 2001, the Company made an investment in Excelsior Radio
                Networks, Inc. (***“Excelsior”***)
                which was completely liquidated during 2005. As part of the purchase
                price
                paid by the Company for its investment in Excelsior, the Company
                issued a
                $1,000,000 note to Winstar. This note was due February 28, 2002 with
                interest at 3.54% per annum but in accordance with the agreement
                has a
                right of offset against certain representations and warranties made
                by
                Winstar. 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.





(b)
            From
                January 11, 2006 through June 30, 2006, Ault Glazer Capital Partners,
                LLC
                (formerly AGB Acquisition Fund) (the***“Fund”***),
                a related party, loaned the Company a total of $443,000, all of which
                was
                repaid. As consideration for the loans, the Company issued the Fund
                secured promissory notes with an interest rate of 7% per annum (the***“Fund
                Notes”***),
                and entered into a security agreement granting the Fund a security
                interest in the Company’s personal property and fixtures, inventory,
                products and proceeds as security for the Company’s obligations under the
                Fund Notes. During the year ended December 31, 2006, the Company
                incurred
                and paid interest expense of $2,000 on the Fund Notes.




On
      February 8, 2006, the Fund loaned $687,000 to ASG and at March 31, 2007 the
      entire amount was outstanding. 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, bears interest at the rate of 10% per annum and was due
      on
      September 15, 2006. The ASG Note is in default and classified with current
      liabilities. 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 granted the Fund a security
      interest in all personal property and fixtures located at the ASG Property.
      During the three months ended March 31, 2007 and 2006, the Company incurred
      interest expense, excluding amortization of debt discount, of $17,000 and
      $10,000, respectively, on the ASG Note. At March 31, 2007 accrued interest
      on
      the ASG Note is $78,000.





11
 
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**


As
      of
      March 31, 2007 and 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 bears interest at the rate of 3% above the Prime Rate as
      published in the Wall Street Journal (8.25% at March 31, 2007). All unpaid
      principal, interest and charges under the Real Estate Note are due in full
      on
      July 31, 2010. The Real Estate Note is collateralized by a mortgage on certain
      real estate owned by ASG pursuant to the terms of a Future Advance Mortgage
      Assignment of Rents and Leases and Security Agreement dated July 27, 2005
      between ASG and the Fund. During the three months ended March 31, 2007 and
      2006,
      the Company incurred interest expense of $41,000 and $33,000, respectively,
      on
      the Real Estate Note. At March 31, 2007 accrued interest on the Real Estate
      Note
      is $231,000.





From
      March 7, 2006 through October 16, 2006, the Fund loaned the Company a total
      of
      $524,000, of which $130,000 was repaid. The outstanding balance at March 31,
      2007 is $394,000. 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 is 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 and are convertible into shares of the Company’s
      common stock at the option of the Fund at a price of $3.10 per share. The
      secured promissory notes issued pursuant to the Revolving Line of Credit are
      currently in default and the Company is in discussions with the Fund to
      restructure these notes. The obligations of the Company pursuant to such secured
      promissory notes are secured by the Company’s assets, personal property and
      fixtures, inventory, products and proceeds therefrom. During the three months
      ended March 31, 2007 and 2006, the Company incurred interest expense of $9,000
      and $200, respectively, on the Revolving Line of Credit. At March 31, 2007
      accrued interest on the Revolving Line of Credit is $25,000.





(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 by the scheduled maturity and to date has not been extended,
                therefore the Caspi Note is recorded in current liabilities. The
                Caspi
                Note is in default and therefore accruing interest at the rate of
                18% per
                annum. During the three months ended March 31, 2007 and 2006, the
                Company
                incurred interest expense of $44,000 and $21,000, respectively, on
                the
                Caspi Note. At March 31, 2007 accrued interest on the Caspi Note
                is
                $120,000.





(d)
            From
                September 8, 2006 through September 19, 2006, Mr. Caspi loaned the
                Company
                a total of $1,495,000, all of which is outstanding at March 31, 2007.
                As
                consideration for the loan, the Company issued Mr. Caspi a Convertible
                Promissory Note in the principal amount of $1,495,000 (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 three months ended March 31, 2007, the Company
                had
                incurred interest expense, excluding amortization of debt discount,
                of
                $44,000 on the Second Caspi Note. At March 31, 2007 accrued interest
                on
                the Second Caspi Note is $100,000.





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


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





The
      warrant issued to Mr. Caspi in conjunction with the Second Caspi Note will
      expire after September 8, 2011. The Company recorded debt discount in the amount
      of $231,000 based on the estimated fair value of the warrants. The debt discount
      as a result of the beneficial conversion feature of the note and the estimated
      fair value of the warrants will be amortized as non-cash interest expense over
      the term of the debt using the effective interest method. During the three
      months ended March 31, 2007, interest expense of $123,000 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 three months ended March 31, 2007,
      interest expense of $7,000 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 three months ended March 31, 2007, the Company incurred interest expense,
      excluding amortization of debt discount, of $8,000 on the Langsam Notes. At
      March 31, 2007 accrued interest on the Langsam Notes is $58,000.





(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 upon the earlier
                of
                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.





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 three
                months ended March 31, 2007, the Company incurred interest expense,
                excluding amortization of debt discount, of $12,000 on the Second
                Kalina
                Note. At March 31, 2007 accrued interest on the Second Kalina Note
                is
                $12,000.





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 three
      months ended March 31, 2007, interest expense of $23,000 has been recorded
      from
      the debt discount amortization.





**9.
      ACCRUED LIABILITIES**





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




**March
                31, 2007**
            
            **December
                31, 2006**Accrued
                interest
            
            $
            685,001
            
            $
            520,114Accrued
                professional fees
            
            
            10,000
            
            
            10,000Accrued
                dividends
            
            
            114,975
            
            
            95,812Accrued
                salaries
            
            
            53,659
            
            
            197,495Other
            
            
            65,339
            
            
            1,045$
            928,974
            
            $
            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 shall have an exercise price equal to $2.00 per
      share.





Between
      January 29, 2007 and April 5, 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 these accredited investors an aggregate of 2,104,000
      shares of its common stock and warrants to purchase an additional 1,052,000
      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 $2,630,000.





**11.
      WARRANTS**





During
      the three months ended March 31, 2007, a total of 1,315,120 warrants, at an
      exercise price of $2.00 per share were issued. 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%,
      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 March 31, 2007, a total of 4,589,641 warrants, at exercise
      prices ranging from $1.25 to $6.05 remain outstanding.





14
 
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Interim Financial Statements - Unaudited
          (continued)**


**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"*** ),
      based
      upon their usage of the facilities, paid the remaining base rent. 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
      March 31, 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.*





On
      June
      30, 2005, the Company formalized the terms of a consulting agreement, consented
      to by IPEX, whereby the Company was retained by the majority shareholder of
      IPEX
      and former President, Chief Executive Officer and director of IPEX ( ***“Majority
      Shareholder”*** ),
      to
      serve as a business consultant to IPEX. At June 30, 2005, Mr. Ault, the
      Company’s Chairman and Chief Executive Officer at that time, was granted an
      irrevocable voting proxy for 18,855,900 shares of IPEX owned by the Majority
      Shareholder (representing approximately 67% of the then outstanding shares
      of
      IPEX). At December 31, 2005, the Company held 7.8% of IPEX’s outstanding shares
      of common stock. On June 30, 2005, the Company agreed with IPEX as to the scope
      of such consulting services and the consideration for such services. The Company
      initially valued the amount of the consulting services at $1,331,000, which
      was
      due on August 15, 2005. The Company received 500,000 shares of IPEX common
      stock
      in December 2005 as payment for the services. At the time of payment, the fair
      market value of IPEX common stock had decreased by approximately 33%.
      Accordingly, the Company reduced the initial value of the consulting services
      by
      the amount of the decrease in the fair market value of IPEX common stock,
      $675,000. As a result of the decrease in the fair market value of IPEX common
      stock, the Company ultimately recognized $656,000 in revenue as a result of
      this
      agreement, of which $55,000 was recognized during the three months ended March
      31, 2006.





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





*Digicorp*





At
      March
      31, 2007 and 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, William B. Horne, 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 three months ended March 31, 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, William B. Horne, was also Chief Financial
      Officer of Ault Glazer.





15




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


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




**13.
      COMMITMENTS AND CONTINGENCIES**





*Legal
      Proceedings*





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





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





**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
      April
      4, 2007, ASG entered into an agreement for the sale of real property located
      in
      Tuscaloosa, Alabama (the “Tuscaloosa Undeveloped Land”) to Twin Properties, LLC.
      Pursuant to the agreement, ASG is 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 agreed to sell the Tuscaloosa
      Undeveloped Land for a purchase price of $965,000. This transaction is expected
      to close in July 2007.




On
      April
      26, 2007, ASG entered into a binding term sheet to sell its express car wash
      and
      a parcel of real property, both 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 aggregate purchase
      price for both properties is $2.25 million. This
      transaction is expected to close in July 2007.




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 March 31, 2007, 7.75%
      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.





We
      have
      two wholly-owned operating subsidiaries: (1) SurgiCount Medical, Inc., a
      California corporation; and (2) Automotive Services Group, Inc., (formerly
      known
      as Ault Glazer Bodnar Merchant Capital, Inc.) a Delaware
      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
      holds our investment in ASG, its wholly-owned express car wash subsidiary.
      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. We purchased the remaining equity interest in ASG in March
      2006
      and during the fourth quarter of 2006 we began marketing for sale the assets
      held in ASG.





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
      the
      surgical dressings in at the beginning of a surgical procedure and then scanning
      them out at the end of the procedure, the sponges can be counted faster and
      more
      accurately than traditional methods which require two medical personnel manually
      counting the used and un-used sponges. The Safety-Sponge System is the only
      FDA
      510k approved computer assisted sponge counting system.  SurgiCount
      is the first acquisition in our plan to become a leader in the patient safety
      market.





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 $1,411,000 at March 31, 2007, versus $4,000
      at
      December 31, 2006. Total current liabilities were $6,292,000 at March 31, 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 the three months ended March 31,
      2007.





We
      had a
      working capital deficit of approximately $4,185,000 at March 31, 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 March 31, 2007 the
      outstanding principal balance of loans that we have entered into with the Fund
      was $2,576,000. We have begun discussions with the Fund to restructure the
      terms
      of these loans. At March 31, 2007 we also had outstanding promissory notes
      to
      primarily three additional lenders in the principal amount of
      $4,104,000.





On
      January 12, 2006, Steven J. Caspi ( ***“Caspi”*** )
      loaned
      $1,000,000 to ASG. As consideration for the loan, ASG issued Caspi a promissory
      note in the principal amount of $1,000,000 (the ***“Caspi
      Note”*** )
      and
      granted Caspi a mortgage on certain real estate owned by ASG and a security
      interest on all personal property and fixtures located on such real estate
      as
      security for the obligations under the Caspi Note. In addition, we entered
      into
      an agreement guaranteeing ASG’s obligations pursuant to the Caspi Note. 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 by the scheduled maturity and to date has not been extended.
      The
      Caspi Note is in default and therefore accruing interest at the rate of 18%
      per
      annum.





From
      September 8, 2006 through September 19, 2006, Caspi loaned the Company a total
      of $1,495,000, all of which is outstanding at March 31, 2007. As consideration
      for the loan, the Company issued Caspi a Convertible Promissory Note in the
      principal amount of $1,495,000 (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, 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.





20


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.





In
      August
      2006, we entered into subscription agreements with two unaffiliated accredited
      investors, pursuant to which we sold 200,000 shares of the Company’s common
      stock, $0.33 par value per share, at a price of $1.25 per share. We received
      gross proceeds of approximately $250,000 from the sale of our common stock
      to
      the accredited investors. Pursuant to the subscription agreement, we granted
      the
      accredited investors piggy back registration rights to register the resale
      of
      the shares of common stock.





Between
      November 30, 2006 and December 15, 2006, the Company entered into a subscription
      agreement and sold an aggregate of 238,000 shares of its Common Stock and
      warrants to purchase an aggregate of up to 119,000 shares of its Common Stock
      in
      a private placement transaction to certain unaffiliated accredited investors.
      The warrants are exercisable for a period of three 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. Pursuant to the
      subscription agreement, we granted the accredited investors piggy back
      registration rights to register the resale of the shares of common stock. We
      received aggregate gross proceeds of $298,000.





On
      January 29, 2007, the Company entered into a subscription agreement and sold
      an
      aggregate of 800,000 shares of its Common Stock and warrants to purchase an
      aggregate of up to 300,000 shares of its Common Stock in a private placement
      transaction to A Plus, an accredited investor. 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. 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. We used the net proceeds from the private placement transaction
      primarily for general corporate purposes and repayment of existing liabilities.
      Pursuant to the subscription agreement, we granted the accredited investors
      piggy back registration rights to register the resale of the shares of common
      stock.





On
      January 29, 2007, the Company entered into a subscription agreement with several
      unaffiliated 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 104,000 shares of its common stock
      and warrants to purchase an additional 52,000 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 $130,000. We used the net proceeds
      from the private placement transaction primarily for general corporate purposes
      . Pursuant to the subscription agreement, we granted the accredited investors
      piggy back registration rights to register the resale of the shares of common
      stock.





Between
      March 7, 2007 and April 5, 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 2,000,000 shares of its common
      stock and warrants to purchase an additional 1,000,000 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 $2,500,000. We are
      required to use our reasonable best efforts to cause the registration statement
      to become effective within 120 days after the Closing Date, April 5, 2007.
      If
      the registration statement has not been filed on or prior to the 120th day
      after
      the Closing Date, we will issue, as liquidated damages, to the purchasers of
      the
      2,000,000 shares of our Common Stock and the warrants to purchase 1,000,000
      shares of our Common Stock warrants with a term of five years and an exercise
      price of $2.00 per share to purchase shares of our Common Stock equal to 2.5%
      of
      the number of shares of Common Stock purchased by the purchasers. We intend
      to
      use the net proceeds from this private placement transaction primarily for
      general corporate purposes and repayment of existing liabilities.





21


On
      April
      4, 2007, ASG entered into an agreement for the sale of real property located
      in
      Tuscaloosa, Alabama for $965,000 and on April 26, 2007, ASG entered into a
      binding term sheet to sell its express car wash and a parcel of real property,
      both located in Birmingham, Alabama, to Charles H. Dellaccio and Darrell
      Grimsley for $2.25 milllion. Mr. Grimsley is the Chairman of the Board and
      Chief
      Executive Officer of Automotive Services Group. There can be no guarantee that
      the execution of these contracts will result
      in
      the consummation of the transactions. However, to the extent we are successful
      in consummating these transactions then we would expect to receive proceeds
      from
      the transactions in July 2007. If
      all
      the properties are sold, we will receive gross proceeds of approximately $3.2
      Million. By selling these assets we will be better positioned 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 March 31, 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
      March 31, 2007, other than our office lease and employment agreements with
      key
      executive officers, we had no commitments not reflected in our consolidated
      financial statements.





Cash
      increased by $1,407,000 to $1,411,000 during the three months ended March 31,
      2007, compared to a decrease of $22,000 during the three months ended March
      31,
      2006.




Operating
      activities used $971,000 of cash during the three months ended March 31, 2007,
      compared to providing $7,000 during the three months ended March 31,
      2006.




Operating
      activities for the three months ended March 31, 2007, exclusive of changes
      in
      operating assets and liabilities, used $860,000 of cash, as the Company's net
      cash used in operating activities of $971,000 included non-cash charges for
      depreciation and amortization of $113,000, debt discount of $169,000 and stock
      based compensation of $312,000. For the three months ended March 31, 2006,
      operating activities, exclusive of changes in operating assets and liabilities,
      used $1,024,000 of cash, as the Company's net cash used in operating activities
      of $7,000 included non-cash charges for depreciation and amortization of
      $90,000, debt discount of $75,000, realized losses of $136,000, unrealized
      gains
      of $77,000 and stock based compensation of $2,354,000





Changes
      in operating assets and liabilities used cash of $111,000 during the three
      months ended March 31, 2007, principally due to decreases in the level of
      accounts payable and accrued liabilities which were partially offset by a
      decrease in prepaid expenses. During the three months ended March 31, 2006,
      changes in operating assets and liabilities provided cash of $1,031,000,
      principally due to net proceeds received from marketable securities, and
      decreases in our receivables from investments which were partially offset by
      decreases in the level of accounts payable and accrued liabilities 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, 2006 we invested our cash balances in the public equity
      and debt markets in an attempt to maximize the short-term return on such assets.
      The amount due to our broker varied throughout the year depending upon the
      aggregate amount of marketable investment securities held by us and the level
      of
      borrowing against our available-for-sale securities. The actual amount of
      marketable investment securities held was influenced by several factors,
      including but not limited to, our expectations of potential returns available
      from what we considered to be mispriced securities as well as the cash needs
      of
      our operating activities. During times when we were heavily invested in
      marketable investment securities our liquidity position was significantly
      reduced. We no longer make a practice of investing in marketable investment
      securities.





22


The
      principal factor in the $79,000 of cash used in investing activities during
      the
      three months ended March 31, 2007 was the capitalized costs of $73,000 related
      to the ongoing development of software related to our Safety-Sponge TM System.
      The principal factor in the $2,082,000 of cash used in investing activities
      during the three months ended March 31, 2006 was the purchase of land of
      $1,697,000 and capitalized construction costs of $317,000 related to the
      construction of our first automated car wash site by our subsidiary,
      ASG.





Cash
      provided by financing activities during the three months ended March 31, 2007,
      of $2,457,000 resulted primarily from net proceeds from the issuance of common
      stock and warrants of $2,897,000 offset by the repayment of the Winstar Note
      in
      the amount of $450,000. Cash provided by financing activities for the three
      months ended March 31, 2006, of $2,054,000 resulted from the net proceeds from
      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
      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 March 31, 2007.





A
      summary
      of our investment portfolio, which is valued at $1,442,000 and represents 11.06%
      of our total assets, is reflected below. Excluding our real estate investments,
      our investment portfolio represents 7.75% of our total assets. The investment
      portfolio is classified as long-term investments.




**March
                  31,**
              **2007**Alacra
                Corporation
            
            $
            1,000,000Digicorp
            
            
            10,969Real
                Estate
            
            
            430,564$
            1,441,533




*Alacra
      Corporation*





At
      March
      31, 2007, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued at $1,000,000, which represents 7.67% 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 statements total assets of approximately $4.7 million with total
      liabilities of approximately $7.4 million. Deferred revenue, which represents
      subscription revenues are amortized over the term of the contract, which is
      generally one year, and 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.





23


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.





*Digicorp*





At
      March
      31, 2007, the Company held 96,269 shares of Digicorp common stock valued at
      $10,970. Digicorp's common stock is quoted on the OTC Bulletin Board. During
      the
      three months ended March 31, 2007 the closing prices for Digicorp’s common stock
      ranged between $0.08 and $0.18 per share. At March 31, 2007, the quoted closing
      price was $0.13 per share.





We
      are
      required to purchase 224,000 shares of Digicorp common stock from certain
      selling shareholders of Digicorp at a price of $0.145 per share at such time
      that Digicorp registers the resale of the shares with the SEC. During December
      2005 we extended loans of approximately $32,500 to these selling shareholders
      from our working capital. Such loans represented the amount of the remaining
      obligation to purchase 224,000 shares of Digicorp common stock and are secured
      by the 224,000 shares of Digicorp common stock presently held by such selling
      shareholders. On July 20, 2005, William B. Horne, our Chief Executive Officer,
      was appointed as a director and as Chief Financial Officer of Digicorp. On
      September 30, 2005, Mr. Horne was appointed as the interim Chief Executive
      Officer. On December 29, 2005, William B. Horne resigned as Chief Executive
      Officer and on April 20, 2007 he resigned as the Chief Financial
      Officer.





*Investments
      in Real Estate*





At
      March
      31, 2007, we had several real estate investments, valued at $431,000, which
      represents 3.30% 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.





24


**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.





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





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





**Revenues**





We
      recognized revenues of $307,000 and $55,000 during the three months ended March
      31, 2007 and 2006, respectively. All of the revenues generated during the three
      months ended March 31, 2007 related to sales of our Safety-Sponge TM System.
      Revenues from sales of our Safety-Sponge TM System
      consisted of sales from the safety sponge of $201,000 and sales from hardware
      and supplies of $106,000. 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.





During
      the quarter ended March 31, 2007, sales generated by our
      Safety-Sponge TM System
      exceeded all sales generated from the Safety-Sponge TM System
      during the entire year of 2006. We attribute a significant amount of the
      increase to the adoption by the University
      of California San Francisco Medical Center in February 2007 to our Safety-Sponge TM System.





25


All
      of
      the revenue earned during the three months ended March 31, 2006 was 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.





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.
      We cannot reasonably predict or estimate the financial impact of the agreement
      with Cardinal but believes it will have a material impact on our results of
      operations.





**Expenses**





Operating
      expenses were $1,409,000 and $3,395,000 for the three months ended March 31,
      2007 and 2006, respectively.





The
      decrease in operating expenses of $1,986,000, for the three months ended March
      31, 2007 when compared to the three months ended March 31, 2006, was primarily
      the result of salaries and employee benefits, which decreased by $1,887,000.
      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
      three months ended March 31, 2007, we recorded $58,000 related to grants of
      nonqualified stock options and $192,000 related to restricted stock awards
      to
      our employees and non-employee directors. During the three months ended March
      31, 2006, we recorded $922,000 relating to grants of nonqualified stock options
      and $1,014,000 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 resulted in a decrease in
      stock based compensation expense of $1,686,000 for the three months ended March
      31, 2007. Therefore, excluding stock based compensation, salaries and employee
      benefits decreased by $201,000.





The
      remaining increase of $201,000 in salaries and employee benefits is primarily
      attributed to the non-recurring severance package that we paid in January 2006
      to Milton “Todd” Ault III, our former Chairman and Chief Executive Officer.
      Pursuant to this severance package we paid Mr. Ault $180,000. In July 2006,
      subsequent to the payment of Mr. Ault’s severance package, Mr. Ault was
      re-appointed as our Chief Executive Officer at a nominal salary.





At
      March
      31, 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 $200,000 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 $135,000. 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.





26


The
      second largest component of our operating expenses is professional fees, which
      decreased by $309,000 during the three months ended March 31, 2007 compared
      to
      the amount reported during the three months ended March 31, 2006. This decrease
      is primarily comprised of decreases in stock based compensation to outside
      consultants of $312,000. During the three months ended March 31, 2006 stock
      based compensation expense of $418,000 was the most significant component of
      professional fees. The majority of the $418,000 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.





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 $214,000 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 TM System.





General
      and administrative expenses experienced a decrease of $20,000 during the three
      months ended March 31, 2007 over the prior year. As
      discussed above, in Financial Condition, Liquidity and Capital Resources, we
      have a
      working
      capital deficit of $4,185,000 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 the decrease 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 $1,000 for the three months ended March 31, 2007
      and 2006, respectively.





The
      increase in interest income for the three months ended March 31, 2007 when
      compared to March 31, 2006 was primarily the result of an overall increase
      in
      cash during the three months ended March 31, 2007.





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





During
      the three months ended March 31, 2007 and 2006, we realized net losses of nil
      and $136,000, respectively. The absence of realized gains (losses) during the
      three months ended March 31, 2007 reflect the absence of trading operations
      as
      we focus all of our efforts solely on the Safety-Sponge TM System
      and the patient safety market. The realized loss during the three months ended
      March 31, 2006 resulted primarily from the sale of 102,100 shares of Tuxis
      Corporation.





**Interest
      expense**





We
      had
      interest expense of $268,000 and $35,000 for the three months ended March 31,
      2007 and 2006, respectively.





27


The
      increase in interest expense for the three months ended March 31, 2007 when
      compared to March 31, 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 three months ended March 31, 2007 and 2006, we
      recorded $169,000 and $75,000, respectively, in non-cash interest charges.
      The
      non-cash interest charges that were incurred during the three months ended
      March
      31, 2006 were attributed to our car wash segment and recorded in loss from
      discontinued operations. Thus, non-cash interest charges resulted in an increase
      of $169,000 and represented the primary cause of the increase in interest
      expense. These charges resulted from the issuance of debt that either had
      conversion prices on the date of issuance that was below the fair market value
      of the underlying common stock or required the issuance of warrants to purchase
      shares of our common stock, which required us to record an expense based on
      the
      estimated fair value of the warrant. The remaining increase in interest expense
      is attributable to the overall increased level of borrowings during the three
      months ended March 31, 2007 over the prior year.





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





During
      the three months ended March 31, 2007 and 2006, unrealized appreciation of
      investments increased by nil and $77,000, respectively.





Due
      to
      the absence of any material amount of marketable securities during the three
      months ended March 31, 2007, the Company did not recognize any unrealized
      appreciation. The increase in unrealized appreciation during the three months
      ended March 31, 2006, was primarily due to the sale of 102,100 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 $0.88 per share at March 31, 2006.
      We
      valued our holdings in IPEX at a discount to the closing prices, or $1.19 and
      $0.66 per share at December 31, 2005 and March 31, 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 $81,000 during the three
      months ended March 31, 2007 from a loss of $170,000 during the three months
      ended March 31, 2006. ASG’s
      first site, developed in Birmingham, Alabama, had its grand opening on March
      8,
      2006. Thus, the three months ended March 31, 2007 reflected an entire quarter
      of
      operations whereas the three months ended March 31, 2006 only reflected
      operations for a partial quarter. During the three months ended March 31, 2007,
      as a result of the full quarter of operations, revenues and operating costs
      increased by $139,000 and $42,000, respectively.




**Accumulated
      other comprehensive income**





Unrealized
      gains (losses) on our investments designated as available-for-sale are recorded
      in accumulated other comprehensive income. At March 31, 2007 and December 31,
      2006, our remaining investments were carried at cost and therefore we did record
      any unrealized gains (losses) on these investments. At March 31, 2006, our
      restricted holdings in IPEX and Digicorp were classified as available-for-sale.
      At March 31, 2006, the unrealized gains (losses) on our restricted holdings
      in
      IPEX and Digicorp amounted to ($831,000) and $2,460,000,
      respectively.


28


**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.





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





Between
      January 1, 2007 and April 6, 2007, the Company issued 79,138 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 $131,000. These shares were issued in reliance
      upon
      the exemption provided by Section 4(2) of the Securities Act.





29


On
      January 29, 2007, the Company entered into a subscription agreement and sold
      an
      aggregate of 800,000 shares of its Common Stock and warrants to purchase an
      aggregate of up to 300,000 shares of its Common Stock in a private placement
      transaction to A Plus, an accredited investor. 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. 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. 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.





On
      January 29, 2007, the Company entered into a subscription agreement with several
      unaffiliated 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 104,000 shares of its common stock
      and warrants to purchase an additional 52,000 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 $130,000. 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.





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.





Between
      March 7, 2007 and April 5, 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 2,000,000 shares of its common
      stock and warrants to purchase an additional 1,000,000 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 $2,500,000. We are
      required to use our reasonable best efforts to cause the registration statement
      to become effective within 120 days after the Closing Date, April 5, 2007.
      If
      the registration statement has not been filed on or prior to the 120th day
      after
      the Closing Date, we will issue, as liquidated damages, to the purchasers of
      the
      2,000,000 shares of our Common Stock and the warrants to purchase 1,000,000
      shares of our Common Stock warrants with a term of five years and an exercise
      price of $2.00 per share to purchase shares of our Common Stock equal to 2.5%
      of
      the number of shares of Common Stock purchased by the purchasers. We intend
      to
      use the net proceeds from this private placement transaction primarily for
      general corporate purposes and repayment of existing liabilities. These
      securities were sold in reliance upon the exemption provided by Section 4(2)
      of
      the Securities Act and the safe harbor of Rule 506 under Regulation D
      promulgated under the Securities Act. No advertising or general solicitation
      was
      employed in offering the securities, the sales were made to a limited number
      of
      persons, all of whom represented to the Company that they are accredited
      investors, and transfer of the securities is restricted in accordance with
      the
      requirements of the Securities Act.





30


On
      April
      5, 2007, the Company issued 89,600 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
      $81,000 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.





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





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





On
      February 8, 2006, ASG entered into a secured promissory note with Ault Glazer
      Capital Partners, LLC (the ***“Fund”*** ),
      a
      related party, in the principal amount of $687,000 (the ***“ASG
      Note”*** ).
      The
      ASG Note was due to be repaid on September 15, 2006.





From
      March 7, 2006 through October 16, 2006, the Fund loaned the Company a total
      of
      $524,000, of which $130,000 was repaid. The outstanding balance at March 31,
      2007 is $394,000. 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. Each advance under the Revolving Line
      of
      Credit is evidenced by a secured promissory note and a security agreement.
      The
      secured promissory notes issued pursuant to the Revolving Line of Credit
      required repayment within 60 days from issuance and are currently in
      default.





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





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





The
      Company is in the process of restructuring the debt that is owed to the Fund
      and
      Messrs. Steven J. Caspi and 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**31.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(a)
                or
                Rule 15d-14(a)32.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(b)
                or
                Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the
                United
                States Code





*
      Filed
      herewith.





31


**SIGNATURES**





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


PATIENT
                SAFETY TECHNOLOGIES, INC.Date:
                May 21, 2007
            By:
            /s/
                William B. HorneWilliam
                B. HorneChief
                Executive and Chief Financial Officer and
              Principal
                  Accounting Officer


32