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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



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FORM 10-Q

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

FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2005

OR

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

FOR THE TRANSITION
PERIOD
FROM                TO

COMMISSION FILE
NUMBER:

PATIENT SAFETY TECHNOLOGIES, INC.(Exact name of registrant as specified in its charter)

|                           |  |                                          
|-------------------------- |  | -----------------------------------------
|Delaware                   |  | 13-3419202                               
|(State of
  Incorporation) |  | (I.R.S.
  Employer Identification Number)

100
Wilshire Boulevard, Suite 1500
Santa Monica, California 90401
(Address of principal executive offices)

Registrants
telephone number, including area code: (310) 752-1442

With
Copies To:Marc J. Ross, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas
New York, New York 10018
(212) 930-9700

Indicate
by check mark whether the registrant (1) 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    Noo.

Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).   Yes  o    Nox

APPLICABLE
ONLY TO CORPORATE ISSUERS

Indicate
the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practicable date: On July 27, 2005, there were
5,466,592 shares outstanding of the Registrants common stock, $0.33 par
value.

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PATIENT
SAFETY TECHNOLOGIES, INC.

FORM
10-Q FOR THE SIX MONTHS
ENDED JUNE 30, 2005

TABLE
OF CONTENTS

|                               |                                                                                         |     
|------------------------------ | --------------------------------------------------------------------------------------- | ----
|                               |                                                                                         | Page
|                               |                                                                                         |     
|PART I  FINANCIAL INFORMATION |                                                                                        
|                               |                                                                                         |     
|Item 1.                        | Condensed Consolidated Financial
  Statements                                           | 1   
|Item 2.                        | Managements Discussion and Analysis
  of Financial Condition and Results of Operations | 16  
|Item 3.                        | Quantitative and Qualitative
  Disclosures About Market Risk                            | 36  
|Item 4.                        | Controls and Procedures                                                                 | 37  
|                               |                                                                                         |     
|PART II  OTHER INFORMATION    |                                                                                        
|                               |                                                                                         |     
|Item 1.                        | Legal Proceedings                                                                       | 37  
|Item 2.                        | Unregistered Sales of Equity
  Securities and Use of Proceeds                           | 37  
|Item 3.                        | Defaults Upon Senior Securities                                                         | 38  
|Item 4.                        | Submission of Matters to a Vote of
  Security Holders                                   | 38  
|Item 5.                        | Other Information                                                                       | 38  
|Item 6.                        | Exhibits                                                                                | 39  
|                               |                                                                                         |     
|SIGNATURES                     | 40                                                                                     

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PART I  FINANCIAL INFORMATION

Item
1.           Financial
Statements.

|                                                    
|----------------------------------------------------
|PATIENT
  SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES
|                                                    
|                                                    
|Condensed Consolidated Balance
  Sheets (Unaudited) 
|                                                    
|                                                    

|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | ------------------ | - | ---------- | -
|                                                                                                                                                                                                                             |  | June 30,2005 |             | December 31,2004 * |  
|                                                                                                                                                                                                                             |  |              |             |                    |  
|ASSETS                                                                                                                                                                                                                       |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|CURRENT
  ASSETS                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|Cash and cash equivalents                                                                                                                                                                                                    |  | $            | 91,252      |                    | $ | 846,404    |  
|Accounts receivable                                                                                                                                                                                                          |  |              | 1,331,250   |                    |   |            |  
|Marketable securities                                                                                                                                                                                                        |  |              | 1,402,222   |                    |   | 3,487,719  |  
|Other current assets                                                                                                                                                                                                         |  |              | 380,708     |                    |   | 255,510    |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|TOTAL
  CURRENT ASSETS                                                                                                                                                                                                       |  |              | 3,205,432   |                    |   | 4,589,633  |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|Property and equipment, net                                                                                                                                                                                                  |  |              | 145,401     |                    |   | 23,657     |  
|Patents, net                                                                                                                                                                                                                 |  |              | 4,576,262   |                    |   |            |  
|Long-term investments                                                                                                                                                                                                        |  |              | 3,861,012   |                    |   | 2,320,953  |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|TOTAL
  ASSETS                                                                                                                                                                                                               |  | $            | 11,788,107  |                    | $ | 6,934,243  |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|LIABILITIES
  AND STOCKHOLDERS EQUITY                                                                                                                                                                                       |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|CURRENT
  LIABILITIES                                                                                                                                                                                                        |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|Notes payable                                                                                                                                                                                                                |  | $            | 1,838,880   |                    | $ | 892,530    |  
|Accounts payable and
  accrued liabilities                                                                                                                                                                                   |  |              | 1,831,446   |                    |   | 939,568    |  
|Marketable securities, sold
  short                                                                                                                                                                                          |  |              |             |                    |   | 1,075,100  |  
|Due to broker                                                                                                                                                                                                                |  |              | 8,376       |                    |   | 460,776    |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|TOTAL
  CURRENT LIABILITIES                                                                                                                                                                                                  |  |              | 3,678,702   |                    |   | 3,367,974  |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|STOCKHOLDERS
  EQUITY                                                                                                                                                                                                       |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|Convertible preferred stock, $1 par value, cumulative 7%
dividend:
  1,000,000 shares authorized; 10,950 issued and outstanding at June 30, 2005
  and December 31, 2004 (Liquidation preference $1,095,000)                 |  |              | 10,950      |                    |   | 10,950     |  
|Common stock, $0.33 par value: 25,000,000 shares authorized;
  6,886,634 shares issued and 5,455,339 shares outstanding as of June 30, 2005;
  6,128,067 shares issued and 4,670,703 shares outstanding at December 31, 2004 |  |              | 2,272,589   |                    |   | 2,022,262  |  
|Paid-in capital                                                                                                                                                                                                              |  |              | 20,629,446  |                    |   | 13,950,775 |  
|Other comprehensive income                                                                                                                                                                                                   |  |              | 1,158,750   |                    |   |            |  
|Accumulated deficit                                                                                                                                                                                                          |  |              | (13,392,306 | )                  |   | (9,800,885 | )
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              | 10,679,429  |                    |   | 6,183,102  |  
|Deduct: 1,431,295 and 1,457,364 shares of common stock held in
  treasury, at cost, at June 30, 2005 and December 31, 2004, respectively                                                                                     |  |              | (2,570,024  | )                  |   | (2,616,833 | )
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|TOTAL
  STOCKHOLDERS EQUITY                                                                                                                                                                                                 |  |              | 8,109,405   |                    |   | 3,566,269  |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|TOTAL
  LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                 |  | $            | 11,788,107  |                    | $ | 6,934,243  |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  
|                                                                                                                                                                                                                             |  |              |             |                    |   |            |  

* Restated to include the impact of share-based
compensation expense

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

1

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|                                                                                             
|---------------------------------------------------------------------------------------------
|PATIENT
  SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES                                         
|                                                                                             
|                                                                                             
|Condensed Consolidated Statements
  of Operations and Comprehensive Income (Loss) (Unaudited)
|                                                                                             
|                                                                                             

|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|------------------------------------------------------- |  | -------------------- | ---------- | ------------------ | - | --------------- | - | ----------------- | ---------- | - | - | --------- | -
|                                                        |  | Three
  Months Ended |            | Six Months
  Ended |  
|                                                        |  | June 30,
  2005      |            | June 30,
  2004 *  |   | June 30,
  2005 |   | June 30,
  2004 * |           
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|REVENUES                                                |  | $                    | 586,627    |                    | $ |                |   | $                 | 586,627    |   | $ |          |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|EXPENSES                                                |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Salaries and employee benefits                          |  |                      | 900,385    |                    |   | 133,030         |   |                   | 2,110,096  |   |   | 261,931   |  
|Professional fees                                       |  |                      | 897,974    |                    |   | 184,122         |   |                   | 1,454,945  |   |   | 241,122   |  
|Rent                                                    |  |                      | 24,478     |                    |   | 18,879          |   |                   | 24,478     |   |   | 36,954    |  
|Insurance                                               |  |                      | 22,788     |                    |   | 17,037          |   |                   | 43,578     |   |   | 34,075    |  
|Taxes other than income taxes                           |  |                      | 23,947     |                    |   | 6,037           |   |                   | 45,982     |   |   | 18,801    |  
|Amortization of patents                                 |  |                      | 81,235     |                    |   |                 |   |                   | 108,314    |   |   |           |  
|General and administrative                              |  |                      | 204,463    |                    |   | 34,684          |   |                   | 461,634    |   |   | 84,828    |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Operating expenses                                      |  |                      | 2,155,270  |                    |   | 393,789         |   |                   | 4,249,027  |   |   | 677,711   |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Operating loss                                          |  |                      | (1,568,643 | )                  |   | (393,789        | ) |                   | (3,662,400 | ) |   | (677,711  | )
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Interest, dividend income and other, net                |  |                      | 11,485     |                    |   | 50              |   |                   | 40,088     |   |   | 215       |  
|Equity in income (loss) of investee                     |  |                      | (17,020    | )                  |   |                 |   |                   | (17,020    | ) |   |           |  
|Realized gains on investments, net                      |  |                      | 138,372    |                    |   | 451,400         |   |                   | 103,644    |   |   | 500,878   |  
|Interest expense                                        |  |                      | (34,243    | )                  |   | (9,002          | ) |                   | (61,561    | ) |   | (17,928   | )
|Unrealized gains (losses) on marketable securities, net |  |                      | (300,384   | )                  |   | (19,015         | ) |                   | 43,203     |   |   | 83,744    |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Net income (loss)                                       |  |                      | (1,770,433 | )                  |   | 29,644          |   |                   | (3,554,046 | ) |   | (110,802  | )
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Preferred dividends                                     |  |                      | (24,637    | )                  |   | (19,161         | ) |                   | (37,375    | ) |   | (38,325   | )
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Net income (loss) attributable to common
shareholders   |  | $                    | (1,795,070 | )                  | $ | 10,483          |   | $                 | (3,591,421 | ) | $ | (149,127  | )
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Basic and diluted net income (loss) per common
share    |  | $                    | (0.33      | )                  | $ | 0.00            |   | $                 | (0.69      | ) | $ | (0.05     | )
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Weighted average common shares outstanding              |  |                      | 5,430,528  |                    |   | 3,083,664       |   |                   | 5,172,181  |   |   | 3,072,048 |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Comprehensive income (loss):                            |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Net income (loss)                                       |  | $                    | (1,770,433 | )                  | $ | 29,644          |   | $                 | (3,554,046 | ) | $ | (110,802  | )
|Other comprehensive income                              |  |                      | 1,158,750  |                    |   |                 |   |                   | 1,158,750  |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|Comprehensive income (loss)                             |  | $                    | (611,683   | )                  | $ | 29,644          |   | $                 | (2,395,296 | ) | $ | (110,802  | )
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  
|                                                        |  |                      |            |                    |   |                 |   |                   |            |   |   |           |  

* Restated to include the impact of share-based
compensation expense

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

2

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

|                                                                                            |  |                    |            |                   |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ----------------- | - | -------- | -
|                                                                                            |  | Six Months
  Ended |           
|                                                                                            |  | June 30,
  2005    |            | June 30,
  2004 * |  
|Cash flows from operating
  activities:                                                     |  |                    |            |                   |   |          |  
|Net loss                                                                                    |  | $                  | (3,554,046 | )                 | $ | (110,802 | )
|Adjustments to reconcile net loss to net cash
(used in) provided by
  operating activities: |  |                    |            |                   |   |          |  
|Depreciation                                                                                |  |                    | 5,131      |                   |   |          |  
|Amortization of patents                                                                     |  |                    | 108,314    |                   |   |          |  
|Realized gains on investments, net                                                          |  |                    | (103,644   | )                 |   | (500,878 | )
|Unrealized gain on marketable
securities                                                    |  |                    | (43,203    | )                 |   | (83,744  | )
|Stock based
compensation                                                                    |  |                    | 2,464,863  |                   |   | 5,094    |  
|Stock received for services                                                                 |  |                    | (10,000    | )                 |   |          |  
|Loss on investee                                                                            |  |                    | 17,019     |                   |   |          |  
|Changes in operating assets and
liabilities:                                                |  |                    |            |                   |   |          |  
|Accounts
  receivable                                                                       |  |                    | (1,331,250 | )                 |   |          |  
|Purchases
  of marketable investment securities, net                                        |  |                    | 717,245    |                   |   | 774,332  |  
|Other
  current assets                                                                      |  |                    | (145,198   | )                 |   | 25,926   |  
|Accounts
  payable and accrued liabilities                                                  |  |                    | 873,666    |                   |   | (52,135  | )
|Due
  to broker                                                                             |  |                    | (452,400   | )                 |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|Net cash provided by (used in) operating
activities                                         |  |                    | (1,453,503 | )                 |   | 57,793   |  
|                                                                                            |  |                    |            |                   |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|Cash flows from investing
  activities:                                                     |  |                    |            |                   |   |          |  
|Purchase of property and equipment                                                          |  |                    | (59,981    | )                 |   |          |  
|Purchase of SurgiCount                                                                      |  |                    | (432,398   | )                 |   |          |  
|Proceeds from sale of long-term
investments                                                 |  |                    | 300,466    |                   |   |          |  
|Purchases of long-term investments                                                          |  |                    | (163,173   | )                 |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|Net cash used in investing activities                                                       |  |                    | (355,086   | )                 |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|Cash flows from financing
  activities:                                                     |  |                    |            |                   |   |          |  
|Proceeds from issuance of common stock and
warrants                                         |  |                    | 100,000    |                   |   |          |  
|Proceeds from exercise of stock
options                                                     |  |                    | 26,250     |                   |   | 39,375   |  
|Cash proceeds related to 16B filing                                                         |  |                    |            |                   |   | 2,470    |  
|Payments of preferred dividends                                                             |  |                    | (19,163    | )                 |   | (38,325  | )
|Proceeds from notes payable                                                                 |  |                    | 1,000,000  |                   |   |          |  
|Payments and decrease in notes                                                              |  |                    | (53,650    | )                 |   | (11,040  | )
|                                                                                            |  |                    |            |                   |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|Net cash provided by (used in) financing
activities                                         |  |                    | 1,053,437  |                   |   | (7,520   | )
|                                                                                            |  |                    |            |                   |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|Net increase (decrease) in
  cash and cash equivalents                                      |  |                    | (755,152   | )                 |   | 50,273   |  
|                                                                                            |  |                    |            |                   |   |          |  
|Cash and cash equivalents
  at beginning of period                                          |  |                    | 846,404    |                   |   | 224,225  |  
|                                                                                            |  |                    |            |                   |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|Cash and cash equivalents
  at end of period                                                |  | $                  | 91,252     |                   | $ | 274,498  |  
|                                                                                            |  |                    |            |                   |   |          |  
|                                                                                            |  |                    |            |                   |   |          |  
|Supplemental disclosures of cash flow
information:                                          |  |                    |            |                   |   |          |  
|Cash
  paid during the period for interest                                                  |  | $                  | 32,552     |                   | $ | 228      |  
|Issuance
  of common stock and warrants in connection with SurgiCount acquisition           |  | $                  | 4,232,178  |                   | $ |         |  
|Issuance of common stock
   in connection with asset purchase agreement                     |  | $                  | 66,895     |                   | $ |         |  
|Issuance of common stock in connection with
   land acquisition                             |  | $                  | 85,619     |                   | $ |         |  
|Dividends
  accrued                                                                         |  | $                  | 37,375     |                   | $ | 19,163   |  

|                                                                      
|----------------------------------------------------------------------
|                                                                      
|* Restated to include the impact of share-based
  compensation expense

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

3

---



Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements  Unaudited
June 30, 2005

1.
DESCRIPTION OF BUSINESS

Until March 31, 2005, Patient Safety Technologies,
Inc. (PST, or the Company)
(formerly known as Franklin Capital Corporation) was a Delaware corporation
that elected to be 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. Through its
operating subsidiaries, the Company is currently involved in providing capital
and managerial assistance to early stage companies in the medical products,
health care solutions, financial services and real estate industries.

Currently, the Company has four wholly-owned operating
subsidiaries: (1) SurgiCount Medical, Inc., a California corporation; (2) Patient Safety Consulting Group, LLC, a
Delaware Limited Liability Company; (3) Franklin Capital Properties, LLC, a
Delaware Limited Liability Company; and (4) Ault Glazer Bodnar Merchant
Capital, Inc., a Delaware corporation.

The Company, including its
operating subsidiaries, is engaged in the acquisition of controlling interests
in companies and research and development of products and services focused on
the health care and medical products field, particularly the patient safety
markets, as well as the financial services and real estate industries.
SurgiCount Medical, Inc., a provider of patient safety devices and Patient
Safety Consulting Group, LLC, a healthcare consulting services company, focus
on the Companys primary target industries, the health care and medical
products field. Ault Glazer Bodnar Merchant Capital, Inc. (AGB Merchant Capital) was formed on June 27,
2005, to
hold the Companys non-patient safety related assets, such as Franklin Capital
Properties, LLC, a real estate development and management company, and to focus
on the financial services and real estate industries.

2. BASIS
OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of
Presentation

The accompanying condensed
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all the information and disclosures
required by accounting principles generally accepted in the United States of
America. The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. The accounting estimates that require managements most
difficult and subjective judgments are the valuation of the non-marketable
equity securities. The actual results may differ from managements estimates.

The interim condensed
consolidated financial information is unaudited, but reflects all normal
adjustments that are, in the opinion of management, necessary to provide a fair
statement of results for the interim periods presented. The condensed
consolidated interim financial statements should be read in connection with the
consolidated financial statements in the Companys Annual Report on Form 10-K
for the year ended December 31, 2004. Certain amounts reported in the previous
period have been reclassified to conform to the current presentation reflecting
the Companys withdrawal of its election to be treated as a BDC.

Reclassifications

Certain amounts reported in
the condensed consolidated financial statements, as of June 30, 2004, have been
reclassified to conform with the presentation adopted to report June 30, 2005
results.

4

---



Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

Revenue Recognition

Consulting service contract
revenue is recognized when the service is performed. Consequently, the
recognition of such revenue is deferred until each phase of the contract is
complete. This method is predominately used by the Financial Services and Real
Estate segment. Service activities may include the following: financial advice
on mergers, acquisitions, restructurings and similar corporate finance matters.

Liquidity

The Company has a working
capital deficiency of approximately $473,000 at June 30, 2005. The Company
continues to have recurring losses and has relied upon liquidating its
investments to fund operations. Management believes that existing cash
resources together with proceeds from its investments should be adequate to
fund its operations for the 12 months subsequent to June 30, 2005. However,
long term liquidity is dependent on the Companys ability to attain future
profitable operations.

Investments

Marketable Securities.The Companys investment in marketable
securities that are bought and held principally for the purpose of selling them
in the near-term are classified as trading securities. Trading securities are
recorded at fair value on the balance sheet in current assets, with the change
in fair value during the period included in earnings.

Available-for-Sale Investments.Investments designated as available-for-sale
include both marketable equity and debt (including redeemable preferred stock)
securities. Investments that are designated as available-for-sale are reported
at fair value, with unrealized gains and losses, net of tax, recorded in
stockholders equity. Realized gains and losses on the sale or exchange of
equity securities and declines in value judged to be other than temporary are
recorded in realized gains (losses) on investments, net.

Equity Method.Included in long-term investments are investments in companies in which
the Company has a 20% to 49% interest. These investments are carried at cost,
adjusted for the Companys proportionate share of their undistributed earnings
or losses. The Companys proportionate share of income or losses are recorded
in equity in income (loss) of investee.

Stock-Based
Compensation

Prior to January 1,
2005, the Company accounted for stock-based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, as permitted by Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. In
December 2004, SFAS No. 123(R), Share-Based Payment, which addresses the
accounting for employee stock options, was issued. SFAS 123(R) revises the
disclosure provisions of SFAS 123 and supercedes APB Opinion No. 25. SFAS
123(R) requires that the cost of all employee stock options, as well as other
equity-based compensation arrangements, be reflected in the financial
statements over the vesting period based on the estimated fair value of the
awards. This statement is effective for the Company as of the beginning of the
first interim or annual reporting period that begins after January 1, 2006. The
Company elected to adopt SFAS 123(R) 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 year ended December 31, 2004, the entire amount of equity
compensation expense required to be recognized under the modified retrospective
application method was $5,094 relating to stock option grants that occurred in
the second quarter of 2004. During the six months and three months ended June
30, 2005, the Company had stock-based compensation expense included in reported
net loss of $890,448 and $337,906, respectively. All options that we granted in
2005 and 2004 were granted at the per share fair

5

---



Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

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 and
  six months ended June 30, |  
|                                                                    |  | 2005                                  |   | 2004 |  
|                                                                    |  |                                       |   |      |  
|Weighted average risk free
  interest rates                         |  |                                       |   | 3.75 | % |  |  |  | 3.00 | % | 
|Weighted average life (in
  years)                                  |  |                                       |   | 3.0  |   |  |  |  | 0.1  |   | 
|Volatility                                                          |  |                                       |   | 83   | % |  |  |  | 102  | % | 
|Expected dividend yield                                             |  |                                       |   | 0    | % |  |  |  | 0    | % | 
|Weighted average grant-date fair value per share of options
granted |  |                                       | $ | 2.92 |   |  |  |  |      |   | 

Comprehensive
Income

The Company applies SFAS No.
130, Reporting
Comprehensive Income.Comprehensive income (loss) consists of the
after tax net change in unrealized gains and losses on securities classified as
available for sale by the Company during the three and six months ended June
30, 2005 and 2004 that have been excluded from net loss and reflected instead
in equity. At June 30, 2005, the only investment designated as available for
sale was the Companys restricted holdings in IPEX.

3. LOSS
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
statements of operations. Basic loss per 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
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.

Options and warrants
outstanding as of June 30, 2005 to purchase 609,000 and 1,149,683 shares of
common stock, respectively, and 246,375 shares issuable upon conversion of
outstanding convertible preferred stock were not included in the computation of
diluted net loss per common share for the three and six months ended June 30,
2005, as their inclusion would have been antidilutive.

Options outstanding as of
June 30, 2004 to purchase 61,875 shares of common stock, and 246,375 shares
issuable upon conversion of outstanding convertible preferred stock were not
included in the computation of diluted net loss per common share for the three
and six months ended June 30, 2004, as their inclusion would have been antidilutive.

4.
EQUITY TRANSACTIONS

On March 30, 2005,
stockholders approval was obtained to (i) decrease the authorized number of
shares of Common Stock from 50,000,000 shares to 25,000,000 shares, (ii)
decrease the authorized number of shares of Preferred Stock from 10,000,000
shares to 1,000,000 shares and (iii) to reduce the par value of the Common
Stock from $1.00 per share to $0.33 per share and effect a three-for-one split
of the Common Stock.

Stockholders equity has
been restated to give retroactive recognition to the stock split for all
periods presented. In addition, all per share and weighted average share
amounts have been restated to reflect this stock split.

6

---



Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

During the six months ended
June 30, 2005, the Company issued 5,625 shares of common stock held in treasury
upon exercise of options under the Companys 1997 Stock Incentive Plan
and 20,444 shares of common stock held in treasury to purchase 0.61 acres of
vacant land in Springfield, Tennessee.

On April 5, 2005, the
Company entered into a consulting agreement with Health West Marketing
Incorporated, a California corporation (Health West). Under the agreement,
Health West agreed to help the Company establish a comprehensive manufacturing
and distribution strategy for the Companys Safety-SpongeTM System
worldwide. The initial term of
the agreement is for a period of two years. After the initial two-year term,
the agreement will terminate unless extended by the parties for one or more
additional one-year periods.

In consideration for Health
Wests services, the Company agreed to issue Health West 42,017 shares of the
Companys common stock, to be issued as follows: (a) 10,505 shares valued at
$62,505 were issued upon signing the agreement; (b) if Health West helps the
Company structure a comprehensive manufacturing agreement with A Plus
Manufacturing by July 5, 2005, then the Company will issue Health West an
additional 15,756 shares; and (c) if Health West helps the Company develop a
regional distribution network to integrate the Safety-SpongeTM
System into the existing
acute care supply chain by February 5, 2006, then the Company will issue Health
West the remaining 15,756 shares. At July 5, 2005, the primary terms of a
comprehensive manufacturing agreement with A Plus Manufacturing had been agreed
upon and the July 5, 2005 deadline was extended. As an additional incentive the
Company granted Health West warrants to purchase a total of 175,000 shares of
the Companys common stock as discussed in Note 11. In the event of the death
of Bill Adams, who is Health Wests Chief Executive Officer, the agreement will
automatically terminate. The Company may terminate the agreement at any time upon
delivery to Health West of notice of a good faith determination by the
Companys Board of Directors that the agreement should be terminated for cause
or as a result of disability of Mr. Adams. Health West may voluntarily
terminate the agreement only after expiration of the initial two-year term upon
providing 30 days prior written notice to the Company.

On April 22, 2005, the
Company entered into a subscription agreement pursuant to which the Company
sold to an investor 20,000 shares of the Companys common stock and warrants to
purchase an additional 20,000 shares of the Companys common stock. The
warrants are exercisable for a period of five years, have an exercise price
equal to $6.05, and 50% of the warrants are callable. In the event the closing sale
price of the Companys common stock equals or exceeds $7.50 for at least five
consecutive trading days, the Company, upon 30 days prior written notice, may
call the callable warrants at a redemption price equal to $0.01 per share of
common stock then purchasable pursuant to such warrants. Notwithstanding, such
notice, the warrant holder may exercise the callable warrant prior to the end
of the 30-day notice period. The Company received gross proceeds of $100,000
from the sale of stock and warrants. The sale was made in a private placement
exempt from registration requirements pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.

On May 12, 2005, the Company
entered into an asset purchase agreement whereby the Company purchased all of
the assets of Cinapse Digital Media, a sole proprietorship, for the issuance of
17,241 shares of common stock and 8,621 warrants to purchase common stock at an
exercise price of $5.80 and a contractual life of 5 years. The assets were
valued at $66,895 and consisted primarily of computers and equipment utilized
in the production of digital video. Simultaneously with the asset purchase, the
Company formed Cinapse Digital Media, LLC, a 50% owned Delaware limited
liability company, and contributed the acquired assets. Cinapse Digital Media,
LLC produces digital video for corporate clients and will also produce digital
training videos for the Companys patient safety devices.

5.
ACQUISITION

In February 2005, the
Company invested $4,035,600, excluding acquisition costs, to acquire 100% of
the common stock of SurgiCount Medical, Inc. (SurgiCount). The Company
acquired SurgiCount for its patents related to the Safety-SpongeTM System,
an innovation which the Company believes will allow it to capture a significant
portion of the United States and European surgical sponge sales. SurgiCounts
operating results from the closing date of the

7

---



Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

acquisition, February 25,
2005, through June 30, 2005, are included in the condensed consolidated
financial statements.

At closing, the purchase
price, including acquisition costs was determined to be $4,684,576, comprised
of $340,000 in cash payments and 600,000 shares of the Companys common stock
valued at $3,695,600 issued to SurgiCounts equity holders. Additionally, the
Company incurred approximately $112,398 in direct costs and issued 150,000
warrants, valued at $536,578, to purchase the common stock of the Company to
consultants providing advisory services for the Merger. The value assigned to
the stock portion of the purchase price is $6.16 per share based on the average
closing price of the Companys common stock for the five days beginning two
days prior to and ending two days after February 4, 2005, the date of the
Agreement and Plan of Merger and Reorganization (the Merger). In addition, in
the event that prior to the fifth anniversary of the closing of the Merger the
cumulative gross revenues of SurgiCount exceed $500,000 the Company is
obligated to issue an additional 50,001 shares of the Companys common stock to
certain SurgiCount shareholders. Should the cumulative gross revenues exceed
$1,000,000 during the five-year period the additional shares would be increased
by 50,001, for a total of 100,002 additional shares.  Such amount is not included in the aggregate purchase price and
will be recorded when and if issued.

The entire purchase price,
including acquisition costs, has been allocated to SurgiCounts patents, with
an approximate useful life of 14.4 years, on a preliminary basis and may change
as additional information becomes available.

The following pro forma data
summarizes the results of operations for the periods indicated as if the
SurgiCount acquisition had been completed as of the beginning of each period
presented. The pro forma data gives effect to actual operating results prior to
the acquisition, adjusted to include the pro forma effect of amortization of
intangibles. These pro forma amounts do not purport to be indicative of the
results that would have actually been obtained if the acquisition occurred as
of the beginning of each period presented or that may be obtained in future
periods:

|                                            |  |                             |            |                           |   |         |   |      |            |   |   |          |  
|------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | ------- | - | ---- | ---------- | - | - | -------- | -
|                                            |  | Three months ended June 30, |            | Six months ended June 30, |  
|                                            |  | 2005                        |            | 2004                      |   | 2005    |   | 2004 |           
|                                            |  |                             |            |                           |   |         |   |      |           
|Revenue                                     |  |                             |           |                           |   |        |   |      |           |   |   |         |  
|Net loss                                    |  | $                           | (1,789,000 | )                         | $ | (65,000 | ) | $    | (3,633,000 | ) | $ | (299,000 | )
|Basic and diluted net loss per common share |  | $                           | (0.33      | )                         | $ | (0.02   | ) | $    | (0.70      | ) | $ | (0.10    | )

6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities at June 30,
2005 and December 31, 2004 are comprised of the following:

|                                     |  |                 |           |                     |  |   |         |  | 
|------------------------------------ |  | --------------- | --------- | ------------------- |  | - | ------- |  | 
|                                     |  | June 30,
  2005 |           | December 31,
  2004 | 
|                                     |  |                 |           |                     | 
|Professional fees  legal            |  | $               | 467,607   |                     |  | $ | 351,867 |  | 
|Accrued purchase price on investment |  |                 | 165,240   |                     |  |   | 165,240 |  | 
|Officers severance                  |  |                 | 31,405    |                     |  |   | 160,142 |  | 
|Accrued interest                     |  |                 | 141,441   |                     |  |   | 112,432 |  | 
|Professional fees  other            |  |                 | 84,500    |                     |  |   | 52,950  |  | 
|Deferred revenue                     |  |                 | 754,623   |                     |  |   |         |  | 
|Accrued  other                      |  |                 | 186,630   |                     |  |   | 96,937  |  | 
|                                     |  |                 |           |                     |  |   |         |  | 
|                                     |  | $               | 1,831,446 |                     |  | $ | 939,568 |  | 
|                                     |  |                 |           |                     |  |   |         |  | 

8

---



Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

7. MARKETABLE SECURITIES

Marketable securities at
June 30, 2005 and December 31, 2004 are comprised of the following:

|                |  |                 |           |                     |   |           | 
|--------------- |  | --------------- | --------- | ------------------- | - | --------- | 
|                |  | June 30,
  2005 |           | December 31,
  2004 |  
|                |  |                 |           |                     |  
|U.S. Treasuries |  | $               |          |                     | $ | 2,016,406 | 
|IPEX, Inc.      |  |                 | 471,599   |                     |   |           | 
|Other Equities  |  |                 | 930,623   |                     |   | 1,471,313 | 
|                |  |                 |           |                     |   |           | 
|                |  | $               | 1,402,222 |                     | $ | 3,487,719 | 
|                |  |                 |           |                     |   |           | 

IPEX, Inc.

At June 30, 2005, the
Company held 607,425 shares of common stock and warrants to purchase 225,000
shares of common stock at $1.50 per share and warrants to purchase 225,000
shares of common stock at $2.00 per share of IPEX, Inc. (IPEX), formerly Administration for International
Credit & Investments, Inc.  The
Company is currently restricted from selling 450,000 shares of the common stock
and of the warrants.  The remaining
157,425 shares of common stock are valued at $471,599 and included in
marketable securities. IPEXs common stock is traded on the OTC Bulletin Board,
which reported a closing price, at June 30, 2005, of $3.55.  The Company has valued its holdings in IPEX
at a 25% discount to the $3.55 closing price, or $2.66 per share, due to the
limited average number of shares traded on the OTC Bulletin Board as well as
other trading restrictions on the Companys unregistered holdings in IPEX.  The warrants are exercisable for a period of
five years and are callable by IPEX in certain instances. IPEX operates an
electronic market for collecting, detecting, converting, enhancing and routing
telecommunication traffic and digital content.
Members of the exchange anonymously exchange information based on route
quality and price through a centralized, web accessible database and then route
traffic. IPEXs fully-automatic, highly scalable Voice over Internet Protocol
routing platform updates routes based on availability, quality and price and
executes the capacity request of the orders using proprietary software and
delivers them through IPEXs system. IPEX invoices and processes payments for
its members transactions and offsets credit risk through its credit management
programs with third parties.

8. LONG-TERM INVESTMENTS

Long-term investments at June 30, 2005 and December 31, 2004 are
comprised of the following:

|                   |  |                 |           |                     |   |           | 
|------------------ |  | --------------- | --------- | ------------------- | - | --------- | 
|                   |  | June 30,
  2005 |           | December 31,
  2004 |  
|                   |  |                 |           |                     |  
|Alacra Corporation |  | $               | 1,000,000 |                     | $ | 1,000,000 | 
|DigiCorp           |  |                 | 549,942   |                     |   | 532,435   | 
|IPEX, Inc.         |  |                 | 1,608,750 |                     |   |           | 
|Real Estate        |  |                 | 652,320   |                     |   | 738,518   | 
|China Nurse        |  |                 | 50,000    |                     |   | 50,000    | 
|                   |  |                 |           |                     |   |           | 
|                   |  | $               | 3,861,012 |                     | $ | 2,320,953 | 
|                   |  |                 |           |                     |   |           | 

9

---



Patient Safety
Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

Alacra Corporation

At June 30, 2005, the Company had an investment
in shares of Series F convertible preferred stock of Alacra Corporation, valued
at $1,000,000, and classified as an available-for-sale investment. The Company
has the right to have the Series F convertible preferred stock redeemed by
Alacra for face value plus accrued dividends on December 31, 2006. Alacra,
based in New York, is a global provider of business and financial information.
Alacra provides a diverse portfolio of fast, sophisticated online services that
allow users to quickly find, analyze, package and present mission-critical
business information. Alacras customers include more than 750 financial
institutions, management consulting, law and accounting firms and other
corporations throughout the world.

DigiCorp

At June 30, 2005, the
Company held 4,016,027 shares, or 41%, of the common stock of DigiCorp recorded
at its cost, as adjusted for the Companys proportionate share of DigiCorps
losses, of $549,942, or approximately $0.14 per share. Digicorps common stock
is traded on the OTC Bulletin Board, which reported a closing price, at June
30, 2005, of $0.22. The Company accounts for its investment in Digicorp under
the equity method of accounting. The Companys proportionate share of income or
losses from this investment is recorded in interest, dividend income and other,
net.

Excelsior Radio Networks,
Inc.

During
the period from August 12, 2003 through October 22, 2004, the Company
liquidated its investment in Excelsior Radio Networks, Inc. (Excelsior). The
Company sold a total of 1,476,804 shares and warrants to purchase 87,111 shares
of Excelsior common stock. Certain of these sales are subject to potential
adjustment whereby the Company would receive additional proceeds in the event
of certain circumstances. However, no value has been ascribed to this right.

Investments in Real Estate

At
June 30, 2005, the Company had several real estate investments, recorded at its
cost of $652,320. These investments are included in long-term investments. The
Company holds its real estate investments in Franklin Capital Properties, LLC (Franklin Properties). Franklin
Properties primary focus is on the acquisition and management of income
producing real estate holdings.
Franklin Properties real estate holdings consist of eight vacant single
family buildings and two multi-unit buildings in Baltimore, Maryland,
approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas, 0.61 acres of undeveloped land in
Springfield, Tennessee, and various
loans secured by real estate in Heber Springs, Arkansas.  Franklin Properties is evaluating
alternative uses for its real estate holdings, which range from development and
capital investments as a means of generating recurring revenue to the
liquidation of specific properties.

9. NOTES
PAYABLE

The Company initially purchased Excelsior on August
28, 2001. 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% but in accordance with the agreement
has a right of offset against certain representations and warranties made by
Winstar. The due date of the note was extended until the lawsuit
discussed in Note 13 was settled, which occurred on June 1, 2005. At June 30,
2005, the Company had incurred approximately $161,120 in legal expenses which
have been offset against the amount due. No payment has been made as the
Company is evaluating the amount of additional offsets that it believes it is
entitled to.

On April 7, 2005, the
Company issued a $1,000,000 principal amount promissory note (the Note) to Bodnar Capital Management, LLC,
in
consideration for a loan from Bodnar Capital Management, LLC to the Company in
the amount

10

---



Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

of $1,000,000. Steven J. Bodnar
is a managing member of Bodnar Capital Management, LLC. Mr. Bodnar, through
Bodnar Capital Management, LLC, is a principal stockholder of the Company. The
principal amount of the Note and interest at the rate of 6% per annum is
payable on May 31, 2006. The obligations under the Note are collateralized by
all real property owned by the Company.

10. STOCK OPTION PLANS

On September 9, 1997, the Companys stockholders
approved two Stock Option Plans: a Stock Incentive Plan (SIP) to be offered to the
Companys consultants, officers and employees (including any officer or
employee who is also a director of the Company) and a Non-Statutory Stock
Option Plan (SOP) to be offered to the Companys outside directors,
(i.e., those directors who are not also officers or employees of The Company).
As of June 30, 2005, there were no outstanding options to purchase the
Companys Common Stock and no options available for future issuance under
either the SIP or the SOP.

In December 2004, the Board
of Directors of the Company approved the 2005 Stock Option and Restricted Stock
Plan (the 2005
SOP) and the Companys stockholders approved the Plan in
March 2005. The Plan reserves 1,319,082 shares of common stock for grants
of incentive stock options, nonqualified stock options, and restricted stock
awards to employees, nonemployee directors and consultants performing services
for the Company. Options granted under the Plan have an exercise price equal to
or greater than the fair market value of the underlying common stock at the
date of grant and become exercisable based on a vesting
schedule determined at the date of grant. The options expire 10 years
from the date of grant. Restricted stock awards granted under the Plan are
subject to a vesting period determined at the date of grant. As of
June 30, 2005, the Company has granted 272,144 shares of restricted stock
of which 121,326 are vested. For the six months and three months ended
June 30, 2005, the Company recorded compensation expense of approximately
$949,872 and $374,898, respectively, related to these shares of restricted
stock.

The following is a summary of the status of the Stock
Option Plans:

|                        |  |                                |  |                     |   |                                      |  |  |         |   |  |  |   |      |  | 
|----------------------- |  | ------------------------------ |  | ------------------- | - | ------------------------------------ |  |  | ------- | - |  |  | - | ---- |  | 
|                        |  |                                |  | Outstanding Options |  
|                        |  | Shares
  Available for
  Grant |  | Number of
  Shares  |   | Weighted 
  Average
  Exercise Price | 
|                        |  |                                |  |                     |   |                                      | 
|                        |  |                                |  |                     |   |                                      | 
|December 31, 2003       |  |                                |  | 22,500              |   |                                      |  |  | 61,875  |   |  |  | $ | 3.80 |  | 
|Grants                  |  |                                |  | (78,750             | ) |                                      |  |  | 78,750  |   |  |  | $ | 0.50 |  | 
|Exercises               |  |                                |  |                     |   |                                      |  |  | (78,750 | ) |  |  | $ | 0.50 |  | 
|Cancellations           |  |                                |  | 56,250              |   |                                      |  |  | (56,250 | ) |  |  | $ | 3.71 |  | 
|                        |  |                                |  |                     |   |                                      |  |  |         |   |  |  |   |      |  | 
|December 31, 2004       |  |                                |  |                    |   |                                      |  |  | 5,625   |   |  |  | $ | 4.67 |  | 
|Adoption of 2005 SOP    |  |                                |  | 1,319,082           |   |                                      |  |  |         |   |  |  |   |      |  | 
|Exercises               |  |                                |  |                     |   |                                      |  |  | (5,625  | ) |  |  | $ | 4.67 |  | 
|Restricted Stock Awards |  |                                |  | (272,144            | ) |                                      |  |  |         |   |  |  |   |      |  | 
|Grants                  |  |                                |  | (609,000            | ) |                                      |  |  | 609,000 |   |  |  | $ | 5.27 |  | 
|                        |  |                                |  |                     |   |                                      |  |  |         |   |  |  |   |      |  | 
|June 30, 2005           |  |                                |  | 437,938             |   |                                      |  |  | 609,000 |   |  |  | $ | 5.27 |  | 
|Options exercisable at: |  |                                |  |                     |   |                                      |  |  |         |   |  |  |   |      |  | 
|December 31, 2003       |  |                                |  |                     |   |                                      |  |  | 61,875  |   |  |  | $ | 3.80 |  | 
|December 31, 2004       |  |                                |  |                     |   |                                      |  |  | 5,625   |   |  |  | $ | 4.67 |  | 
|June 30, 2005           |  |                                |  |                     |   |                                      |  |  | 185,250 |   |  |  | $ | 5.27 |  | 

11

---



Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

The outstanding options, all of which are issued under
the 2005 SOP, have a remaining contractual life of approximately 9.75 years.

11.
WARRANTS

On November 3, 2004, the
Company entered into a Subscription Agreement with several accredited investors
(the Investors), relating to the issuance and
sale by the Company of shares of its common stock (the Shares) and five-year
warrants (the Warrants) to purchase additional
shares of its common stock (the Warrant Shares) in
one or more closings of a private placement (the Private Placement).

During the period November
3, 2004 through December 21, 2004, the Company held a series of four closings
of the Private Placement. In conjunction with the closings the Company issued
and sold to the Investors an aggregate of 1,517,700 Shares and Warrants to
purchase an aggregate of up to 758,841 Warrant Shares pursuant to the terms of
the Subscription Agreement. On April 22, 2005, the Company entered into a Subscription
Agreement with an accredited investor whereby the Company sold an additional
20,000 Shares and Warrants to purchase an additional 20,000 Warrant Shares. At
June 30, 2005, the Warrants, including those granted on April 22, 2005,
weighted average exercise price was $3.91 with a remaining contractual life of
4.4 years.

In March 2005, the Company
issued 177,000 warrants (including 150,000 capitalized as part of the
acquisition of the SurgiCount patents) to purchase shares of common stock at
$5.27 per share to various consultants. The warrants are immediately
exercisable and have a five-year life. The warrants were valued at $633,163
and, depending on the nature of the consulting services received by the
Company, were either capitalized or expensed.

In April 2005, the Company
entered into a consulting agreement with Health West Marketing Incorporated and
as incentive for entering into the agreement, the Company agreed to issue
Health West a callable warrant to purchase 150,000 (post 3:1 forward stock
split) shares of the Companys common stock at an exercise price of $5.95,
exercisable for 5 years. In addition, the Company agreed to issue a callable
warrant to purchase 25,000 (post 3:1 forward stock split) shares of the
Companys common stock at an exercise price of $5.95, exercisable upon meeting
specified milestones. The warrants were valued at $615,951 of which $527,958
was expensed during the period and the remaining amount will be expensed when
and if the milestones are met.

Warrants granted during the
year were valued using the Black-Scholes valuation model assuming expected
dividend yield, risk-free interest rate, expected life and volatility of 0%,
3.75%, five years and 83%, respectively. As of June 30, 2005, all warrants
issued to the consultants remain outstanding.

12.
RELATED PARTY TRANSACTIONS

Tuxis Corporation

On July 22, 2005, Ault Glazer filed a Schedule 13D/A with the SEC
relating to its holdings in Tuxis Corporation (Tuxis). Tuxis, a Maryland
corporation, currently is registered under the 1940 Act as a closed-end
management investment company. Tuxis previously received Board of Directors and
shareholder approval to change the nature of its business so as to cease to be
an investment company and on May 3, 2004, filed an application with the SEC to
de-register. At June 30, 2005, the Company directly held 79,800 shares and
indirectly, by virtue of its relationship with

12

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Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

Ault Glazer, held 145,400 shares of Tuxis common
stock, which represented approximately 8.11% and 14.78%, respectively, of the
total outstanding shares. At March 31, 2005, Tuxis had reportable net assets of
approximately $9.0 million.

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

Ipex, Inc.

On June 30, 2005, the Company formalized the terms of
a consulting agreement, consented to by IPEX, whereby the Company was retained
by Wolfgang Grabher, the majority shareholder of IPEX, former President, former
Chief Executive Officer and former director of IPEX, to serve as a business
consultant to IPEX. Mr. Grabher owns 18,855,900 shares of IPEXs 28,195,566
outstanding shares of common stock and has granted Mr. Ault, the Companys
Chairman and Chief Executive Officer, an irrevocable  voting  proxy for his
shares. At June 30, 2005, the Company held 2.15% of IPEXs outstanding shares
of common stock. On June 30, 2005, the Company agreed with IPEX as to the scope
of such consulting services and the consideration for such services. The
Company has provided and/or will provide if reasonably necessary within the
next 12 months, the following services to IPEX: (a) substantial  review of IPEXs business and operations in
order to facilitate an analysis of IPEXs strategic options regarding a
turnaround of IPEXs business; (b) providing advice in the following areas: (i)
identification of financing sources; (ii) providing capital introductions of
financial institutions and/or strategic investors; (iii) evaluation and
recommendation of  candidates for
appointment as officers, directors or employees; (iv) making personnel of the
Company available to IPEX to provide services to IPEX on a temporary or
permanent  basis; (v) evaluation and/or
negotiation of merger or sale opportunities, or such other form of transaction
or endeavor which IPEX may elect to pursue; and (vi) providing any other
services as are  mutually agreed upon in
writing by the Company and Wolfgang Grabher from time to time; and (c)
assisting IPEX in installing a new management team.

At June 30, 2005, the Company had performed a
significant amount of the services stipulated under the terms of the consulting
agreement, including but not limited to: (i) a review of the business and
operations; (ii) the execution of two purchase agreements for the purchase of
certain intellectual property assets; (iii) the hiring of a Chief Executive
Officer, Chief Operating Officer and a Vice President of Research &
Development; and (iv) the appointment of two members to the Board of Directors
of IPEX. The Company has deferred approximately $755,000 of revenue relating
to this consulting agreement which management expects will be substantially
recognized during the year ending December 31, 2005.

13. COMMITMENTS AND CONTINGENCIES

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.  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.

14. SEGMENT
REPORTING

The Company reports selected segment information in
its financial reports to shareholders in accordance with
SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The segment information provided reflects the
three distinct lines of business within the Companys organizational structure:
medical products, which consists of SurgiCount, a provider of patient safety
devices, health care solutions, which consists of Patient Safety Consulting
Group, LLC, and financial services and real estate, which consists of Franklin
Capital Properties,

13

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Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

LLC. Unallocated corporate expenses are centrally
managed at the corporate level and not reviewed by the Companys chief
operating decision maker in evaluating results by segment.

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

Segment information for the three and six months ended
June 30, 2005, and 2004 is as follows:

|                                   |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|---------------------------------- |  | -------------------- | ---------- | ------------------ | - | --------------- | - | --------------- | ---------- | - | - | --------- | -
|                                   |  | Three
  Months Ended |            | Six
  Months Ended |  
|                                   |  | June 30,
  2005      |            | June
  30,
  2004  |   | June 30,
  2005 |   | June 30,
  2004 |           
|Medical Products                   |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Revenue                            |  |                      |           |                    |   |                |   |                 |           |   |   |          |  
|Net loss                           |  | $                    | (947,898   | )                  |   |                |   | $               | (1,168,629 | ) |   |          |  
|Total Assets                       |  | $                    | 4,576,262  |                    |   |                |   | $               | 4,576,262  |   |   |          |  
|                                   |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Health Care Solutions              |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Revenue                            |  |                      |           |                    |   |                |   |                 |           |   |   |          |  
|Net loss                           |  | $                    | (105,196   | )                  |   |                |   | $               | (232,921   | ) |   |          |  
|Total Assets                       |  |                      |           |                    |   |                |   |                 |           |   |   |          |  
|                                   |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Financial Services and Real Estate |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Revenue                            |  | $                    | 586,627    |                    |   |                |   | $               | 586,627    |   |   |          |  
|Net income                         |  | $                    | 237,901    |                    | $ | 432,435         |   | $               | 313,064    |   | $ | 584,837   |  
|Total Assets                       |  | $                    | 6,685,736  |                    | $ | 3,013,708       |   | $               | 6,685,736  |   | $ | 3,013,708 |  
|                                   |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Corporate                          |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Revenue                            |  |                      |           |                    |   |                |   |                 |           |   |   |          |  
|Net loss                           |  | $                    | (955,240   | )                  | $ | (402,791        | ) | $               | (2,465,560 | ) | $ | (695,639  | )
|Total Assets                       |  | $                    | 526,109    |                    | $ | 78,961          |   | $               | 526,109    |   | $ | 78,961    |  
|                                   |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Total                              |  |                      |            |                    |   |                 |   |                 |            |   |   |           |  
|Revenue                            |  | $                    | 586,627    |                    |   |                |   | $               | 586,627    |   |   |          |  
|Net loss                           |  | $                    | (1,770,433 | )                  | $ | 29,644          |   | $               | (3,554,046 | ) | $ | (110,802  | )
|Total Assets                       |  | $                    | 11,788,107 |                    | $ | 3,092,669       |   | $               | 11,788,107 |   | $ | 3,092,669 |  

14. SUBSEQUENT
EVENTS

During July 2005, Ault Glazer Bodnar Merchant Capital,
Inc. purchased a 50% interest in Automotive Services Group (ASG), LLC, an
Alabama Limited Liability Company, for $300,000. ASG was formed to develop and
operate automated car wash sites with the first location under development in
Birmingham, Alabama.

On July 11, 2005, Franklin Capital Properties, LLC
filed a certificate of amendment with the Secretary of State of the State of
Delaware changing its name to Ault Glazer Bodnar Capital Properties, LLC.

14

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Patient
Safety Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)

On July 19, 2005, the Company entered into a stock
purchase agreement pursuant to which the Company sold to an investor 38,000
shares of the Companys common stock. As consideration for the PST shares, the
Company received 12,000 shares of Tuxis common stock valued at $103,680.

15

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

The
following discussion should be read in conjunction with our condensed
consolidated financial statements and the notes thereto included elsewhere in
this form 10-Q. This form 10-Q contains forward-looking statements regarding
the plans and objectives of management for future operations. This information
may involve known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements to be materially
different from future results, performance or achievements expressed or implied
by any forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words may, will, should, expect,
anticipate, estimate, believe, intend or project or the negative of
these words or other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
we cannot assure you that the projections included in these forward-looking
statements will come to pass. Our actual results could differ materially from
those expressed or implied by the forward-looking statements as a result of
various factors. We undertake no obligation to revise these forward-looking
statements to reflect events or circumstances occurring after the date hereof
or to reflect the occurrence of unanticipated events.

Critical
accounting policies and estimates

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

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

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

Investments
identified as having an indicator of impairment are subject to further analysis
to determine if the investment is other than temporarily impaired, in which
case we write the investment down to its impaired value. When a 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. We did not recognize any
impairments for the six months ended June 30, 2005 and 2004.

16

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Security
investments which are publicly traded on a national exchange or Nasdaq Stock
Market are stated at the last reported sales 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. Our Board may determine, if appropriate, to discount the
value where there is an impediment to the marketability of the securities held.

Accounting
Developments

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

Overview

Until
March 31, 2005, Patient Safety Technologies, Inc., a Delaware corporation (PST, or the
Company), elected
to be a Business Development Company (BDC) under the
Investment Company Act of 1940, as amended. 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.

We
are currently engaged in the acquisition of controlling interests in companies
and research and development of products and services focused on the health
care and medical products field, particularly the patient safety markets, as
well as the financial services and real estate industries. SurgiCount Medical,
Inc., a provider of patient safety devices, Patient Safety Consulting Group,
LLC, a healthcare consulting services company, Ault Glazer Bodnar Merchant
Capital, Inc., a holding company for the Companys non-patient safety related
assets, and Franklin Capital Properties, LLC, a real estate development and
management company, are wholly-owned operating subsidiaries, which were either
acquired or created to enhance our ability to focus our efforts in each
targeted industry.

SurgiCount
is our first acquisition in our plan to become a leader in the billion dollar
patient safety field market. SurgiCount owns patents issued in the United States
and Europe related to the Safety-SpongeTMSystem, an innovation
which management believes will allow us to capture a significant portion of the
United States and European surgical sponge sales. Based upon assumptions that
take into consideration factors such as the approximate number of hospitals and
operating rooms in the United States and Europe, the approximate number of
surgeries performed annually, and estimates for the average cost of surgical
sponges, incorporating the Safety-SpongeTMSystem, per surgery, we
believe that the existing market for surgical sponge sales in the United States
and Europe represents a market opportunity equal to or in excess of $650
million in annual sales.

The
Safety-SpongeTMSystem allows for faster and more accurate counting
of surgical sponges. SurgiCount has obtained FDA 510k exempt status for the
Safety-SpongeTMline.

Ault
Glazer Bodnar Merchant Capital, Inc. was formed during June 2005 as a means to
separate the Companies core patient safety related business from its
non-healthcare assets. The Company expects that Ault Glazer Bodnar Merchant
Capital, Inc. will hold the majority of the Companys marketable securities and
long-term investments.

The
Company, including its subsidiaries, also provides capital and managerial
assistance to early stage companies in the medical products, health care
solutions, financial services and real estate industries.

Our
principal executive offices are located at 100 Wilshire Boulevard, Suite 1500,
Santa Monica, California 90401. Our telephone number is (310) 752-1416. Our
website is located at http://www.patientsafetytechnologies.com.

17

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Financial
Condition

The
Companys cash and marketable securities were $1,493,474, at June 30, 2005,
versus $4,334,123 at December 31, 2004. Total current liabilities, were
$3,678,702 at June 30, 2005 versus $3,367,974 at December 31, 2004. Included in
current liabilities at June 30, 2005 and December 31, 2004 is a note payable,
and accrued interest on such note, payable to Winstar Communications, Inc. in
the amount of $966,512 and $1,004,962, respectively. As discussed in
Note 9 in the Companys notes to its condensed consolidated financial
statements filed with this Form 10-Q, the due date on the note payable to
Winstar was June 1, 2005, the settlement date of the Leve Lawsuit. However, the
note payable had a right of offset against certain representations and
warranties made by Winstar and the Company is currently evaluating the amount
of offsets that it believes it is entitled to.

At
June 30, 2005 and December 31, 2004, we had $91,252 and $846,404 in cash and
cash equivalents. Our Board has given our Chairman and Chief Executive Officer,
Milton Todd Ault III, the authority to invest our cash balances in the public
equity and debt markets as appropriate to maximize the short-term return on
such assets. The making of such investments entails risks related to the loss
of investment and price volatility.

The
Company had a working capital deficit of approximately $473,000 at June 30, 2005.
    The Company continues to have recurring losses and has relied upon liquidating
    its portfolio companies to fund operations. On April 7, 2005, the Company
    issued a $1,000,000 promissory note (the Note)
    to Bodnar Capital Management, LLC, in consideration of a $1,000,000 loan
    from Bodnar Capital Management, LLC to the Company. Steven J. Bodnar is a
    managing member of Bodnar Capital Management, LLC. Mr. Bodnar, through Bodnar
    Capital Management, LLC, is a principal stockholder of the Company. The principal
    amount of the Note and interest at the rate of 6% per annum is payable on
    May 31, 2006, the maturity date of the Note. The obligations under the Note
    are secured by all real property owned by the Company. Management believes
    that existing cash resources, together with anticipated revenues from its
    operations, should be adequate to fund its operations for the twelve months
    subsequent to June 30, 2005. However, long-term liquidity is dependent on
    the Companys
    ability to attain future profitable operations. Management may undertake
    additional debt or equity financings to better enable the Company to grow
    and meet its future operating and capital requirements.

On
November 3, 2004, the Company entered into a Subscription Agreement and sold an
aggregate of 405,625 shares (1,216,875 shares post 3:1 forward stock split) of
its Common Stock and warrants to purchase an aggregate of up to 202,810 shares
(608,430 shares post split) of its Common Stock in a private placement
transaction to certain accredited investors. Pursuant to the terms of the
Subscription Agreement, the Company held additional closings of the private
placement on November 15, 2004, December 2, 2004, and on December 27, 2004, and
sold an aggregate of 100,275 additional shares (300,825 shares post split) of
its Common Stock and warrants to purchase an aggregate of up to 50,137 shares
(150,411 shares post split) of its Common Stock. The Company received aggregate
net proceeds from all the closings of $3,924,786. The Company filed a
registration statement with the SEC on May 3, 2005 registering the resale of
the shares of our Common Stock (including the shares of common stock issuable
upon exercise of the warrants) sold in the private placement transactions on a
continuous or delayed basis under the Securities Act of 1933. We are required
to use our reasonable best efforts to cause the registration statement to
become effective within 90 days after the date we file such registration
statement with the SEC. We intend to use the net proceeds from the private
placement transaction primarily for general corporate purposes and in buying
controlling equity stakes in companies and/or assets in the medical products,
health care solutions, financial services and real estate industries.

As
of June 30, 2005, the Company had no commitments not reflected on its balance
sheet. As in prior acquisitions, we intend to use a combination of common stock
and warrants to purchase common stock as the primary means to acquire
companies. Accordingly, the Companys need to raise significant amounts of cash
can be minimized, provided the companies we acquire are willing to accept
non-cash forms of consideration.

Investments

The
Companys financial condition is dependent on the success of its investments.
The Company intends to invest a substantial portion of its assets in private
companies in the medical products, health care solutions and financial services
industries. These private businesses may be thinly capitalized, unproven, small
companies that

18

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lack management depth, are dependent on new,
commercially unproven technologies and have little or no history of operations.
The following is a discussion of our most significant investments at June 30,
2005.

Alacra
Corporation

At
June 30, 2005, the Company had an investment in Alacra Corporation (Alacra),
valued at $1,000,000, which represents 8.5% of the Companys total assets.
Alacra, a privately held company based in New York, is a leading global
provider of business and financial information. Alacra provides a diverse
portfolio of fast, sophisticated online services that allow users to quickly
find, analyze, package and present mission-critical business information.
Alacras customers include more than 750 leading financial institutions,
management consulting, law and accounting firms and other corporations
throughout the world. Currently, the company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 robust, sophisticated tools
designed to locate and extract business information from the Internet and from
the Alacra library of premium content. The company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 the requisite information in
the appropriate format, gleaned from such prestigious content partners as
Thomson Financial, Barra, The Economist Intelligence Unit, Factiva,
Mergerstat® and many others.

On
April 20, 2000, the Company 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, 2004 revenues were in excess
of the prior years revenues by greater than 20%. The Company has the right to
have the preferred stock redeemed by Alacra for face value plus accrued
dividends on December 31, 2006. In connection with this investment, the Company
was granted observer rights on Alacra board of directors meetings.

China
Nurse

On
November 23, 2004, the Company entered into a strategic relationship with China
Nurse LLC (China Nurse), a developmental stage international nurse-recruiting
firm based in New York that focuses on recruiting and training qualified nurses
from China and Taiwan for job placement with hospitals and other health care
facilities in the United States. China Nurse creates an opportunity for
hospitals and other health care providers to efficiently recruit skilled
professionals from China and Taiwan. It maintains a customized approach to
matching the qualifications of the nurses with the specific needs of U.S. clients.
In connection with this strategic relationship, the Company has agreed to
provide referrals and other assistance and has also made a small capital
investment in that company.

Digicorp

At
June 30, 2005, the Company had an investment in DigiCorp valued at $549,942,
which represents 4.7% of the Companys total assets. On December 29, 2004, the
Company entered into a Common Stock Purchase Agreement with certain
shareholders of DigiCorp (the Agreement), to purchase an aggregate of 3,453,527
shares of DigiCorp common stock. Of such shares, 1,224,000 shares of DigiCorp
common stock will be purchased from the selling shareholders at such time as
the shares are registered for resale with the SEC. The purchase price for such
shares is $.135 or $.145 per share, depending on when the closing occurs.
Digicorps common stock is traded on the OTC Bulletin Board, which reported a
closing price, at June 30, 2005, of $0.22. In connection with the Agreement,
the Company is entitled to designate two members to the Board of Directors of
Digicorp. The Companys first designee, Melanie Glazer, who is also manager of
our subsidiary Franklin Capital Properties, LLC, was appointed on December 29,
2004. Milton Todd Ault, III, our Chairman and Chief Executive Officer, was
appointed Chief Executive Officer of Digicorp on April 26, 2005.  On July 1, 2005, Philip Gatch, our Chief
Technology Officer, was appointed Chief Technology Officer of Digicorp.  On July 16, 2005, Alice M. Campbell, one of
our directors, and Mr. Ault was appointed to the Board of Directors of
Digicorp. On July 20, 2005, Lynne Silverstein, our President and Secretary, was
appointed as a director of Digicorp, and William B. Horne, our Chief Financial
Officer, was appointed as a director and as Chief Financial Officer of
Digicorp.  The Company is currently
evaluating several strategic alternatives for the use of the DigiCorp entity.

19

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Since
June 30, 1995, DigiCorp has been in the developmental stage and has had no
operations other than issuing shares of common stock for financing the
preparation of financial statements and for preparing filings for the SEC. On
May 18, 2005, DigiCorp entered into a subscription agreement with Bodnar
Capital Management, LLC (Bodnar Capital), pursuant to which DigiCorp
sold Bodnar Capital 2,941,176 shares (the Shares) of its
common stock and warrants (the Warrants) to purchase an additional
3,000,000 shares of its common stock. DigiCorp received gross
proceeds of approximately $500,000 from the sale of stock and warrants to Bodnar
Capital. The sale was made in a private placement exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule
506 promulgated thereunder.

On
July 15, 2005, DigiCorp entered into a binding letter of intent to acquire
certain assets which include the iCodemedia suite of websites and internet
properties and all related intellectual property (the iCodemedia Assets) from
Philip Gatch, who was recently appointed DigiCorps Chief Technology Officer.
We agreed to issue Mr. Gatch 1,000,000 shares of our common stock as
consideration for the iCodemedia Assets. Consummation of the transaction is
subject to the execution of a definitive purchase and sale contract.

Excelsior
Radio Networks, Inc.

During
the period from August 12, 2003 through October 22, 2004, the Company
liquidated its investment in Excelsior Radio Networks, Inc. (Excelsior). The Company sold a total of
1,476,804 shares and warrants to purchase 87,111 shares of Excelsior common
stock. The Company has stock appreciation rights on these shares that begin to
expire on August 8, 2005.

IPEX,
Inc.

At
June 30, 2005, the Company held 607,425 shares of common stock and warrants to
purchase 225,000 shares of common stock at $1.50 per share and warrants to
purchase 225,000 shares of common stock at $2.00 per share of IPEX, Inc. (IPEX), formerly
Administration for International Credit & Investments, Inc, valued at
$2,080,349. IPEXs common stock is traded on the OTC Bulletin Board, which
reported a closing price, at June 30, 2005, of $3.55. The warrants are
exercisable for a period of five years and are callable by IPEX in certain
instances. IPEX operates a fully automated, software-based, centralized Voice
over Internet Protocol (VoIP) routing platform that exchanges
international telecommunication traffic. IPEXs exchange operates on a
software-based switching platform which monitors and dynamically checks up to
256 different routes for one country code, optimizing margin and quality
through real time traffic adjustments. The exchange delivers seamless access
through an Internet Protocol (IP) connection which significantly
reduces the time to connect to the exchange. IPEX offers its service to
international telecom carriers and Internet Service Providers and currently has
contracts with approximately 120 international carriers. IPEX invoices and
processes payments for its members transactions and offsets credit risk
through its credit management programs with third parties. On June 23, 2005, Alice M. Campbell, who is
one of our directors, was appointed to the Board of Directors of IPEX. In addition, from May 26, 2005 until July
20, 2005, Milton Todd Ault, III, our Chairman and Chief Executive Officer,
served as interim Chief Executive Officer and a director of IPEX.

As
reflected in IPEXs March 31, 2005 Form 10-Q, sales for the quarter ended March
31, 2005 rose to $1,801,886 as compared to sales of $629,127 from the prior
years quarter ended March 31, 2004. Due to prior working capital constraints
IPEX could only maintain selling to Tier 3 customers on a weekly net 5 basis.
The additional working capital provided by the private placement completed in
March 2005 allowed IPEX to extend credit to Tier 2 carriers under net 15 terms
therefore increasing the number of overall customers. Management believes the
Company is now in a position to increase sales in the future by moving up to Tier
1 customers, which require net 30 terms for payment.

Tuxis
Corporation

On July 22,
2005, Ault Glazer filed a Schedule 13D/A with the SEC relating to its holdings
in Tuxis Corporation (Tuxis). Tuxis, a Maryland corporation, currently is
registered under the 1940 Act, as a closed-end management investment company.
Tuxis previously received Board of Directors and shareholder approval to change

20

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the nature of
its business so as to cease to be an investment company and on May 3, 2004,
filed an application with the SEC to de-register. At June 30, 2005, the Company
directly held 79,800 shares and indirectly, by virtue of its relationship with
Ault Glazer, held 145,400 shares of Tuxis common stock, which represented
approximately 8.11% and 14.78%, respectively, of the total outstanding shares.
At March 31, 2005, Tuxis had reportable net assets of approximately $9.0
million.

Franklin
Capital Properties, LLC

At June 30,
2005, the Company had several real estate investments, valued at $652,320,
which represents 5.5% of the Companys total assets. The Company holds its real
estate investments in Franklin Capital Properties, LLC (Franklin Properties) ,
a Delaware limited liability company and a wholly owned subsidiary. Franklin
Properties primary focus is on the acquisition and management of income
producing real estate holdings. Franklin Properties real estate holdings
consist of eight vacant single family buildings and two multi-unit buildings in
Baltimore, Maryland, approximately 8.5 acres of undeveloped land in Heber
Springs, Arkansas, 0.61 acres of undeveloped land in Springfield, Tennessee,
and various loans secured by real estate in Heber Springs, Arkansas. Franklin
Properties is evaluating alternative uses for its real estate holdings, which
range from development and capital investments as a means of generating
recurring revenue to the liquidation of specific properties. As of June 30, 2005,
the Company had not generated revenue from rental activities on any of its real
estate investments.

Results of Operations

The
Company accounts for its operations under accounting principles generally
accepted in the United States. The principal measure of the Companys financial
performance is captioned Net loss attributable to common shareholders, which
is comprised of the following:

| |   |                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenues,
  which is the amount the Company receives from sales of its products;                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                         
| |  | Operating
  expenses, are the related costs and expenses of operating the business;                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                         
| |  | Interest,
  dividend income and other, net, which is the amount the Company receives
  from interest and dividends from its short term investments and money market
  accounts, and its 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 the Companys 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.

The
Company generally earns 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 the Companys fixed income portfolio and the
average yield on this portfolio.

Revenues

The Company
recognized revenue of $586,627 for the six and three months ended June 30, 2005
as opposed to no revenues during the six and three months ended June 30, 2004.

21

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The
increase in revenue was the result of a consulting agreement, consented to by
IPEX, whereby the Company was retained by Wolfgang Grabher, the majority
shareholder of IPEX, former President, former Chief Executive Officer and
former director of IPEX, to serve as a business consultant to IPEX. Mr. Grabher
owns 18,855,900 shares of IPEXs 28,195,566 outstanding shares of common stock
and has granted Mr. Ault, the Companys Chairman and Chief Executive Officer,
an irrevocable voting proxy for his shares. At June 30, 2005, the Company held
2.15% of IPEXs outstanding shares of common stock. On June 30, 2005, the
Company agreed with IPEX as to the scope of such consulting services and the
consideration for such services. The Company has provided and/or will provide
if reasonably necessary within the next 12 months, the following services to
IPEX: (a) substantial review of IPEXs business and operations in order to
facilitate an analysis of IPEXs strategic options regarding a turnaround of
IPEXs business; (b) providing advice in the following areas: (i)
identification of financing sources, (ii) providing capital introductions of
financial institutions and/or strategic investors, (iii) evaluation and
recommendation of candidates for appointment as officers, directors or
employees, (iv) making personnel of the Company available to IPEX to provide
services to IPEX on a temporary or permanent basis, (v) evaluation and/or
negotiation of merger or sale opportunities, or such other form of transaction
or endeavor which IPEX may elect to pursue, and (vi) providing any other services
as are mutually agreed upon in writing by the Company and Wolfgang Grabher,
founder and majority shareholder of IPEX, from time to time; and (c) assisting
IPEX in installing a new management team.

At
June 30, 2005, the Company had performed a significant amount of the services
stipulated under the terms of the consulting agreement, including but not
limited to: (i) a review of the business and operations (ii) the execution of
two purchase agreements for the purchase of certain intellectual property
assets; (iii) the hiring of a Chief Executive Officer, Chief Operating Officer
and a Vice President of Research & Development; and (iv) the appointment of
two members to the Board of Directors of IPEX. The Company has deferred
approximately $755,000 of revenue relating to this consulting agreement which
management expects will be substantially recognized during the year ended
December 31, 2005.

Expenses

Operating
expenses were $4,249,027 and $677,711 for the six months and $2,155,270 and $393,789 for
the three months ended June 30, 2005 and June 30, 2004, respectively.

The
increase in operating expenses for the six months ended June 30, 2005 when
compared to June 30, 2004, was primarily the result of legal fees and stock
based compensation expenses, and to a lesser extent printing and stock exchange
fees. Until October 22, 2004, the date the Companys shareholders approved certain proposals relating to the
Companys
restructuring plan to change from a business development company to an
operating company, the Companys principal activities involved the management
of existing investments. As such, compensation expense was primarily the
salaries of the Companys Chief Executive Officer and to a lesser extent the
Chief Financial Officer. Since the restructuring plan, management has
aggressively focused on expanding into the health care and medical
products field, particularly the patient safety markets, as well as the
financial services and real estate industries. A significant component of this
strategy has resulted in the acquisition of assets. The Company has hired
personnel in order to meet the increased needs of its current business focus
which has resulted in increases in almost every expense category.

Legal
fees for the six months ended June 30, 2005 were $517,064, an increase of
$329,942 over the six months ended June 30, 2004. The increase in legal fees is
attributable to work performed on the Companys proxy statements, registration
statements and annual report, which required a significant amount of additional
time to prepare due to the Companys change from a business development company
to an operating company, filed with the SEC, as well as other corporate
matters. Other corporate matters typically include services performed in
relation to areas such as attendance at meetings, federal securities law, stock
option plans, press releases, and corporate agreements. Additionally, the
Company experienced an increase in ancillary fees as a direct result of the
proxy statement and the related annual meeting of shareholders. These ancillary
fees included an increase in printing fees of $67,951 and AMEX stock exchange
fees of $58,533 compared to the prior comparable period. Printing fees
increased as a direct result of the greater number of printed documents,
including business cards and stationary, as well as revisions to those
documents. Amex stock exchange fees primarily increased as a result of a
non-recurring fee associated with the Companys 3 for 1 stock split.

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Printing
fees and Amex stock exchange fees are a component of the $376,806 increase
reflected in general and administrative expenses for the six months ended June
30, 2005. An increase in travel related expenses of $109,381, a component of
general and administrative expenses, was attributed to expenses incurred in
identifying and reviewing investment opportunities and attendance at trade
shows and conventions to promote the Companys patient safety products. The
remaining increase in general and administrative expenses is a direct result of
an overall increase in business activity associated with being an operating
company with increased personnel. These expenses, which are not significant
individually, include but are not limited to office supplies, transfer agent
fees, postage, and marketing.

A
majority of the Companys operating expenses consist of employee compensation
and professional fees. Included in stock based compensation expense, which is a
component of both employee compensation and professional fees, for the six
months ended June 30, 2005, was approximately $624,543 relating to the issuance
of warrants to consultants of the Company, as well as $890,448 relating to
grants of nonqualified stock options and $949,872 related to restricted stock
awards to the Companys employees, non-employee directors and consultants
performing services for the Company, all of which were expensed in accordance
with SFAS 123(R). The Company valued the nonqualified stock options and
warrants using the Black-Scholes valuation model assuming expected dividend
yield, risk-free interest rate, expected life and volatility of 0%, 3.75%,
three to five years and 83%, respectively. The restricted stock awards were
valued at the closing price on the date the restricted shares were granted.
During the six months ended June 30, 2004, the Companys total stock based
compensation expense, which was caused from the issuance of 26,250 options to
members of the Companys Board of Directors, was $5,094. Thus, the increase in expenses
related to the issuance of stock options, warrants and restricted stock awards
amounted to $2,459,769.

The
Company also issued 150,000 warrants, valued at $536,578, to a consultant
providing advisory services for the acquisition of SurgiCount Medical, Inc. The
services provided by the consultant included an evaluation of and oversight
over completion of the transaction. The value of the warrants, along with the
purchase price and direct costs incurred as a result of the transaction, were
capitalized. The entire capitalized costs, valued at $4,684,576, have been
allocated to SurgiCounts patents, with an approximate useful life of 14.4
years, on a preliminary basis and may change as additional information becomes
available. Amortization expense related to the patents, for the six months
ended June 30, 2005, was $108,000 as opposed to no expense during the six
months ended June 30, 2004.

Interest, dividend
income and other, net

The
Company had investment income of $40,088 and $215 for the six months ended and
$11,485 and $50 for the three months ended June 30, 2005 and June 30, 2004,
respectively.

The
increase in investment income for the six and three months ended June 30, 2005
when compared to June 30, 2004, was primarily the result of an increased amount
of fixed income investments held throughout the period. At March 31, 2005, the
Company held in marketable securities approximately $2.5 million in U.S.
Treasuries which were liquidated during the three month period ended June 30,
2005. At June 30, 2004, the Companys primary contributing asset to investment
income was its cash balance of $274,498.

Realized gains (losses) on investments, net

During
the six months ended June 30, 2005, the Company realized net gains of $103,644
from trades of marketable securities.

During
the six months ended June 30, 2004, the Company realized net gains of $500,878
primarily from the disposition of a portion of the Companys equity interest in
Excelsior and the sale of common shares in Principal Financial Group.

The
Company has relied and continues to rely to a large extent upon proceeds from
sales of investments rather than investment income to defray a significant
portion of its operating expenses. Because such sales cannot be predicted with
certainty, the Company attempts to maintain adequate working capital to provide
for fiscal periods when there are no such sales.

23

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Unrealized gains (losses) on marketable
securities, net

Unrealized
gains increased by $43,203 during the six months ended June 30, 2005, primarily
due to the Companys investment in Tuxis which had an unrealized gain of
$69,500 for the period then ended. Additionally, any marketable securities
which had an unrealized loss at December 31, 2004 had been disposed of by June
30, 2005.

Unrealized
gains increased by $83,744 during the six months ended June 30, 2004 primarily
due to the increase in value of the Companys Excelsior holdings.

Accumulated other comprehensive income

Unrealized
gains (losses) on the Companys investments designated as available-for-sale
are recorded in accumulated other comprehensive income. At June 30, 2005, the
Company classified all of its restricted holdings in IPEX as available-for-sale.
At June 30, 2005, the unrealized gains on the Companys restricted holdings in
IPEX amounted to $1,158,750. The Company did not hold any investments
classified as available-for-sale at June 30, 2004.

Taxes

The
Company is taxed under Title 26, Chapter 1, Subchapter C of the Internal
Revenue Code of 2004, as amended, and therefore subject to federal income tax
on the portion of its taxable income.

At
December 31, 2004, the Company has a net operating loss carryforward of approximately
$8.6 million to offset future taxable income for federal income tax purposes.
The utilization of the loss carryforward to reduce any such future income taxes
will depend on the Companys ability to generate sufficient taxable income
prior to the expiration of the net operating loss carryforwards. The
carryforward expires beginning in 2011.

A
change in the ownership of a majority of the fair market value of the Companys
common stock can delay or limit the utilization of existing net operating loss
carryforwards pursuant to the Internal Revenue Code Section 382. The Company
believes that such a change occurred during the year ended December 31, 2004.
Based upon a detail analysis of purchase transactions of our equity securities,
the Company believes that its net operating loss carryforward utilization is
limited to approximately $755,000 per year.

Risk Factors

An
investment in our securities involves a high degree of risk relating to our
business, strategy, structure and investment objectives. Each of the following
risks may materially adversely affect our business, financial condition and
results of operations. In addition to the risk factors described below, other
factors that could cause actual results to differ materially include:

| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | changes in the economy;                                                                                                    
| |  | risk associated with possible disruption in the Companys operations
  due to terrorism;                                   
| |  | future regulatory actions and conditions in the Companys operating
  areas or target industries for investments; and      
| |  | other risks and uncertainties as may be detailed from time to time in
  the Companys public announcements and SEC filings.

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

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

24

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Upon
the change of control that occurred in October 2004, we restructured our
business strategy and objective to focus on the medical products, healthcare
solutions, financial services and real estate industries instead of the radio
and telecommunications industries. We have a limited operating history under
this new structure. Historically, we have not typically invested in these
industries and therefore our historical results of operations should not be
relied upon as an indication of our future financial performance. If we do not
successfully implement our new business structure the value of your investment
in our business could decline substantially.

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

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

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

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

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

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

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

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

At
June 30, 2005, patents received in the acquisition of SurgiCount Medical, Inc.,
net of accumulated amortization, represented $4,576,262, or 38.8%, of our total
assets. We perform an annual review in the fourth quarter of each year, or more
frequently if indicators of potential impairment exist to determine if the
recorded

25

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amount of our
patents is impaired. This determination requires significant judgment and
changes in our estimates and assumptions could materially affect the
determination of fair value and/or impairment of patents. We may incur charges
for the impairment of our patents in the future if sales of our patient safety
products, in particular our Safety-Sponge
System, fail to achieve our assumed revenue growth rates or assumed
operating margin results.

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

We
invest in illiquid equity securities acquired directly from issuers in private
transactions. At June 30, 2005, 39% of our assets were comprised of investment
securities, the majority of which are illiquid investments. Investments in
illiquid, or non-marketable, securities are inherently risky and a number of
the companies we invest in are expected to fail. We review all of our
investments quarterly for indicators of impairment; however, for non-marketable
equity securities, the impairment analysis requires significant judgment to identify
events or circumstances that would likely have a material adverse effect on the
fair value of the investment. The indicators we use to identify those events or
circumstances includes as relevant, the nature and value of any collateral, the
companys ability to make payments and its earnings, the markets in which the
company does business, comparison to valuations of publicly traded companies,
comparisons to recent sales of comparable companies, the discounted cash flows
of the company and other relevant factors. Because such valuations are
inherently uncertain and may be based on estimates, our determinations of fair
value may differ materially from the values that would be assessed if a ready
market for these securities existed. Investments identified as having an
indicator of impairment are subject to further analysis to determine if the
investment is other than temporarily impaired, in which case we write the
investment down to its impaired value. When a company is not considered viable
from a financial or technological point of view, we write down the entire
investment since we consider the estimated fair market value to be nominal.
Although we did not recognize any impairment for the three months ended June
30, 2004, since a significant amount of our assets are comprised of
non-marketable investment securities, any future impairment charges from the
write down in value of these securities will adversely affect our financial
condition.

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

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

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

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

26

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

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

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

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

We may not seek a public listing for our subsidiary
Ault Glazer Bodnar Merchant Capital, Inc. as we disclosed we would in our June
30, 2005 press release.

Ault
Glazer Bodnar Merchant Capital, Inc. was formed on June 27, 2005 to hold our
non-patient safety related assets, such as Franklin Capital Properties, LLC, a
real estate development and management company, and to focus on the financial
services and real estate industries. On June 30, 2005, we issued a press
release indicating that we would immediately initiate appropriate regulatory
filings to secure a public listing for Ault Glazer Bodnar Merchant Capital,
Inc. early next year. A public listing for Ault Glazer Bodnar Merchant Capital,
Inc. would significantly increase the liquidity and potential value of our
non-patient safety related assets. We are currently considering alternative
structures for our business and we may decide not to pursue a public listing
for Ault Glazer Bodnar Merchant Capital, Inc.

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

Certain
of our officers, directors and/or their family members have existing
responsibilities and, in the future, may have additional responsibilities, to
act and/or provide services as executive officers, directors, owners and/or
managers of Ault Glazer Bodnar & Company Investment Management LLC. In particular,
Milton Todd Ault, III, our Chairman and Chief Executive Officer,
Melanie Glazer, Manager of our subsidiary Franklin Capital Properties, LLC, and
Lynne Silverstein, our President and Secretary, are all principals of Ault Glazer
Bodnar
& Company Investment Management LLC. Mr. Ault and Ms. Silverstein devote
approximately 85% of their time to our business, based on a 60-hour, 6-day
workweek. Ms. Glazer works full time for Franklin Capital Properties, LLC. Ms.
Silverstein is the stepdaughter of Louis Glazer, one of our Directors and Chief
Health and Science Officer of Patient Safety Consulting Group, LLC.
Accordingly, certain conflicts of interest may arise from time to time with our
officers,

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directors and Ault Glazer Bodnar & Company Investment
Management LLC.  Because of these
possible conflicts of interest, such individuals may direct potential business
and investment opportunities to other entities rather than to us, which may not
be in the best interest of our stockholders.
We will attempt to resolve any such conflicts of interest in our favor.

Our
Board of Directors does not believe that we currently have any conflicts of
interest with the business of Ault Glazer Bodnar & Company Investment Management
LLC, other than certain of our officers responsibility to provide management
and administrative services to Ault Glazer Bodnar & Company Investment Management
LLC. and its clients from time-to-time. However, subject to applicable law, we
may engage in transactions with Ault Glazer Bodnar & Company Investment Management
LLC. and other related parties in the future. These related party transactions
may raise conflicts of interest and, although we do not have a formal policy
to address such conflicts of interest, our Audit Committee intends to evaluate
relationships and transactions involving conflicts of interest on a
case-by-case basis and the approval of our Audit Committee is required for all
such transactions. The Audit Committee intends that any related party
transactions will be on terms and conditions no less favorable to us than terms
and conditions reasonably obtainable from third parties and in accordance with
applicable law.

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

Prior
to the change in control that occurred in October 2004, our current senior
management was primarily engaged in operating a private investment management
firm. In this capacity they developed a general understanding of the
administrative and regulatory environment in which public companies operate.
However, our senior management lacks practical experience operating a public
company and relies in many instances on the professional experience and advice
of third parties including its consultants, attorneys and accountants. Failure
to comply or adequately comply with any laws, rules, or regulations applicable
to our business may result in fines or regulatory actions, which may materially
adversely affect our business, results of operation, or financial condition.

We are
dependent on our Chief Executive Officer for our future success.  The departure of our Chief Executive Officer
could materially adversely affect our ability to run our business.

Our
future success is dependent on the personal efforts, performance and abilities
of Milton Todd Ault, III, our Chairman and Chief Executive Officer.  Mr. Ault is an integral part of our daily
operations.  Although Mr. Ault does not
currently have any plans to retire or leave our company in the near future, he
is not currently subject to an employment contract with us. The departure of
Mr. Ault as our Chief Executive Officer could have a material adverse effect on
our ability to implement our business strategy or achieve our investment
objective.

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

As
of April 26, 2005, Milton Todd Ault, III, our Chief Executive Officer and
Chairman, beneficially owned approximately 27.2% of our common stock.  As a result, Mr. Ault may be able to exert
significant influence over our management and policies to:

| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | elect or defeat the election of our directors;                                   
| |  | amend or prevent amendment of our certificate of
  incorporation or bylaws;      
| |  | effect or prevent a merger, sale of assets or other
  corporate transaction; and 
| |  | control the outcome of any other matter submitted to
  the shareholders for vote.

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

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RISKS RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED
BUSINESS

We
intend to rely on third party manufacturers and suppliers to manufacture our Safety-Sponge
System, the loss of which may interrupt our operations.

We
have not begun commercial manufacturing of our Safety-Sponge System.  Before we begin to commercially manufacture
the system, we intend to enter into agreements or relationships with several
vendors to commercially produce the product. We cannot assure you that we will
be able to enter into such agreements or relationships, maintain such
relationships if attained or secure additional suppliers and manufacturers on
favorable terms as needed. Although we believe the materials used in the
manufacture of the Safety-Sponge System are readily available and can be
purchased and/or produced by multiple vendors, the loss of a major supplier or
manufacturer, the deterioration of our relationship with a major supplier or
manufacturer, changes in the specifications of components used in our products,
or our failure to establish good relationships with major new suppliers or
manufacturers could have a material adverse effect on our business, financial
condition and results of operations.

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

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

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

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

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

Our
products and operations are subject to extensive regulation by numerous
governmental authorities, including, but not limited to, the FDA and state and
foreign governmental authorities. In particular, we must obtain specific
clearance or approval from the FDA before we can market new products or certain
modified products in the United States. The FDA administers the Food, Drug and
Cosmetics Act (the FDC Act). Under the FDC Act, most

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

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

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

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

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

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

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

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

RISKS
RELATED TO OUR INVESTMENTS

We
operate in a highly competitive market for investment opportunities.

A
large number of entities compete with us to make the types of investments that
we make. We compete with a large number of private equity and venture capital
funds, other equity and non-equity based investment funds, investment banks and
other sources of financing, including traditional financial services companies
such as commercial banks and specialty finance companies. Many of our
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than we do. For example, some competitors may
have a lower cost of funds and access to funding sources that are not available
to us. In addition, some of our competitors may have higher risk tolerances or
different risk assessments, which could allow them to consider a wider variety
of investments and establish more relationships than us. There can be no
assurance that the competitive pressures we face will not have a material
adverse effect on our business, financial condition and results of operations.
Also, as a result of this competition, we may not be able to take advantage of
attractive investment opportunities from time to time, and we can offer no
assurance that we will be able to identify and make investments that are
consistent with our investment objective.

Our
business model depends upon the development of strong referral relationships
with private equity and venture capital funds and investment banking firms.

If
we fail to maintain our relationships with key firms, or if we fail to
establish strong referral relationships with other firms or other sources of
investment opportunities, we may not be able to achieve our investment
objective. In addition, persons with whom we have informal relationships are
not obligated to provide us with investment opportunities, and therefore there
is no assurance that such relationships will lead to the origination of equity
or other investments.

We may
experience fluctuations in our quarterly results.

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

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

Many
of the companies in which we have made or will make investments may be
susceptible to economic slowdowns or recessions. An economic slowdown may
affect the ability of a company to engage in a liquidity event such as a sale,
recapitalization, or initial public offering. Our nonperforming assets are
likely to increase and the value of our investments is likely to decrease
during these periods. These conditions could lead to financial losses in our
investments and a decrease in our revenues, net income, and assets.

Our
business of making private equity investments and positioning them for
liquidity events also may be affected by current and future market conditions.
The absence of an active senior lending environment may slow the amount of
private equity investment activity generally. As a result, the pace of our
investment activity may slow. In addition, significant changes in the capital
markets could have an effect on the valuations of private companies and

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on the potential for liquidity events involving such
companies. This could affect the amount and timing of gains realized on our
investments.

The
inability of our portfolio companies to successfully market their products
would have a negative impact on our investment returns

Even
if our portfolio companies are able to develop commercially viable products and
services, the market for new products and services is highly competitive and
rapidly changing. Commercial success is difficult to predict and the marketing
efforts of our portfolio companies may not be successful.

Investing
in private companies involves a high degree of risk.

The
Companys portfolio may include investments in private companies. Investments
in private businesses involve a high degree of business and financial risk,
which can result in substantial losses and accordingly should be considered
speculative. Because of the speculative nature and the lack of a public market
for these investments, there is significantly greater risk of loss than is the
case with traditional investment securities. The Company has invested a
substantial portion of its assets in small private companies or start-up
companies. These private businesses tend to be thinly capitalized and unproven,
with risky technologies that lack management depth and have not attained
profitability or have no history of operations. In addition, some smaller
businesses have narrower product lines and market shares than their competition
and may be more vulnerable to customer preferences, market conditions, loss of
key personnel, or economic downturns, which may adversely affect the return on,
or the recovery of, our investment in such businesses.

The
Company expects that some of its 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. The Company has been risk seeking rather than
risk averse in its approach to its investments. The Company has in the past relied,
and continues to rely to a large extent, upon proceeds from sales of
investments rather than investment income or revenue generated from its
operating activities to defray a significant portion of its operating expenses.

Our
investments may be concentrated in one or more industries and if these
industries should decline or fail to develop as expected our investments will
be lost.

Our
investments may be concentrated in one or more industries. This concentration
will mean that our investments will be particularly dependent on the
development and performance of those industries. Accordingly, our investments
may not benefit from any advantages, which might be obtained with greater
diversification of the industries in which our portfolio companies operate. If
those industries should decline or fail to develop as expected, our investments
in those industries will be subject to loss.

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

A
portion of the Companys investments consist of securities acquired directly
from the issuer in private transactions. They may be subject to restrictions on
resale or otherwise be illiquid. There may not be an established trading market
for such securities. Additionally, many of the securities that the Company may
invest in will not be eligible for sale to the public without registration
under the Securities Act of 1933, which could prevent or delay any sale by the
Company of such investments or reduce the amount of proceeds that might
otherwise be realized therefrom. Restricted securities generally sell at a
price lower than similar securities not subject to restrictions on resale.
Further, even if a portfolio company registers its securities and becomes a
reporting corporation under the Securities Exchange Act of 1934, the Company
may be considered an insider by virtue of its board representation and would be
restricted in sales of such corporations securities.

We
typically exit our investments when the portfolio company has a liquidity event
such as a sale, recapitalization, or initial public offering of the company.
The illiquidity of our investments may adversely affect our ability to dispose
of debt and equity securities at times when it may be otherwise advantageous for
us to liquidate such investments. In addition, if we were forced to immediately
liquidate some or all of the investments in the portfolio, the proceeds of such
liquidation would be significantly less than the value at which we acquired
those investments.

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Our
failure to make follow-on investments in our portfolio companies could impair
the value of our portfolio.

Following
its initial investments in portfolio companies, the Company may make additional
investments in such portfolio companies as follow-on investments, in order to
increase its investment in a portfolio company, and exercise warrants, options
or convertible securities that may be acquired in the original financing. Such
follow-on investments may be made for a variety of reasons including: 1) to
increase the Companys exposure to a portfolio company, 2) to acquire
securities issued as a result of exercising convertible securities that were
purchased in a prior financing, 3) to preserve or reduce dilution of the
Companys proportionate ownership in a subsequent financing, or 4) in an
attempt to preserve or enhance the value of the Companys investment.

There
can be no assurance that the Company will make follow-on investments or have
sufficient funds to make such investments; the Company will have the discretion
to make any follow-on investments as it determines, subject to the availability
of capital resources. The failure to make such follow-on investments may, in
certain circumstances, jeopardize the continued viability of a portfolio
company and the Companys initial investment, or may result in a missed
opportunity for the Company to increase its participation in a successful
operation. Even if the Company has sufficient capital to make a follow-on
investment, we may elect not to make the follow-on investment because we may
not want to increase our concentration of risk or because we prefer other
opportunities.

We may
not realize gains from our equity investments.

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

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

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

Our
financial results could be negatively affected if a significant investment
fails to perform as expected.

We
acquire controlling equity stakes in companies and our total debt and equity
investment in controlled companies may be significant individually or in the
aggregate. Investments in controlled portfolio companies are generally larger
and in fewer companies than our investments in companies that we do not
control. As a result, if a significant investment in one or more controlled
companies fails to perform as expected, our financial results could be more
negatively affected and the magnitude of the loss could be more significant
than if we had made smaller investments in more companies.

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

Borrowings,
also known as leverage, magnify the potential for gain or loss on amounts
invested and, therefore, increase the risks associated with investing in our
securities. We may borrow from and issue senior debt securities to banks,
insurance companies, and other lenders. Lenders of these senior securities have
fixed dollar claims on our consolidated assets that are superior to the claims
of our common shareholders. If the value of our consolidated assets increases,
then leveraging would cause the value of our consolidated assets to increase
more sharply than it would have had we not leveraged. Conversely, if the value
of our consolidated assets decreases,

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leveraging would cause the value of our consolidated
net assets to decline more sharply than it otherwise would have had we not
leveraged. Similarly, any increase in our consolidated income in excess of
consolidated interest payable on the borrowed funds would cause our net income
to increase more than it would without the leverage, while any decrease in our
consolidated income would cause net income to decline more sharply than it
would have had we not borrowed. Leverage is generally considered a speculative
investment technique.

Changes
in interest rates may affect our cost of capital and net investment income.

Because
we may borrow money to make investments, our net income is partially dependent
upon the difference between the rate at which we borrow funds and the rate at
which we invest these funds. As a result, there can be no assurance that a
significant change in market interest rates will not have a material adverse
effect on our net income. In periods of rising interest rates, our cost of
funds would increase, which would reduce our net income. We may use a
combination of long-term and short-term borrowings and equity capital to
finance our investing activities. We may use interest rate risk management
techniques in an effort to limit our exposure to interest rate fluctuations.
Such techniques may include various interest rate hedging activities.
Accordingly, no assurances can be given that such changes will not have a
material adverse effect on the return on, or the recovery of, the Companys
investments.

RISKS RELATED TO OUR REAL ESTATE HOLDINGS

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

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

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

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

RISKS RELATED TO OUR FINANCING

There
are a large number of shares of common stock and shares underlying outstanding
warrants from our recent private placement that may be available for future
sale and the sale of these shares may depress the market price of our common
stock.

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As
of April 26, 2005, we had 5,276,328 shares of common stock outstanding. There
are 1,517,700 outstanding shares of common stock and 758,841 shares of common
stock issuable upon exercise of outstanding warrants from our recent private
placement being offered pursuant to a Form S-3 filed with the SEC on May 3,
2005. After the Form S-3 is declared effective by the SEC, all of these shares
may be sold without restriction. The sale of these shares may adversely affect
the market price of our common stock.

The
issuance of shares upon exercise of outstanding warrants may cause immediate
and substantial dilution to our existing stockholders.

The
issuance of shares upon exercise of our outstanding warrants may result in
substantial dilution to the interests of other stockholders since the selling
stockholders may ultimately exercise and sell the full amount issuable on
exercise.

RISKS
RELATED TO OUR COMMON STOCK

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

The
public market for our common stock has historically been very volatile.  Over the past two fiscal years and the
interim quarterly periods, the market price for our common stock has ranged
from $0.50 to $14.75.  Any future market
price for our shares may continue to be very volatile.  This price volatility may make it more
difficult for you to sell shares when you want at prices you find
attractive.  We do not know of any one
particular factor that has caused volatility in our stock price.  However, the stock market in general has
experienced extreme price and volume fluctuations that often are unrelated or
disproportionate to the operating performance of companies. Broad market factors
and the investing publics negative perception of our business may reduce our
stock price, regardless of our operating performance.  Further, the market for our common stock is limited and we cannot
assure you that a larger market will ever be developed or maintained.  Our common stock is currently listed on the
American Stock Exchange (AMEX).  The
average daily trading volume of our common stock over the past three months was
approximately 16,909 shares.  The last
reported sales price for our common stock on April 26, 2005, was $4.51 per
share. Market fluctuations and volatility, as well as general economic, market
and political conditions, could reduce our market price.  As a result, this may make it difficult or
impossible for you to sell our common stock.

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

Our
common stock is currently traded on the American Stock Exchange (AMEX) under
the symbol PST.  In order for our
securities to be eligible for continued listing on AMEX, we must remain in
compliance with certain listing standards. On June 24, 2004, we received a
letter from AMEX inquiring as to our ability to remain listed on AMEX.  Specifically, AMEX indicated that our common
stock was subject to delisting under sections 1003(a)(i) and 1003(a)(ii) of
AMEXs Company Guide because our stockholders equity was below the level required
by AMEXs continued listing standards. Accordingly, AMEX requested information
relating to our plan to retain listing. On September 13, 2004, we presented the
final components of our proposed plan to AMEX to comply with AMEXs continued
listing standards and on September 15, 2004, AMEX notified us that it accepted
our plan and granted us an extension until December 26, 2005 to regain
compliance, during which time AMEX will continue our listing subject to certain
conditions. We have cooperated, and will continue to cooperate, with AMEX regarding
these issues and we intend to make every effort to remain listed on AMEX. AMEX
has notified us, however, that failure to make progress consistent with the
plan of compliance or to regain compliance with the continued listing standards
by December 26, 2005 could result in our common stock being delisted. As of
June 30, 2005, we believe we have re-gained compliance with AMEXs continued
listing requirements.  If we were to
again become noncompliant with AMEXs continued listing requirements, our
common stock may be delisted which would have a material adverse affect on the
price and liquidity of our common stock.

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

35

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

| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | that a broker or dealer approve a persons account
  for transactions in penny stocks; and                                                                            
| |  | the broker or dealer receive from the investor a
  written agreement to the transaction, setting forth the identity and quantity
  of the penny stock to be purchased.

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

| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obtain financial information and investment
  experience objectives of the person; and                                                                                                                                                                     
| |  | make a reasonable determination that the
  transactions in penny stocks are suitable for that person and the person has
  sufficient knowledge and experience in financial matters to be capable of
  evaluating the risks of transactions in penny stocks.

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

| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | sets forth the basis on which the broker or dealer
  made the suitability determination; and                
| |  | that the broker or dealer received a signed, written
  agreement from the investor prior to the transaction.

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

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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

The
Companys business activities contain elements of risk. The Company considers 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 the Board of
Directors.

The Company
has invested a substantial portion of its 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. The Company expects that some of its 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 typically no public market for the equity interests of the small
companies in which the Company invests, the valuation of the equity interests
in the Companys portfolio is subject to the estimate of the Companys Board of
Directors. In making its determination, the Board may consider valuation
information provided by an independent third party or the portfolio company
itself. In the absence of a readily ascertainable market value, the estimated
value of the Companys portfolio of equity interests may differ significantly
from the values that would be placed on the portfolio if a ready market for the
equity interests existed. Any changes in valuation are recorded in the
Companys consolidated statements of operations as Net increase (decrease) in
unrealized appreciation on investments.

36

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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.

On
October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
filed a lawsuit against Franklin Capital Corp. (n/k/a Patient Safety
Technologies, Inc.), Sunshine Wireless, LLC, and four other defendants
affiliated with Winstar Communications, Inc. On February 25, 2003, the case
against Franklin Capital and Sunshine Wireless was dismissed. However, on
October 19, 2004, the plaintiffs exercised their right to appeal.  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.  The initial lawsuit alleged that the Winstar
Communications defendants conspired to commit fraud and breached their
fiduciary duty to the plaintiffs in connection with the acquisition of the
plaintiffs radio production and distribution business. The complaint further
alleged that Franklin Capital and Sunshine Wireless, which were co-investors in
the acquisition of the plaintiffs radio production and distribution business, joined
the alleged conspiracy in structuring a transaction in which the plaintiffs
business was transferred to a venture primarily composed of and operated by
Franklin Capital and Sunshine Wireless and where the proceeds were retained by
non-bankrupt affiliates of Winstar Communications. The plaintiffs sought
recovery of damages in excess of $10,000,000, costs and attorneys fees.

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

On
April 5, 2005, we entered into a consulting agreement with Health West
Marketing Incorporated, a California corporation (Health West). Under the
agreement, Health West agreed to help the Company establish a comprehensive
manufacturing and distribution strategy for the Companys Safety-Sponge(TM) System
worldwide. In consideration for Health Wests services, the Company agreed to
issue Health West 42,017 shares of the Companys common stock, to be issued as
follows: (a) 10,505 shares were issued upon signing the agreement; (b) if
Health West helps the Company structure a comprehensive manufacturing agreement
with A Plus Manufacturing by July 5, 2005, then the Company will issue Health
West an additional 15,756 shares; and (c) if Health West helps the Company
develop a regional distribution network to integrate the Safety-Sponge(TM)
System into the existing acute care supply chain by February 5, 2006, then the
Company will issue Health West the remaining 15,756 shares. As incentive for
entering into the agreement, the Company agreed to issue Health West a callable
warrant to purchase 150,000 (post 3:1 forward stock split) shares of the
Companys common stock at an exercise price of $5.95, exercisable for 5 years.
In addition, the Company agreed to issue a callable warrant to purchase 25,000
(post 3:1 forward stock split) shares of the Companys common stock at an
exercise price of $5.95, exercisable upon meeting specified milestones. These
securities will be issued pursuant to Section 4(2) of the Securities Act of
1933, as amended.

On
May 12, 2005, the Company purchased certain assets from Philip Gatch, our
current Chief Technology Officer, for use in a production and post-production
media content facility. As consideration for the assets the Company issued Mr.
Gatch: (1) 17,241 shares of common stock; and (2) warrants to purchase 8,621
shares of common stock with a three-year term and an exercise price of $5.80
per share.  These securities were issued
pursuant to Rule 506 under the Securities Act of 1933, as amended.

37

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On
April 22, 2005, we entered into a subscription agreement with an accredited
investor, pursuant to which we sold 20,000 shares of common stock and warrants
to purchase an additional 20,000 shares of common stock.  We received gross proceeds of $100,000 from
the sale of stock and warrants.  These
securities were issued pursuant to Rule 506 under the Securities Act of 1933,
as amended.

We
sold shares of common stock at a price of $5.00 per share.  For each two shares of common stock
purchased we issued one callable warrant and one non-callable warrant to
purchase additional shares of our common stock.  In aggregate, the accredited investor purchased 20,000 shares of
common stock, callable warrants to purchase 10,000 shares of common stock and
non-callable warrants to purchase 10,000 shares of common stock.  Pursuant to the subscription agreement, we
granted piggy back registration rights to register the resale of the shares of
common stock and shares issuable upon exercise of the warrants.

Both
the callable and non-callable warrants are exercisable for a period of five
years from April 22, 2005 and have an exercise price per share equal to
$6.05.  In the event the closing sale
price of our common stock equals or exceeds $7.50 for at least five consecutive
trading days, upon 30 days prior written notice we may call the callable
warrant at a redemption price equal to $0.01 per share of common stock then
purchasable pursuant to such warrant.
Notwithstanding such notice, the warrant holder may exercise the
callable warrant prior to the end of the 30-day notice period.

On
June 13, 2005, we entered into an employment agreement with William B. Horne as
our Chief Financial Officer. Pursuant to the employment agreement we agreed to
issue Mr. Horne 26,315 shares of common stock which shares will vest quarterly
over each year of the agreement. The number of shares to be issued to Mr. Horne
for the first year of the agreement will be reduced by the value of any
unvested restricted stock that he would be entitled to under his prior
consulting agreement with the Company.

Except
as expressly set forth above, for transactions exempt from registration under
Rule 506, the individuals and entities to whom we issued securities are
unaffiliated with us. For each of such sales, no advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited
investors, business associates of ours or our executive officers, and transfer
was restricted by us in accordance with the requirements of the Securities Act.
Each of the above security holders who were not our executive officers
represented that they are accredited and sophisticated investors, that they are
capable of analyzing the merits and risks of their investment, and that they
understand the speculative nature of their investment. Furthermore, all of the
above-referenced persons had access to our Securities and Exchange Commission
filings.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

38

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Item 6. Exhibits.

|                 |             |                                                                                                                                                                                                                                                                                
|---------------- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
  Number | Description
|                 |            
|4.1              |             | $1,000,000
  principal amount Promissory Note dated April 7, 2005 issued to Bodnar Capital
  Management, LLC (Incorporated by reference to the Companys Form 8-K filed
  with the Securities and Exchange Commission on April 13, 2005)                                       
|4.2              |             | Security
  Agreement dated April 7, 2005 in favor of Bodnar Capital Management, LLC
  (Incorporated by reference to the Companys Form 8-K filed with the
  Securities and Exchange Commission on April 13, 2005)                                                              
|4.3              |             | Form of
  non-callable Warrant issued to James Colen (Incorporated by reference to the
  Companys Form 8-K filed with the Securities and Exchange Commission on April
  26, 2005)                                                                                             
|4.4              |             | Form of
  callable Warrant issued to James Colen (Incorporated by reference to the
  Companys Form 8-K filed with the Securities and Exchange Commission on April
  26, 2005)                                                                                                 
|10.1             |             | Consulting
  Agreement entered into as of April 5, 2005 by and between Health West
  Marketing Incorporated and Patient Safety Technologies, Inc. (Incorporated by
  reference to the Companys Form 8-K filed with the Securities and Exchange
  Commission on April 11, 2005)
|10.2             |             | Subscription
  Agreement dated April 22, 2005 between Patient Safety Technologies, Inc. and
  James Colen (Incorporated by reference to the Companys Form 8-K filed with
  the Securities and Exchange Commission on April 26, 2005)                                          
|10.3             |             | Employment Agreement
  entered into as of June 13, 2005 by and between Patient Safety Technologies,
  Inc. and William B. Horne (Incorporated by reference to the Companys Form
  8-K filed with the Securities and Exchange Commission on June 16, 2005)                     
|10.4             |             | Consulting
  Agreement among Wolfgang Grabher and Patient Safety Technologies, Inc.
  (Incorporated by reference to the Companys Form 8-K filed with the
  Securities and Exchange Commission on July 7, 2005)                                                                
|10.5             |             | Agreement
  between Patient Safety Technologies, Inc. and IPEX, Inc. dated July 7, 2005
  (Incorporated by reference to the Companys Form 8-K filed with the
  Securities and Exchange Commission on July 7, 2005)                                                            
|31.1             |             | Certification
  by Chief Executive Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of
  the Exchange Act                                                                                                                                                                 
|31.2             |             | Certification
  by Chief Financial Officer, required by Rule 13a-14(a) or Rule 15d-14(a) of
  the Exchange Act                                                                                                                                                                 
|32.1             |             | Certification
  by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of
  the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United
  States Code                                                                                          
|32.2             |             | Certification
  by Chief Executive Officer, required by Rule 13a-14(b) or Rule 15d-14(b) of
  the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United
  States Code                                                                                          

39

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SIGNATURES

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

|                        |                                   |                                                                          
|----------------------- | --------------------------------- | -------------------------------------------------------------------------
|                        | PATIENT SAFETY TECHNOLOGIES, INC.
|                        |                                   |                                                                          
|Date: August
  15, 2005 | By:                               | /s/ Milton
  Todd Ault III                                             
|                        |                                   |                                                                          
|                        |                                   | Milton
  Todd Ault IIIChairman & Chief Executive
  Officer             
|                        |                                   |                                                                          
|Date: August
  15, 2005 | By:                               | /s/ William
  B. Horne                                                   
|                        |                                   |                                                                          
|                        |                                   | William B.
  HorneChief Financial Officerand Principal Accounting Officer

40

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