**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

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**(Mark One)**

**x**                                 ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe fiscal year ended December 31, 2006**

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

**Forthe transition period from                     to                     **

Commission file number **000-30885**

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**Retractable Technologies, Inc.**

(Name of registrant asspecified in its charter)

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| **Texas**                                 | ** ** | **75-2599762**       |
|-------------------------------------------|------------|----------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer     |
| incorporation or  organization)           |       | Identification  No.) |
|                                      |       |                 |
| **511  Lobo Lane**                        | ** ** | ** **           |
| **Little  Elm, Texas**                    | ** ** | **75068-0009**       |
| (Address of  principal executive offices) |       | (Zip Code)           |

 

Registrant’s telephonenumber, including area code **(972) 294-1010**

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Securities registeredpursuant to Section 12(b) of the Act:

| **Title of each class** | ** ** | **Name of  each exchange on which registered** |
|-------------------------|------------|------------------------------------------------|
| Common                  |       | The American  Stock Exchange                   |

 

Securities registeredpursuant to Section 12(g) of the Act:

**Preferred Stock**

(Title of Class)

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Indicate by check mark if the registrant is a well-known, seasonedissuer, as defined in Rule 405 of the SecuritiesAct.    Yes  o    No  x

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  x

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.     o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct (check one):

| Large accelerated  filer  o |   | Accelerated  filer  o |   | Non-accelerated  filer  x |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

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

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, as of the last business day of the registrant’smost recently completed second fiscal quarter. The aggregate market value of the common equity held by non-affiliatesis $36,649,107, assuming a price of $3.70, which was computed with reference tothe closing price as of June 30, 2006.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13, or15(d) of the Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court.    Yes  o    No  o

(APPLICABLE ONLY TOCORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each ofthe registrant’s classes of common equity, as of the latest practicable date.As of March 1, 2007, there were 23,674,164 shares of our Common Stock issuedand outstanding.

DOCUMENTS INCORPORATED BYREFERENCE

None except exhibits

 

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**TABLE OFCONTENTS**
|                                                                                                                              | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Item 1.  Business.                                                                                                           |       | 1          | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item  1A. Risk Factors.                                                                                                      |       | 8          | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 1B. Unresolved Staff Comments.                                                                                          |       | 11         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 2.  Properties.                                                                                                         |       | 11         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item  3. Legal Proceedings.                                                                                                  |       | 11         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                                 |       | 11         | ** ** |
|                                                                                                                         |       |       | ** ** |
| PART II                                                                                                                      | ** ** | ** ** | ** ** |
|                                                                                                                         | ** ** | ** ** | ** ** |
| Item 5. Market for Registrant’s Common Equity, Related  Stockholder Matters, and Issuer Purchases of Equity Securities. |       | 12         |       |
|                                                                                                                         |       |       |       |
| Item 6. Selected Financial Data.                                                                                             |       | 14         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 7. Management’s Discussion and Analysis of  Financial Condition and Results of Operation.                          |       | 14         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 7A. Quantitative and Qualitative Disclosures  About Market Risk.                                                        |       | 21         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 8. Financial Statements and Supplementary Data.                                                                         |       | F-1        | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 9. Changes in and Disagreements with Accountants  on Accounting and Financial Disclosure.                               |       | 22         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 9A. Controls  and Procedures.                                                                                           |       | 22         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 9B. Other  Information.                                                                                                 |       | 22         | ** ** |
|                                                                                                                         |       |       | ** ** |
| PART III                                                                                                                     | ** ** | ** ** | ** ** |
|                                                                                                                         | ** ** | ** ** | ** ** |
| Item 10.  Directors and Executive Officers of the Registrant.                                                                |       | 22         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 11. Executive  Compensation.                                                                                            |       | 27         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 12. Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters.                    |       | 38         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 13. Certain Relationships and Related  Transactions.                                                                    |       | 41         | ** ** |
|                                                                                                                         |       |       | ** ** |
| Item 14. Principal Accounting Fees and Services.                                                                             |       | 42         | ** ** |
|                                                                                                                         |       |       | ** ** |
| PART IV                                                                                                                      | ** ** | ** ** | ** ** |
|                                                                                                                         | ** ** | ** ** | ** ** |
| Item 15. Exhibits, Financial Statement Schedules.                                                                            |       | 43         | ** ** |
|                                                                                                                         |       |       | ** ** |
| SIGNATURES                                                                                                                   |       | 45         | ** ** |

 

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**PART I**

**Item 1.Business.**

DESCRIPTION OF BUSINESS

General Description 

We design, develop, manufacture, and market innovativepatented safety needle devices for the healthcare industry. Our VanishPoint® products utilize a unique friction ringmechanism patented by Thomas J. Shaw, our Founder, President, and ChiefExecutive Officer. VanishPoint® products are designed specifically to preventneedlestick injuries and to prevent reuse. The friction ring mechanism permitsthe automated retraction of the syringe needle into the barrel of the syringe,directly from the patient, after delivery of the medication is completed. TheVanishPoint® blood collection tube holder utilizes the samemechanism to retract the needle after blood has been drawn from the patient.Closure of an attached end cap of the blood collection tube holder causes theneedle to retract directly from the patient into the closed tube holder. The IVcatheter also operates with a friction ring mechanism whereby the needle isretracted after insertion of the catheter into the patient.  We introduced an IV safety catheter in thefirst quarter of 2006.  ** **Advantages of ourproducts include protection from needlestick injuries, prevention of crosscontamination through reuse, and reduction of disposal and other associatedcosts. Federal regulation now requires the use of safe needle devices. We havean exclusive license from Thomas J. Shaw, our President and Chief ExecutiveOfficer, for the patent rights for our safety needle products.

We and Thomas J. Shaw entered into a TechnologyLicense Agreement dated effective as of the 23rd day of June 1995, whereby Mr.Shaw granted us a worldwide exclusive license to manufacture, market, sell, anddistribute ‘Licensed Products’ and ‘Improvements’ until the expiration of thelast to expire of the last ‘Licensed Patents’ unless sooner terminated undercertain conditions without right to sublicense. ‘Licensed Products’, ‘Improvements’,and ‘Licensed Patents’ are all terms that are extensively defined in theTechnology License Agreement. In exchange, we paid Mr. Shaw a $500,000 initiallicensing fee and a 5 percent royalty on gross sales after returns of ‘LicensedProducts’.  Mr. Shaw entered into anagreement whereby Suzanne August, his spouse, is entitled to $100,000 perquarter payable out of his royalties. See “Patents, Licenses and ProprietaryRights” for a more detailed discussion. Our goal is to become a leadingprovider of automated retraction safety devices.

Development of theCompany 

While owning and operating Checkmate Engineering, asole proprietorship, Thomas J. Shaw, our President and Chief Executive Officer,developed and patented the idea and early prototypes of the syringe that wereto become the VanishPoint® safety syringe. OnMay 9, 1994, the Company was incorporated in Texas to design, develop,manufacture, and market medical safety devices for the healthcare industry.

We have been manufacturing and marketing our productsinto the market place since 1997. Our products have been and continue to bedistributed nationally through numerous distributors. However, we have beenblocked from access to the market by exclusive marketing practices engaged inby Becton Dickinson and Company, Inc. (“BD”) who dominates our market.

We continue to attempt to gain access to the marketthrough our sales efforts, our innovative technology, and introduction of newproducts. We are focusing on methods of upgrading our manufacturing capabilityand efficiency in order to enable us to offer our technology at a reducedprice. We believe our current capitalization provides the resources necessaryto implement these changes and greatly improve our manufacturing capacity andefficiency, thereby reducing our unit cost.

Principal Products

Our products with Notice of Substantial Equivalence tothe FDA include the VanishPoint® IV Safety Catheter, 1cc tuberculin,insulin, and allergy antigen VanishPoint® syringes; 3cc,5cc, and 10cc 

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VanishPoint® syringes; and the VanishPoint® blood collection tube holder and small tubeadapter. Syringe sales comprised 97.5%, 98.6%, and 98.8% of revenues in 2004,2005, and 2006.

We also have begun selling allergy trays with 25syringes per tray. The trays accounted for approximately 1.4% of U.S. sales in2006. The tray design eliminates the need to individually unwrap each syringe.

We introduced the IV safety catheter into the marketin the first quarter of 2006.  We havecompleted the construction of automated assembly equipment in the first quarterof 2007 and we expect it will be placed in service in the second quarter of2007.

Our products (without Notice of SubstantialEquivalence to the FDA) also include a dental syringe, a butterfly IV, and anautodisable syringe.****From 1999 to2001 and in 2003 ECRI (formerly known as the Emergency Care Research Institute),a recognized authority in evaluating medical devices, awarded the VanishPoint® syringe and blood collection tube holder itshighest possible rating.

Principal Markets

The VanishPoint® syringe and needle device products are sold toand used by healthcare providers primarily in the United States (with 12.2% ofrevenues in 2006 generated from sales outside the United States) which include,but are not limited to, acute care hospitals, alternate care facilities,doctors’ offices, clinics, emergency centers, surgical centers, convalescenthospitals, Veterans Administration facilities, military organizations, publichealth facilities, and prisons.

The syringe and needle device market continues to be amarket in transition. The nature of the products comprising the market isslowly****changing from standard to safetydevices. The impetus for the change to safety devices is the risk that iscarried with each needlestick injury which includes the transmission of over 20bloodborne pathogens, including the human immunodeficiency virus (“HIV,” whichcauses AIDS), hepatitis B, and hepatitis C. Because of the occupational andpublic health hazards posed by conventional disposable syringes, public healthpolicy makers, domestic organizations and government agencies have beeninvolved in the effort to get more effective safety needle products tohealthcare workers. Federal legislation was signed into law on November 6,2000, by former President Clinton. This legislation, which became effective formost states on April 12, 2001, now requires safety needle products be used forthe vast majority of procedures. However, even with this requirement, many hospitals are neglecting tofollow the law intended to protect healthcare workers.

According to Greystone Associates, the worldwidemarket for safety syringes was a little over $1 billion in 2003 and isprojected to be approximately $1.6 billion by 2007.  The safety syringe market made upapproximately 43% of the total 2003 syringe market and is expected to make up57% of the market in 2007.

Methods of Marketing andDistribution

Under the current supply chain system in the U.S.acute care market, the vast majority of decisions relating to the contractingfor and purchasing of medical supplies are made by the representatives of grouppurchasing organizations (“GPOs”) rather than the end-users of the product(nurses, doctors, and testing personnel). The GPOs and manufacturers oftenenter into long-term exclusive contracts which can prohibit entry in themarketplace by competitors.

We distribute our products throughout the UnitedStates and its territories through general line and specialty distributors. Wealso utilize international distributors. We have developed a national directmarketing network in order to market our products to health care customers andtheir purchaser representatives. Our marketers make calls on target marketsthat are users of syringes, blood collection tube holders and IV safetycatheters.  Our marketers make contactwith all of the departments that affect the decision-making process for safetyproducts, including the purchasing agents. They call on acute care andalternate care sites and speak directly with the decision-makers of thesefacilities. We employ trained 

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clinicians, including registered nurses and/or medicaltechnologists that educate healthcare providers and healthcare workers on theuse of safety devices through exhibits at related tradeshows and publicationsof relevant articles in trade journals and magazines. These nurses provideclinical support to customers. In addition to marketing our products, thenetwork demonstrates the safety and cost effectiveness of the VanishPoint® automated retraction products to customers.

In the needle and syringe market, the market shareleader, BD, has utilized, among other things, long-term exclusive contractswhich have restricted our entry into the market.

We have numerous agreements with organizations for thedistribution of our products in foreign markets. Sales to these marketsincreased from 7.9% to 12.2% of revenues in 2006. The total population ofWestern Europe exceeds 310 million, and the recognition for the urgency of safeneedle devices in parts of Europe has followed the United States model. InFrance, England, Germany, and Italy, organized healthcare worker unions havetaken action to force hospitals and government agencies to place safety as apriority. Regions within Asia and Africa are also recognizing the need for ourproducts. Beginning in 2004, we were awarded a federal contract to supply syringesto various African countries. The 2004 award from PATH was for 1,530,000units.  The 2005 award was for 11,700,000units.  The 2006 award was for 16,400,000units.  All awards were filled overmultiple quarters due principally to logistical requirements for theorders.  We are hopeful that these awardswill continue to increase under this program.

Key components of our strategy to increase our marketshare are to: (a) focus on methods of upgrading our manufacturing capabilityand efficiency in order to enable us to offer products at a reduced price andimproved profit margins; (b) continue marketing emphasis in the U.S.; (c)continue to add Veterans Administration facilities, health departments,emergency medical services, federal prisons, long-term care and home healthcarefacilities as customers; (d) educate healthcare providers, insurers, healthcareworkers, government agencies, government officials, and the general public onthe reduction of risk and the cost effectiveness afforded by our VanishPoint® products; (e) supply product through GPOs andIntegrated Delivery Networks where possible; (f) consider possibilities forfuture licensing agreements and joint venture agreements for the manufactureand distribution of safety products in the United States and abroad; (g)introduce new products where market access is possible; and (h) continue toincrease international sales.

Status of New Products 

We have patented and are in the process of developingadditional safety needle products. Such products include a 1⁄2 cc insulinsyringe, an autodisposable syringe, a dental syringe, and a winged butterfly IVfor which we have developed early stage prototypes.  We have preproduction prototypes for ourautodisable syringe. Our limited access to the market has slowed theintroduction of these products into the market. We launched an IV safety catheter in the first quarter of 2006.

Competitive Conditions 

We believe VanishPoint® products continue to be the most effectivesafety devices in today’s market. Our products include passive safetyactivation, require less disposal space, and are activated while in thepatient.   The Company has three majorcompetitors: BD, Tyco, and Terumo.

Founded in 1897, BD is headquartered in New Jersey. BD’ssafety-engineered device sales accounted for approximately 11.3 percent of BD’stotal 2006 sales. BD currently manufactures the SafetyLokTM, a syringe that utilizes atubular plastic sheath that must be manually slid over the needle after aninjection, and the SafetyGlideTM,a needle which utilizes a hinged lever to cover the needle tip. BD alsomanufactures a safety blood collection and hypodermic needle that utilizes theEclipseTM needle cover. BD also manufactures a 3cc and1cc retracting needle product based on a license agreement with SpecializedHealth Products International, Inc. (formerly the Med-Design Corporation).  The Integra, a retractable syringe offered byBD, does not offer a full product line and cannot be used with highly viscousmedication due to leakage (as described on their labels). The introduction ofthis syringe has had little impact on our sales due to BD’s historic marketdominance.  BD’s “Vacutainer®” blood collection products are commonlyused as industry jargon to refer to blood collection products in general.

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Sherwood was acquired by Tyco International Ltd., acompany headquartered in Bermuda. Sherwood manufactures the Monoject®, a safety syringe thatutilizes a sheath similar to the BD SafetyLokTM syringe. Sherwood also manufactures theMagellan safety syringe, a product similar to the BD SafetyGlideTM.

Founded in 1974, Terumo was the first company to selldisposable syringes in Japan. Today Terumo manufactures standard syringes andblood collection tube holders, operates internationally, and has sales in some120 countries.

Both BD’s SafetyLokTM andSherwood’s Monoject® safety syringes require the use of two handsand several extra steps to activate the tubular plastic shield which must beslid and locked into place to protect the needle. These products must beremoved from the patient in order for the safety mechanism to beactivated.  In contrast, use of theVanishPoint® syringe is identical to that of a standardsyringe until the end of an injection, when the automated retraction mechanismretracts the needle directly from the patient safely into the barrel of thesyringe. This allows both hands to remain safely out of harm’s way. BD’sIntegra operates in a similar way but may have to be removed from the patientin order to have retraction of the needle occur.

BD and Sherwood have controlling market share, greaterfinancial resources, larger and more established sales, marketing anddistribution organizations, and greater market influence, including thelong-term and/or exclusive contracts with GPOs described earlier. The currentconditions have restricted competition in the needle and syringe market. BD maybe able to use its resources to improve its products through research oracquisitions or develop new products, which may compete more effectively with ourproducts. We continue to attempt to gain access to the market through our salesefforts and our innovative technology. We are focusing on methods of upgradingour manufacturing capability and efficiency in order to enable us to compete byoffering our technology at a reduced price. We believe our currentcapitalization provides the resources necessary to implement these changes andgreatly improve our manufacturing capacity and efficiency, thereby reducing ourunit cost.

Our competitive strengths include that the VanishPoint® syringe is one of four syringes given thehighest possible rating by ECRI.****Our bloodcollection tube holder is one of only two safety products given the highestpossible rating. Our products also have an advantage over non-retracting safetyneedles because minimal training and changes to practitioners’ normal routinesare required. Use of our products also prohibits unfortunate and improperreuse. Several factors could materially and beneficially affect themarketability of our products. Demand could be increased by existinglegislation and other legislative and investigative****efforts.Outsourcing arrangements such as our purchases from Double Dove have increasedour manufacturing capacity with little or no capital outlay and provide acompetitive cost.  Licensing agreementssuch as the one with Baiyin Tonsun Medical Device Co., Ltd. (“BTMD”) couldprovide entry into new markets and generate additional revenue.****A discussion of the BTMD agreement can be found elsewhereherein.

Our competitive weaknesses include our current lack ofmarket share because two well-established companies control most of the market.Our competitive position is also weakened by the method that providers use formaking purchasing decisions and the fact that our initial price per unit may behigher. However, our price per unit is competitive or even lower than thecompetition once all the costs incurred during the life cycle of a syringe areconsidered. Such life cycle costs include disposal costs, testing and treatmentcosts for needlestick injuries, and treatment for contracted illnesses throughneedlestick injuries. Demand for our products could decrease due to theintroduction of the Integra, a retractable syringe manufactured by BD, whichdominates the market.  Although, to date,the introduction of the Integra has not noticeably impacted our sales, BD has awider range of product offerings and more capital resources.

Principal Suppliers andSources of Raw Materials 

We purchase most of our product components from singlesuppliers, including needle adhesives and packaging materials. There aremultiple sources of these materials. We own the molds that are used tomanufacture the plastic components of our products. Our suppliers include MagorMold, Inc., APEC,

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Multivac, Inc., Exacto Spring Corporation,Sterigenics, and ISPG. We have also received shipments of product from DoubleDove since early 2004.

Dependence on MajorCustomers 

Two distributors accounted for an aggregate of 31.3%of our revenue in 2006. We have numerous other distributors that sell ourproducts in the U.S. and internationally.

Backlog Orders 

Order backlog is not material to our business inasmuchas orders for our products generally are received and filled on a currentbasis, except for items temporarily out of stock.

Patents, Licenses, andProprietary Rights 

Thomas J. Shaw and the Company entered into aTechnology License Agreement dated effective as of the 23rd day of June, 1995, whereby Mr. Shaw granted us“... a worldwide exclusive license and right under the ‘Licensed Patents’ and ‘Information’,to manufacture, market, sell and distribute ‘Licensed Products’ and ‘Improvements’without right to sublicense and subject to such nonexclusive rights as may bepossessed by the Federal Government...” ‘Licensed Patents’, ‘Information’, ‘LicensedProducts’, and ‘Improvements’ are all defined extensively in the TechnologyLicense Agreement. We may enter into sublicensing arrangements with Mr. Shaw’swritten approval of the terms and conditions of the licensing agreement. The ‘LicensedProducts’ include all retractable syringes and retractable fluid samplingdevices and components thereof, assembled or unassembled, which comprise aninvention described in ‘Licensed Patents’, and improvements thereof includingany and all ‘Products’ which employ the inventive concept disclosed or claimedin the ‘Licensed Patents’.

In exchange, we paid Mr. Shaw a licensing fee andagreed to pay a 5 percent royalty on gross sales after returns. The licenseterminates upon expiration of the last licensed patents unless soonerterminated under certain circumstances. The licensing fees have been paid inaccordance with this agreement with the exception of $1,500,000 in fees whichwere waived by Mr. Shaw and his wife.

We have the right and obligation to obtain protectionof the invention, including prosecution of patent properties. The licenseunilaterally changes to a nonexclusive license in the event of a hostiletakeover. Also, if Mr. Shaw involuntarily loses control of the Company, thelicense becomes a nonexclusive license and a right to information.

We have sought foreign patent protection through thePatent Cooperation Treaty and have filed applications for regional and nationalpatent protection in selective countries where we believe the VanishPoint® syringe can be utilized most.

We hold numerous United States patents related to ourautomated retraction technology, including patents for dental syringes, IVsafety catheters, winged IV sets, syringes, and blood collection tube holders.In addition, we have multiple applications for patents currently pending. Theprincipal syringe patents in the U.S., as well as their foreign counterparts,will expire in May 2015.

We have also registered the following trade names andtrademarks: VanishPoint®,VanishPoint® logos, RT with a circle mark, the Spiral Logoused in packaging our products, and the color coded spots on the ends of oursyringes. We also have trademark protection for the phrase “The New Standardfor Safety.”

There are currently no patent infringement claimspending against the VanishPoint® retraction technology. We have decided, on theadvice of patent counsel, not to purchase patent insurance because it wouldrequire inappropriate disclosure of information that is currently proprietaryand confidential.

We currently obtain roughly 72.8% of our finishedproducts through Double Dove, a Chinese manufacturer.  We believe we could make up any long-termdisruption in these supplies by utilizing more 

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of the capacity at the Little Elm facility, except for5cc and 10cc syringes which comprised about 5.8% of our 2006 revenues.

We had anticipatedreceiving royalties from the licensing agreement with BTMD by the end of thefirst quarter of 2007.  However, becauseof the completion involved in building the factory, assembly equipment, and therelated infrastructure, the production has been delayed.  We continue to expect a royalty stream laterthis year, pending completion of the facility and BTMD meeting all governmentrequirements.

Seasonal Effect on Business

We have generally experienced higher syringe salesduring the last half of the year which we believe is due to flu season.

Working Capital Practices

Cash and cash equivalents include unrestricted cashand investments with original maturities of three months or less.

Our credit policy has provided for negligible reserverequirements on our Accounts Receivable. Outstanding accounts are reviewed regularly and reserves provided forpotential write off, if applicable.

Inventories are valued at lower of cost ormarket.  We maintain a reserve forpotential write-downs or write offs, and obsolete inventory is written off.

Receivables are established for federal and statetaxes where we have determined we are entitled to a refund for overpayments ofestimated taxes or loss carry backs.

Accounts payable and other short-term liabilitiesinclude amounts that we believe we have an obligation for at the end ofyear.  These included charges for goodsor services received in 2006 but not billed to us at the end of the year.  It also included estimates of potentialliabilities such as rebates and other fees.

Our domestic return policy is set forth in ourstandard Distribution Agreement, a copy of which is incorporated by referencein Exhibit number 10.1.  This policyprovides that a customer may return incorrect ship­ments within 10 daysfollowing arrival at the distributor’s facility.  In all such cases the distributor must obtainan authorization code from us and affix the code to the returned product.  We will not accept returned goods without areturned goods authorization number.  Wemay refund the cus­tomer’s money or replace the product.

Our international contracts do not provide for anyreturns.

Our return policy alsoprovides that a customer may return product that is overstocked.  Overstocking returns are limited to two times in each twelve month period up to 1% of distributor’stotal purchase of products for the prior twelve month period upon the followingterms: i) an “overstocked” product is that portion of distributor’s inventoryof the product (individual catalog number) which exceeds distributor’s salesvolume for the product during the preceding four months; ii) distributor mustnot have taken delivery of the product which is overstocked (individual catalognumber)****during the preceding four months, iii)overstocked product held by distributor in excess of twelve (12) months fromthe date of original invoice will not be eligible for return; iv) theoverstocked product must be returned to us in our saleable case cartons whichare unopened and untampered, with no broken or re-taped seals;  v) distributor will be granted a credit whichmay be used only to purchase other products from us, the credit to be in theamount of the invoice price of the returned products less a 10% restocking feewhich will be assessed against distributor’s subsequent purchase of product;vi) distributor must obtain an authorization code from our distributiondepartment and affix the code to the returned product; and vii) distributorshall bear the cost of shipping the returned products to us.  All product overstocks and returns aresubject to inspection and acceptance by manufacturer.

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Regulatory Status and Effect of Regulation 

We and our products areregulated by the FDA. The syringe and the IV safety catheter are Class IImedical devices which require assurance by the manufacturer that the device issafe and effective and that they meet certain performance standards. The FDAissued its Notice of Substantial Equivalence declaring the VanishPoint® syringe products to be substantiallyequivalent to a legally marketed predicate device (i.e., granted us permissionto market our safety syringes in interstate commerce) the VanishPoint® blood collection tube holder and small tubeadapter.  In September 2005, the FDAgranted permission to market our IV safety catheter in interstate commerce.

In addition to the Notice of Substantial Equivalence,we must register with the FDA on an annual basis and provide the FDA with alist of commercially distributed products. Texas has similar registrationrequirements. The FDA tries to inspect all medical device manufacturingfacilities at least once every two years to determine the extent to which theyare complying with Quality System Regulation. The most recent inspectionoccurred in July 2005 after which the auditor determined “No Action Indicated.”

TUV-USA, a member of the TUV Nord Group, performs ourquality management system certification. We were originally certified to ISO9001:1994 in 1997 and received annual surveillance audits, maintaining thatcertification until March of 2004 with no major non-conformances. We receivedcertification to ISO 13485:2000, CAN/CSA:13485:1996 and EN 13485:2000 in August2004.  We have since received certificationto the most current version of these standards. In addition, the VanishPoint product line was certified for a CE Mark byTUV-USA. The CE Mark authorizes us to sell in the European Union. TUV-USAperforms annual surveillance audits to ensure our compliance with ENISO13485:2003, CAN/CSA:13485:2003 and the Medical Device Directive, 93/42/EEC.

Government Funding of Research and Right to License 

Thomas J. Shaw developed his initial version of asafety syringe with the aid of grants by the National Institute of Drug Abuse,a subsidiary of the National Institutes of Health. As a result, the federalgovernment has the right, where the public interest justifies it, to dispersethe technology to multiple manufacturers so that the safety syringe can be madewidely available to the public. However, the funding was only used to developand patent the earlier syringe design as of 1991. That syringe was a bulkier,less effective, and more expensive version of the current product. Accordinglyand on the advice of counsel, Management believes that the risk of thegovernment demanding manufacture of this alternative product is minimal.

Research and Development 

We spent $626,941, $934,209, and $958,798 in fiscal2004, 2005, and 2006 respectively, on research and development. Costs in 2006were primarily for compensation, validation and engineering costs, andconsulting costs.****Our ongoingresearch and development activities are performed by an internal research anddevelopment staff. This team of engineers is developing process improvementsfor current and future automated machines. Products currently in development byour internal team include the winged butterfly IV, the dental syringe, a 1⁄2 ccinsulin syringe and an autodisable syringe.****Ourlimited access to the market has slowed the introduction of these products intothe market. Possible future products include all needle medical devices towhich the automated retraction mechanism can be applied.

Environmental Compliance 

We believe that we do not incur material costs inconnection with compliance with environmental laws. We are considered aConditionally Exempt Small Quantity Generator because we generate less than 100kilograms (220 lbs.) of hazardous waste per month. Therefore, we are exemptfrom the reporting requirements set forth by the Texas Commission onEnvironmental Quality. The waste that is generated at our facility is primarilymade up of flammable liquids and paint-related waste and is sent for fuelblending 

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by Safety Kleen. This fuel blending process completelydestroys our waste and satisfies our “cradle-to-grave” responsibility.

Other nonhazardous production waste includes cleanpolypropylene regrind that is sold for recycling. The Company also grinds dirtyplastics, syringes, and needles for disposal by Waste Management. All othernonhazardous waste produced is considered municipal solid waste and sent to asanitary landfill by Waste Management.

We also produce small amounts of regulatedbiohazardous waste from contaminated sharps and laboratory wastes. This wasteis sent for incineration by Stericycle.

Employees 

As of March 1, 2007, we had 146 full-time employees, 5part-time employees, and 6 independently contracted consultants. Of the 146full-time employees, 5 persons were engaged in research and developmentactivities, 61 persons were engaged in manufacturing and engineering, 18persons were engaged in quality assurance and regulatory affairs, 42 personswere engaged in sales and marketing, 19 persons were engaged in general andadministrative functions, and one person in facilities.  No employees are covered by collectivebargaining agreements. We are dependent upon a number of key management andtechnical personnel, and the loss of services of one or more key employeescould have a material adverse effect on us. Our President and Chief ExecutiveOfficer, Thomas J. Shaw, has an employment contract with an initial term thatended on September 2002 that contains an automatic and continuous renewalprovision for consecutive two-year periods.

FINANCIAL INFORMATION

We have no long-lived assets in foreign countries.Shipments to international customers generally require a prepayment either bywire transfer or an irrevocable confirmed letter of credit.  We do extend credit to internationalcustomers on some occasions depending upon certain criteria, including, but notlimited to, the credit worthiness of the customer, the stability of thecountry, banking restrictions, and the size of the order.  All transactions are in United Statescurrency.

|                      | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|----------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic sales       |       | $         | 22,240,347 |      | $          | 22,310,150 |       | $ | 20,193,999 |   |
| International  sales |       | 3,084,172 |       | 1,924,866 |       | 1,327,701  |       |
| Total sales          |       | $         | 25,324,519 |      | $          | 24,235,016 |       | $ | 21,521,700 |   |
|                 |       |      |       |      |       |       |       |
| Long-lived  assets   |       |      |       |      |       |       |       |
| Domestic             |       | $         | 12,212,140 |      | $          | 11,925,976 |       | $ | 11,056,865 |   |
| Foreign              |       | $         | —     |      | $          | —     |       | $ | — |   |

 

Please see the financial statements in Item 8 forinformation about our revenues, profits and losses for the last three years,and total assets for the last two years.

**Item 1A.Risk Factors.**

You should carefully consider the following materialrisks facing the Company.  If any ofthese risks occur, our business, results of operations or financial conditioncould be materially adversely affected.

The Majority of our International Sales are Filled usingone Supplier

Most international sales are filled by production fromDouble Dove. In the event that we were unable to purchase such product fromDouble Dove, we would need to find an alternate supplier for the 5 cc and 10 ccsyringes and increase domestic production for 1 cc and 3 cc syringes to avoid adisruption in supply. Currently, approximately 72.8% of our production isprovided by Double Dove.

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Our Cash Position is Decreasing

Due to continuing barriers to the market place,coupled with the completion of the discount reimbursement program and increasesin accounts receivable and inventory, mitigated by an increase in accountspayable, the Company’s cash position declined $5.7 million.  The negative impact in the third and fourthquarter of the ending of the discount reimbursement program is approximately$6.0 million.

In the event we continue to have only limited marketaccess and the cash provided by the litigation settlements and generated fromoperations becomes insufficient and royalties from BTMD are not forthcoming,the Company would take cost cutting measures to reduce cash requirements. Suchmeasures could result in reduction of units being produced, reduction ofworkforce, reduction of salaries of officers and other nonhourly employees, anddeferral of royalty payments to Thomas Shaw.

WeCompete in a Monopolistic Marketplace

Weoperate in an environment that is dominated by the major syringe manufacturerin the United States, BD.  We believethat its monopolistic business practices continue despite its paying theCompany $100 million to settle a lawsuit for anticompetitive practices,business disparagement, and tortious interference.  Although we made limited progress in someareas, such as the alternate care and international markets, our volumes arenot as high as they should be given the nature and quality of our product, thefederal and state legislation requiring use of safe needle devices, and theSenate Subcommittee hearings on GPOs.

We Have GenerallyBeen Unable to Gain Sufficient Market Access to Achieve Profitable Operations

We have incurred net operating losses in all fiscal quarters of 2006 and may experience operating losses in the future. If we are unable to gain sufficient market access and market share, we may be unable to continue to finance research and development as well as support operations and expansion of production.

OurPatent Protection Is Aging

Our main competitive strength is our technology.  As it ages (and the associated patent lifeexpires), our competitive position in the marketplace will weaken.  The initial patents protecting ourrevolutionary spring action syringe will expire beginning in May 2015.  Patent life may be extended, not through theoriginal patents, but related improvements. ** **Eventually, however, our patentprotection may decrease and we will be vulnerable to other competitorsutilizing our technology.

We Are Vulnerable to New Technologies

Because we have a narrow focus on a particular product line and technology (retractable needles), we are vulnerable to the development of superior competing products and to changes in technology which could eliminate or reduce the need for our products.  If a superior technology is created, the demand for our products could greatly diminish.

We May Lack Future Financial Resources to Capture Increased Market Share

The three leading manufacturers of hypodermic syringes and blood collection products are BD with a worldwide market share in the safety syringe market of approximately 68 percent, Sherwood with approximately 18 percent, and Terumo with a market share of approximately 4 percent.  All three companies offer both standard syringes and at least one safety syringe alternative.  BD also offers a retractable syringe.  BD and Sherwood have greater financial resources, larger and more established sales and marketing and distribution organizations, and greater market influence, including long-term contracts with GPOs.  These competitors may be able to use these resources to improve their products through research and acquisitions or develop new products, which may compete more effectively with our products.  

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If our competitors choose to use their resources tocreate products superior to ours, we may be unable to sell our products and theability of our company to continue would be weakened.

Fluctuations inSupplies of Inventory Could Temporarily Increase Costs

Fluctuationsin the cost and availability of raw materials and inventory and the ability tomaintain favorable supplier arrangements and relationships could result in theneed to manufacture all (as opposed to 27.2%) of the products in the UnitedStates.  This could temporarily increaseunit costs as we ramp up domestic production.

We Face Inherent Product Liability Risks

As a manufacturer and provider of safety needle products, we face an inherent business risk of exposure to product liability claims in the event of product failure or claim of harm caused by product operation. Product failure could result in injury to the patient or loss of blood and could expose healthcare workers to the risk of blood borne pathogens.  If any of our products prove to be defective, we may be required to recall those products.  If a product liability claim is made and damages are in excess of our product liability coverage, our competitive position could be weakened by the amount of money we could be required to pay to compensate those injured by our products.  We have products liability coverage with St. Paul Insurance Company covering up to $1,000,000 per occurrence, with coverage up to $2,000,000 in the aggregate. Each claim is subject to a $25,000 deductible.  Additionally, we have additional products liability protection under an Umbrella Liability Policy.  This policy provides an additional $10,000,000 per occurrence and aggregate limits in the event claims exceed the primary commercial general liability policy limit.  We have not had any product liability claims.

WeHave Limited Access to the Capital Markets

The volume of trading in our Common Stock on theAmerican Stock Exchange (the “AMEX”) is low. Accordingly, it is unclear if there is any significant market for ourshares.  This may reduce our ability toraise cash through public or private offerings in the future.

Our Company Is Controlled by Two Shareholders

Thomas J. Shaw, our President and a Director, Ms. Suzanne August, and Lillian E. Salerno, a consultant to the Company, own 35.8%, 11.8%, and 10.5%, respectively, of the Common Stock as of March 1, 2007.  The shares held by Ms. August are controlled by Mr. Shaw pursuant to a voting agreement, which terminates upon sale of all the shares for value or if terminated by both parties in writing.  These shareholders will, therefore, have the ability to direct our operations and financial affairs and to substantially influence the election of members of our Board of Directors.  The interests of these persons may not always coincide with the Company’s interests or the interests of other stockholders. This concentration of ownership, for example, may have the effect of delaying, deferring or preventing a change in control of the Company, impeding a merger, consolidation, takeover or other business combination involving the Company or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could materially adversely affect the market price of the Common Stock.  Of the 23,674,164 shares of Common Stock outstanding as of March 1, 2007, Officers and Directors own 12,761,500****of the shares.

Current InvestigationsCould Result in Beneficial Legislation Increasing Our Access to the HospitalMarket

OnMarch 15, 2006, the Senate Judiciary Subcommittee on Antitrust, CompetitionPolicy and Consumer Rights held its fourth hearing on the anti-competitivepractices of GPOs.  As the Senate’sfour-year inquiry has revealed, these purchasing cartels, in collusion with thedominant medical supply manufacturers, have harmed competition, stifledinnovation, and increased the cost of healthcare. Senate testimony, governmentstudies, and media reports have exposed a long list of abuses, includingconflicts of interest, kickbacks, sole-source and long-term contracts, andother exclusionary practices that have kept patients and healthcare workers inGPO-member hospitals from gaining access to better, safer, and more 

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cost-effective medical products. The U. S. Departmentof Justice and the Connecticut Attorney General are also conductingwide-ranging criminal investigations of GPO practices and have issued subpoenasto many of the nation’s largest medical suppliers, GPOs, and hospital systems.

**Item 1B.Unresolved Staff Comments.**

Not applicable and none.

**Item 2.Properties.**

Our 22,500 square foot headquarters is located at 511Lobo Lane, on 35 acres, which we own, overlooking Lake Lewisville in LittleElm, Texas. The building is a modular portion of a larger planned building forwhich the engineering design has been finalized which could be expanded withminimal disruption of production. The headquarters are in good condition andhouse our administrative offices and manufacturing facility. We put a 45,000square foot warehouse in service in March 2005.   The manufacturing facility producedapproximately 27.2% of the units that were sold in 2006.  In the event of a disruption in service ofour outside supplier, we believe we could produce quantities sufficient to meetdemand under current circumstances except for demand for 5cc and 10cc syringeswhich are sold principally in the international market.  In that event, we would attempt to engageanother manufacturer.

The Company obtained a loan from 1st International Bank (“1st International”) for $2,500,000, secured by theland and existing buildings, which provided interim funding for theconstruction of the 45,000 square foot warehouse. The proceeds from the loanwere used to pay off the remaining $475,000 of the revolving credit agreementwith 1st International in addition to funding the newwarehouse and related infrastructure. Payments on the note were interest onlyduring the first twelve months. The payments for the permanent funding arebased on a twenty-year amortization with a five-year maturity. Interest ratesare based on the amount of funds kept on deposit with the bank. Accordingly,interest will vary from the Wall Street Journal Prime Rate (the “WSJPR”) to theWSJPR plus 1 percent, with floors that may range from 4.25 percent to 6.50percent. Compensating balances at 1st International affecting the interest rate willrange from $0 to $500,000.

Additional capital expenditures may include additionalassembly lines, molding equipment, manufacturing space, warehousing, andrelated infrastructure.  The expansioncould include those products that have been developed but not yet marketed, aswell as expanding manufacturing capacity for existing products.

We also lease Suites 618, 620, 622, and 628 S. MillStreet, Lewisville, Texas, as well as storage stalls located at 102 E. Purnell,Lewisville, Texas, from LES Development, the successor to Mill StreetEnterprises, a sole proprietorship owned by Lillian E. Salerno, a shareholderholding more than 10% of the Common Stock. This lease is for over 4,000 squarefeet of office space in good condition. The lease is for a five-year periodbeginning in July 2002 at a monthly rate of $2,900.  This lease is expected to terminate in thesecond quarter of 2007.

In the opinion of Management, all the properties andequipment are suitable for their intended use and are adequately covered by aninsurance policy.

**Item 3.Legal Proceedings.**

We are not a party to any material legal proceedingother than a lawsuit against Abbott Laboratories which was announced in a Form10-Q filed on August 15, 2005. A hearing recently resulted in a determinationthat the litigation will proceed in court and not in arbitration as argued bythe defendants. 

The Company was sued by Occupational and MedicalInnovations Limited (“OMI”) in August 2006 in Federal Court of Australia,alleging that two letters written to OMI by the Company’s outside counselcontained unjustified threats. OMI is not seeking monetary damages in theaction. The Company sought preliminary discovery. In December 2006, the Courtdenied the Company’s motion and awarded costs to OMI. The Company’s motion forleave to appeal the Court’s interlocutory ruling is pending and no trial datehas been set for the original action.

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

No matters were submitted to a vote during the fourthquarter of 2006.

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**PART II**

**Item 5.     Market for Registrant’s Common Equity,Related Stockholder Matters, and Issuer Purchases of Equity Securities.**

MARKET INFORMATION

Our Common Stock has been listed on the AMEX since May4, 2001. Shown below are the high and low sales prices of our Common Stock asreported by the AMEX for each quarter of the last two fiscal years:

|                | ** ** | **Common Stock** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **High**              | ** ** | **Low** | ** ** |
| 2006           |       |                  |       |   |   |
| Fourth Quarter |       | $                     | 3.44       |   | $ | 2.20 |   |
| Third Quarter  |       | $                     | 3.96       |   | $ | 3.16 |   |
| Second Quarter |       | $                     | 4.02       |   | $ | 3.22 |   |
| First Quarter  |       | $                     | 4.11       |   | $ | 3.45 |   |
| 2005           |       |                  |       |   |   |
| Fourth Quarter |       | $                     | 4.83       |   | $ | 3.51 |   |
| Third Quarter  |       | $                     | 6.49       |   | $ | 2.65 |   |
| Second Quarter |       | $                     | 4.04       |   | $ | 2.60 |   |
| First Quarter  |       | $                     | 4.80       |   | $ | 3.70 |   |

 

SHAREHOLDERS

As of March 1, 2007, there were 23,674,164 shares ofCommon Stock held by 297 shareholders of record not including shareholders whobeneficially own Common Stock held in nominee or “street name.”

DIVIDENDS

We have not ever declared or paid any dividends on theCommon Stock. We have no current plans to pay any cash dividends on the CommonStock. We intend to retain all earnings, except those required to be paid tothe holders of the Preferred Stock, to support operations and future growth.

The Board of Directors declared a dividend on theSeries I and II Class B Convertible Preferred Stock in 2004. The cumulativedividend arrearage through June 30, 2004, on the Series I and II Class BConvertible Preferred Stock of $7,118,583 was paid on August 27, 2004, to theholders of record as of August 17, 2004. As of December 31, 2006, $12,163,000in dividends were in arrears on the Class B stock. Dividends may not be paid onthe Common Stock until all dividends on the Preferred Stock have been paid.

On March 27, 2007, the Board of Directors declared adividend on the Series I and Series II Class B Convertible Preferred Stock tobe paid on July 24, 2007 to Shareholders of Record on July 2, 2007.  Arrearages will be paid through June 30, 2007in the amount of $1.1 million.

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EQUITY COMPENSATION PLANINFORMATION

See Item 12 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters for a chart describing compensation plans under which equitysecurities are authorized.

RECENT SALES OFUNREGISTERED SECURITIES

Sales of unregistered securities in the first andsecond quarters of 2006 were reported in the Company’s Form 10-Q quarterlyreports filed with the United States Securities and Exchange Commission (the “Commission”)which are available via EDGAR.   Therewere no sales of unregistered securities in the third or fourth quarter.

PERFORMANCE GRAPH

The following graph compares the cumulative totalreturn for our Common Stock from December 31, 2001, (the year in which theCompany became a public company) to December 31, 2006, to the total returns forthe Russell Microcap and Becton Dickinson (“BD”), a peer issuer. The graphassumes an investment of $100 in Common Stock and in the Russell Microcap indexas of January 1, 2001, and that all dividends are reinvested.

The comparisons in the graph are required by the SEC.You should be careful about drawing any conclusions from the data contained inthe graph, because past results do not necessarily indicate future performance.The information contained in this graph shall not be deemed to be “solicitingmaterial” or “filed” with the SEC or subject to the liabilities of Section 18of the Exchange Act, except to the extent that we specifically incorporate itby reference into a document filed under the Securities Act of 1933, as amendedor the Exchange Act.

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**Item 6.Selected Financial Data.**

The following selected financial data are qualified byreference to, and should be read in conjunction with, our audited financialstatements and the notes to those statements and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” appearing elsewhereherein.  The selected statement ofoperations data presented below for the years ended December 31, 2003 and 2002,and the balance sheet data as of December 31, 2004, 2003, and 2002, have beenderived from our audited financial statements, which are not included herein.

(In thousands except forearnings per share, shares outstanding and percentages)
| ** **                                         | ** ** | **As of and for the Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                                                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Sales, net                                         |       | $                                                                                      | 20,898     |   | $ | 21,157 |   | $ | 21,136 |   | $ | 19,078 |   | $ | 20,316 |   |
| Reimbursed discounts                               |       | 4,427                                                                                  |       | 3,078 |   | 386 |   | — |   | — |   |
| Total sales                                        |       | 25,325                                                                                 |       | 24,235 |   | 21,522 |   | 19,078 |   | 20,316 |   |
| Cost of sales                                      |       | 17,779                                                                                 |       | 15,429 |   | 16,411 |   | 14,654 |   | 15,472 |   |
| Gross profit                                       |       | 7,546                                                                                  |       | 8,806 |   | 5,111 |   | 4,424 |   | 4,844 |   |
| Total operating  expenses                          |       | 14,260                                                                                 |       | 11,683 |   | 13,110 |   | 10,327 |   | 11,234 |   |
| Loss from operations                               |       | (6,714                                                                                 | )          | (2,877 | ) | (7,999 | ) | (5,903 | ) | (6,390 | ) |
| Interest income                                    |       | 1,976                                                                                  |       | 1 ,373 |   | 475 |   | 45 |   | 10 |   |
| Interest expense, net                              |       | (411                                                                                   | )          | (340 | ) | (243 | ) | (308 | ) | (446 | ) |
| Litigation settlements,  net                       |       | —                                                                                 |       | — |   | 74,635 |   | 13,880 |   | — |   |
| Net income (loss)  before income taxes             |       | (5,149                                                                                 | )          | (1,844 | ) | 66,868 |   | 7,714 |   | (6,826 | ) |
| Provision (benefit) for  income taxes              |       | (1,280                                                                                 | )          | (605 | ) | 12,177 |   | 266 |   | — |   |
| Net income (loss)                                  |       | (3,869                                                                                 | )          | (1,239 | ) | 54,691 |   | 7,448 |   | (6,826 | ) |
| Preferred Stock  dividend requirements             |       | (1,451                                                                                 | )          | (1,503 | ) | (1,993 | ) | (2,560 | ) | (2,266 | ) |
| Earnings (loss)  applicable to common shareholders |       | $                                                                                      | (5,320     | ) | $ | (2,742 | ) | $ | 52,698 |   | $ | 4,888 |   | $ | (9,092 | ) |
| Earnings (loss) per  share — basic            |       | $                                                                                      | (0.23      | ) | $ | (0.12 | ) | $ | 2.33 |   | $ | 0.23 |   | $ | (0.45 | ) |
| Earnings (loss) per  share — diluted          |       | $                                                                                      | (0.23      | ) | $ | (0.12 | ) | $ | 2.08 |   | $ | 0.20 |   | $ | (0.45 | ) |
| Weighted average shares  outstanding               |       | 23,591,999                                                                             |       | 23,332,277 |   | 22,600,166 |   | 21,001,004 |   | 20,300,454 |   |
| Current assets                                     |       | $                                                                                      | 57,780     |   | $ | 61,485 |   | $ | 64,674 |   | $ | 13,497 |   | $ | 7,065 |   |
| Current liabilities                                |       | $                                                                                      | 6,891      |   | $ | 5,458 |   | $ | 7,852 |   | $ | 5,773 |   | $ | 8,021 |   |
| Property, plant, and  equipment, net               |       | $                                                                                      | 12,212     |   | $ | 11,926 |   | $ | 11,057 |   | $ | 9,679 |   | $ | 10,515 |   |
| Total assets                                       |       | $                                                                                      | 70,794     |   | $ | 73,756 |   | $ | 76,123 |   | $ | 23,631 |   | $ | 18,059 |   |
| Long-term debt                                     |       | $                                                                                      | 4,399      |   | $ | 4,646 |   | $ | 3,807 |   | $ | 2,934 |   | $ | 3,441 |   |
| Stockholders’ equity                          |       | $                                                                                      | 59,746     |   | $ | 63,625 |   | $ | 63,665 |   | $ | 15,135 |   | $ | 7,437 |   |
|                                               |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Redeemable Preferred  Stock (in shares)            |       | 2,441,166                                                                              |       | 2,498,666 |   | 2,572,116 |   | 3,591,216 |   | 5,379,366 |   |
| Cash dividends per  common share                   |       | $                                                                                      | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Gross profit margin                                |       | 29.8                                                                                   | %          | 36.3 | % | 23.7 | % | 23.2 | % | 23.8 | % |

 

**Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperation.**

FORWARD-LOOKING STATEMENTWARNING

Certain statements included by reference in thisfiling containing the words “could,” “may,” “believes,” “anticipates,”“intends,” “expects,” and similar such words constitute forward-looking 

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statements within the meaning of the PrivateSecurities Litigation Reform Act. Any forward-looking statements involve knownand unknown risks, uncertainties, and other factors that may cause our actualresults, performance, or achievements to be materially different from anyfuture results, performance, or achievements expressed or implied by suchforward-looking statements. Such factors include, among others, the impact ofdramatic increases in demand, our ability to quickly increase capacity in theevent of a dramatic increase in demand, our ability to access the market, ourability to decrease production costs, our ability to continue to financeresearch and development as well as operations and expansion of production, therecently increased interest of larger market players, specifically BD, inproviding safety needle devices, and other factors listed in **Item 1A Risk Factors**. Given these uncertainties, unduereliance should not be placed on forward-looking statements.

OVERVIEW

Wehave been manufacturing and marketing our products into the marketplace since1997. Our products have been and continue to be distributed nationally throughnumerous distributors. However, we have been blocked from access to the marketby exclusive marketing practices engaged in by BD who dominates the market. Webelieve that their monopolistic business practices continue despite theirpaying $100 million to settle a lawsuit with the Company for anticompetitivepractices, business disparagement, and tortious interference.  Although we made limited progress in someareas, such as the alternate care and international markets, our volumes arenot as high as they should be given the nature and quality of our product, thefederal and state legislation requiring use of safe needle devices, and theSenate Subcommittee hearings on GPOs.  Wecontinue to pursue various strategies to have better access to the hospitalmarket, as well as other markets, including attempting to gain access to themarket through our sales efforts and innovative technology.

Weare focusing on methods of upgrading our manufacturing capability andefficiency in order to enable us to offer our technology at a reducedprice.  We believe our currentcapitalization provides the resources necessary to implement these changes,improve profit margins, and greatly improve our manufacturing capacity andefficiency, thereby reducing our unit cost. We are also marketing more productsinternationally.  Beginning in 2004, wewere awarded a federal contract to supply syringes to various Africancountries. The 2004 award from PATH was for 1,530,000 units.  The 2005 award was for 11,700,000 units.  The 2006 award was for 16,400,000 units.  All awards were filled over multiple quarters****due principally to logistical requirements for theorders.    We are hopeful that theseawards will continue to increase under this program.  We continue to produce syringes and bloodcollection tube holders in Little Elm, Texas.

Additionally, the Company was awarded a one-yearcontract to supply its VanishPoint®  automated retraction syringes to all ofQueensland Health’s 202 acute care facilities. Queensland Health is a department within the government of Queensland,Australia.  The contract is effectiveimmediately and renewable for two years. VanishPoint® products are distributed in Australia byBrisbane-based Scientific Educational Supplies Pty Ltd.

Product purchases from Double Dove have enabled us toincrease manufacturing capacity with little capital outlay and provided acompetitive manufactured cost.  Thesepurchases have enabled improved profit margins in spite of limitedrevenues.  The cost of production per unithas generally declined as volumes increased. We currently obtain roughly 72.8%of our finished products through Double Dove, a Chinese manufacturer. Webelieve we could make up any long-term disruption in these supplies byutilizing more of the capacity at the Little Elm facility, except for 5cc and10cc syringes which comprised about 5.8% of our 2006 revenues.

We also have alicense agreement with BTMD, a Chinese company. We had anticipated receivingroyalties by the end of the first quarter of 2007.  However, because of the completion involvedin building the factory, assembly equipment, and the related infrastructure,the production has been delayed.  Wecontinue to expect a royalty stream in 2007, pending completion of the facilityand BTMD meeting all government requirements.

 

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Historically, unit sales have increased in the latterpart of the year due, in part, to the demands for syringes during the fluseason.

RESULTS OF OPERATIONS

The following discussion contains trend informationand other forward-looking statements that involve a number of risks anduncertainties. Our actual future results could differ materially from ourhistorical results of operations and those discussed in the forward-lookingstatements. All period references are to our fiscal years ended December 2006,2005 or 2004. Dollar amounts have been rounded for ease of reading.

*Comparison of Year Ended**December 31, 2006, and Year Ended December31, 2005*

Revenues increased 4.5%, due principally to increasedsales in the alternate care and international markets.  Domestic sales were 87.8% of revenues withinternational sales comprising the remainder. Unit sales of the 1cc syringe increased 39.1% and 3cc unit salesincreased 19.7%.  Unit sales of allproducts increased 32.6%.  The hospitalmarket continues to lag despite very favorable promotional pricing under thediscount program.  The increase indiscount reimbursements in 2006 is due principally to the reduction of thepromotional prices initiated in April 2005, resulting in larger reimbursements,mitigated by the ending of the reimbursement of the discounts in the thirdquarter of 2006.  The discountreimbursement program expired since the settlement agreement under which it wasestablished provided for a total of $8.0 million in reimbursements.  We had recognized $8.0 million in cumulativediscount reimbursements in the third quarter of 2006.  Sales to two distributors accounted for 31.3%and 34.8% of our revenues in 2006 and 2005, respectively.

Cost of sales as a percentage of revenues increaseddue to the lower average selling price resulting from the ending of thediscount reimbursement program mitigated by higher volumes of product producedand sold.  The increased volume ofproduction resulted in a lower unit cost. The effect of the reduction in staff in August 2005 also contributed tothe lower unit cost in 2006.  Royaltyexpenses were higher due to an increase in gross revenues.

As a result, gross profits decreased, and gross profitmargins declined from 36.3% in 2005 to 29.8% in 2006.

Operating expenses increased from the prior year dueto increases in sales and marketing costs and general and administrative costs.

Sales and marketing expenses increased as we continuedto grow our sales force, resulting in higher compensation costs, marketing andpromotional costs, and travel and entertainment.  We also had increased consulting expensemitigated by a reduction in stock option expense.  We expect sales and marketing costs willcontinue to increase as we work to get our products into U.S. hospitals and inthe international market.

Research and development costs were flat. We hadincreases in consulting costs and decreases in engineering costs dueprincipally to validation testing and the development work on the IV safetycatheter in 2005.  We began marketing theIV safety catheter in the first quarter of 2006.  We anticipate that until we reach economiesof scale in manufacturing this product, we will incur losses on its sale.

General and administrative costs increased dueprincipally to higher legal costs, compensation costs, consulting, and taxesother than income taxes.  Decreases inexpenses include stock option expense, shareholder expenses, outside accountingcosts, severance pay and training.   Thelegal costs incurred in 2006 in regard to the Abbott Laboratories litigationare higher than those in 2005.  We expectsuch costs to continue until the litigation is resolved. We also havelitigation expenses concerning OMI, an Australian company, which is discussedelsewhere herein.  Compensation costsincreased as officers and other salaries were brought into a more appropriaterange in 2005, the full effect being reflected in 2006.  The Company also awarded merit increases toour employees in 2006.  Consulting costsincreased due to our continuing 

16

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efforts to penetrate U.S. and internationalmarkets.  We had increases in taxes otherthan income taxes in 2006.  We donatedproduct in an international humanitarian effort in 2006.  There have been no stock options awardedsince 2004, therefore this expense continues to decline as the costs becomefully amortized.

Preferred Stock dividend requirements declined due toconversion of Preferred Stock into Common Stock.  The dividend arrearage at December 31, 2006,on all classes of Preferred Stock was approximately $12,200,000.

Interest income increased due to higher interestrates.  Interest expense increased due tohigher interest rates mitigated by lower debt balances.

Provision for income tax benefits consists primarilyof federal tax subject to carry back provisions.  State income taxes are also subject to thevarious states’ carry back rules.  TheCompany also has a valuation reserve for all deferred taxes, with the exceptionof deferred taxes on the beneficial conversion feature associated with its notepayable to Katie Petroleum, Inc.

Cash flow from operations was negative for 2006 dueprincipally to the loss for the year.  Theeffect of non-cash expenses and the change in working capital were a positive$500,000.  Investing activities utilized$2.0 million in cash.

*Comparison of Year Ended**December 31, 2005, and Year Ended December31, 2004*

Revenues increased, due principally to increased salesin the alternate care and international market. Domestic sales were 92.1% of revenues with international salescomprising the remainder.  Unit sales ofthe 1cc syringe increased 20.9% and 3cc unit sales increased 12.7%.  Unit sales of all products increased19.1%.  The hospital market continued tolag despite very favorable promotional pricing under the discount reimbursementprogram.  The increase in discountreimbursements in 2005 was due principally to the reduction of the promotionalprices in April 2005.  We recognized $3.5million in discount reimbursements through December 31, 2005.  Sales to two distributors accounted for 34.8%of our revenues in 2005 and sales to one distributor accounted for 16.6% of ourrevenues in 2004.

Cost of sales as a percentage of revenues improved ashigher volumes of product were produced and sold.  The increased volume resulted in a lower unitcost of production.  The effect of thereduction in staff in August 2005 also contributed to the lower unit cost.  Royalty expenses declined due to a reduction ingross revenues.

Operating expenses decreased from the prior year dueto decreases in general and administrative costs, mitigated by increases insales and marketing costs as well as an increase in research and developmentcosts.

Sales and marketing expenses increased as we continuedto grow our sales force, resulting in higher compensation and travelexpense.  This increase in sales andmarketing costs was mitigated by a reduction in consulting expenses.

Research and development costs increased due principallyto validation testing and the development work on the IV safety catheter.  We began marketing the IV safety catheter inthe first quarter of 2006.  We alsoanticipate that until we reach economies of scale in manufacturing thisproduct, we will incur losses on its sale.

General and administration costs decreasedsignificantly due principally to lower legal costs incurred in 2005.   The legal costs incurred in 2005 in regardto the Abbott Laboratories litigation were substantially less than the legal costswe incurred for the BD and NMT litigation in 2004.  However, we expect such costs to increase asour litigation against Abbott continues.

17

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Preferred Stock dividend requirements declined due toconversions of Preferred Stock into Common Stock.  The dividend arrearage at December 31, 2005,on all classes of Preferred Stock was approximately $10,700,000.

Interest income increased due to a higher averageoutstanding cash balance and higher interest rates.  Interest expense increased due to higher debtbalances incurred for the warehouse financing and higher interest rates.

Provision for income tax benefits consisted primarilyof federal tax subject to carry back provisions.  State income taxes were also subject to thevarious states’ carry back rules.

Cash flow from operations was negative for 2005 dueprincipally to the loss for the year and changes in working capital.

SIGNIFICANT ACCOUNTINGPOLICIES

We consider the following to be our most significantaccounting policies. Careful consideration and Company review is given to theseand all accounting policies on a routine basis to ensure that they areaccurately and consistently applied.

**Accounts Receivable**

TheCompany records trade receivables when revenue is recognized. No product hasbeen consigned to customers.  The Company’sallowance for doubtful accounts is primarily determined by review of specifictrade receivables.  Those accounts thatare doubtful of collection are included in the allowance.  An additional allowance has been establishedbased on a percentage of receivables outstanding.  These provisions are reviewed to determinethe adequacy of the allowance for doubtful accounts.  Trade receivables are charged off when thereis certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not beenmade within contract terms.

**Revenue Recognition**

Revenue is recognized for sales to distributors whentitle and risk of ownership passes to the distributor, generally upon shipment.Revenue is recorded on the basis of sales price to distributors, lesscontractual pricing allowances. Contractual pricing allowances consist of(i) rebates granted to distributors who provide tracking reports whichshow, among other things, the facility that purchased the products, and (ii) aprovision for estimated contractual pricing allowances for products that theCompany has not received tracking reports. Rebates are recorded when issued andare applied against the customer’s receivable balance. The provision forcontractual pricing allowances is reviewed at the end of each quarter andadjusted for changes in levels of products for which there is no trackingreport. Additionally, if it becomes clear that tracking reports will not beprovided by individual distributors, the provision is further adjusted. Theestimated contractual allowance is netted against individual distributors’accounts receivable balances for financial reporting purposes. The resultingnet balance is reflected in accounts receivable or accounts payable, asappropriate. The terms and conditions of contractual pricing allowances aregoverned by contracts between the Company and its distributors. Revenue forshipments directly to end-users is recognized when title and risk of ownershippasses from the Company. Any product shipped or distributed for evaluationpurposes is expensed.

**Inventories**

Inventoriesare valued at the lower of cost or market, with cost being determined using astandard cost method, which approximates average cost.  Provision is made for any excess or obsoleteinventories.

18

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**Marketing Fees**

Under a sales and marketing agreement with Abbott, theCompany paid marketing fees until the Company terminated the contract forbreach.  The contracted services were toinclude participation in promotional activities, development of educational andpromotional materials, representation at trade shows, clinical demonstrations,inservicing and training, and tracking reports detailing the placement of ourproducts to end-users. Marketing fees were accrued at the time of the sale ofproduct to Abbott. These fees were paid after Abbott provided us a trackingreport of product sales to end-users. These costs were included in Sales andmarketing expense in the Statements of Operations. No marketing fees have beenaccrued since October 15, 2003, the date the National Marketing andDistribution Agreement with Abbott was terminated.

**Litigation Proceeds**

Proceeds from litigation settlements in our federalantitrust lawsuit, Retractable Technologies, Inc. v. BD, et al. were recognizedwhen realized. Generally, realization was not reasonably assured and expecteduntil proceeds were collected. Such amounts were net of attorneys’ fees, courtcosts, legal expenses, and amounts payable under the Covenant Not to Sue.Liability for attorneys’ fees was not incurred until proceeds were collected.

**Reimbursed Discounts**

The Company received reimbursed discounts from one ofthe settlement agreements reached in its federal antitrust lawsuit, RetractableTechnologies, Inc. v. BD, et al. Payments under the discount reimbursementprogram were recognized upon delivery of the product, provided collection wasreasonably assured. Such amounts are presented in the Statements of Operationsas a separate component of revenues.  Theprogram reimbursed $8.0 million for discounts, the limit provided by thesettlement agreement.  This limit wasreached during the third quarter of 2006 and negatively affected profit marginfor the third and fourth quarters.  Thediscount program ended on December 31, 2006

LIQUIDITY AND FUTURECAPITAL REQUIREMENTS

Historical Sources ofLiquidity 

We have historically funded operations primarily fromproceeds from private placements, loans, and litigation settlements. We werecapitalized with approximately $52,600,000 raised from six separate privateplacement offerings. We raised $47,375,600 in cash from the private sales of anaggregate of 11,710,221 shares of Convertible Preferred Stock. In addition, weobtained a cancellation of $3,679,284 in debt and $1,550,000 in Accounts Payablein exchange for Series V Class B Convertible Preferred Stock.

We obtained $3,910,000 in 2000 from bank loans ofwhich $3,435,000 has been repaid and $475,000 was refinanced with a new notewith 1st International. Additionally, we received aSmall Business Administration loan of $1,000,000 in 1996 to pay for portions ofautomated assembly equipment, multi-cavity molds, and other equipment. Thisloan has been repaid. Furthermore, we borrowed $5,000,000 in 2000 under ourCredit Agreement with Abbott Laboratories. In October 2002 we repaid the AbbottLaboratories note with proceeds from a new note from Katie Petroleum, Inc. (“KatiePetroleum”) for $3,000,000 and a portion of the proceeds from a privateplacement.

We obtained a loan from 1st International for $2,500,000 for interim andlong-term financing of our warehouse. Principal and interest payments began inthe first part of 2005. See Note 7 to the Financial Statements for a discussionof the terms of the note.

19

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Internal Sources ofLiquidity 

Beginningin early 2004 we began to receive shipment of product from Double Dove, aChinese manufacturer.  Fluctuations inthe cost and availability of raw materials and inventory and the ability tomaintain favorable supplier arrangements and relationships could result in theneed to manufacture all (as opposed to 27.2%) of the products in the UnitedStates.  This could temporarily increaseunit costs as we ramp up domestic production.

Toachieve break even quarters we need minimal access to hospital markets whichhas been difficult to obtain due to the monopolistic marketplace which was thesubject of our antitrust lawsuit against BD. We will continue to attempt togain access to the market through our sales efforts and innovative technology.We are focusing on methods of upgrading our manufacturing capability andefficiency in order to enable us to offer our technology at a reduced price. Webelieve our current capitalization provides the resources necessary toimplement these changes and greatly improve our manufacturing capacity andefficiency, thereby reducing our unit cost.

Wehad anticipated receiving royalties from the licensing agreement with BTMD bythe end of the first quarter of 2007. However, because of the completion involved in building the factory,assembly equipment, and the related infrastructure, the production has beendelayed.  We continue to expect a royaltystream in 2007, pending completion of the facility and BTMD meeting allgovernment requirements.

Historically, unit sales have increased in the latterpart of the year due, in part, to the demand for syringes during the fluseason.

At the present time Management does not intend toraise equity capital in 2007. Due to the litigation settlements, we havesufficient cash reserves and intend to rely on operations, cash reserves, anddebt financing as the primary ongoing sources of cash.

In the event we continue to have only limited marketaccess and cash generated from operations and cash reserves become insufficientto support operations, the Company would take cost cutting measures to reducecash requirements. Such measures could result in reduction of units beingproduced, reduction of workforce, reduction of salaries of officers and othernonhourly employees, and deferral of royalty payments to Thomas Shaw.

The Company had a reduction in force in August 2005.

External Sources ofLiquidity 

We have obtained several loans over the past seven****years, which have, together with proceeds from the sales ofequities and litigation settlements, enabled us to pursue development andproduction of our products. Currently we believe we could obtain additionalfunds through loans if needed. Furthermore, the shareholders have previouslyauthorized an additional 5,000,000 shares of a Class C stock that could, if necessary,be authorized and used to raise funds through the sale of equity.

Contractual Obligations and Commercial Commitments 

The following chart summarizes all of our materialobligations and commitments to make future payments under contracts such asdebt and lease agreements as of December 31, 2006:

20

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| ** **                                              | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**                        | ** ** | ** **                                | ** ** | **Total** | ** ** | **2007** | ** ** | **2008-2009** | ** ** | **2010-2011** | ** ** | **Thereafter** | ** ** |
| Long-Term Debt  Obligations                             |       | $                                         | 4,669,468  |   | $ | 382,397 |   | $ | 873,976 |   | $ | 3,057,707 |   | $ | 355,388 |   |
| Capital Lease  Obligations                              |       | —                                    |       | — |   | — |   | — |   | — |   |
| Operating Lease  Obligations                            |       | 17,400                                    |       | 17,400 |   | — |   | — |   | — |   |
| Purchase  Obligations                                   |       | —                                    |       | — |   | — |   | — |   | — |   |
| Other Long-Term  Liabilities Reflected on Balance Sheet |       | —                                    |       | — |   | — |   | — |   | — |   |
| Total Contractual Cash  Obligations                     |       | $                                         | 4,686,868  |   | $ | 399,797 |   | $ | 873,976 |   | $ | 3,057,707 |   | $ | 355,388 |   |
|                                                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Material Commitments forExpenditures 

Assuming we are able to access the market, we mayobtain additional capital to fund capital expenditures and working capitalneeds. Management would fund these expenditures through debt and equityofferings. Capital expenditures could include additional assembly lines,manufacturing space, warehousing, and related infrastructure. The expansioncould include those products that have been developed but not yet marketed, aswell as expanding manufacturing capacity for existing products.

Wehad $1.5 million in capital expenditures in 2006 and $2.0 million in 2005.  The Company invested $500,000 in a limitedliability company (“LLC”) in which we will be a minority interest holder.  The funds are held in escrow until the LLChas raised the majority of its capital. If such fundraising is not completed by November 2007 the Company hasthe option to have its investment returned. The purpose of this project is to provide information and insight to thepublic regarding healthcare.  Capitalexpenditures in 2007 are dependent upon several factors, including, but notlimited to, projects to decrease production costs, the introduction of newproducts, and access to debt financing.

On March 27, 2007, the Board of Directors declared adividend on the Series I and Series II Class B Convertible Preferred Stock tobe paid on July 24, 2007 to Shareholders of Record on July 2, 2007.  Arrearages will be paid through June 30, 2007in the amount of $1.1 million.

OFF-BALANCE SHEETARRANGEMENTS

We have no off-balance sheet transactions.

**Item 7A.Quantitative and Qualitative Disclosures About Market Risk.**

We believe that our marketrisk exposures are immaterial as we do not have instruments for tradingpurposes and reasonable possible near-term changes in market rates or priceswill not result in material near-term losses in earnings.

 

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**Item 8.Financial Statements and Supplementary Data.**

**RETRACTABLE TECHNOLOGIES, INC.**

**FINANCIAL STATEMENTS AND****REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

**DECEMBER 31, 2006 AND 2005**

**RETRACTABLE TECHNOLOGIES, INC.****INDEX TO FINANCIAL STATEMENTS**

F-1

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|                                                                                                          | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                 |       | F-3      |       |
|                                                                                                     |       |     |       |
| Financial Statements:                                                                                    |       |     |       |
|                                                                                                     |       |     |       |
| Balance Sheets as of December 31, 2006 and 2005                                                          |       | F-4      |       |
|                                                                                                     |       |     |       |
| Statements of Operations for the years ended  December 31, 2006, 2005 and 2004                           |       | F-5      |       |
|                                                                                                     |       |     |       |
| Statements of Changes in Stockholders’ Equity  for the years ended December 31, 2006, 2005 and 2004 |       | F-6      |       |
|                                                                                                     |       |     |       |
| Statements of Cash Flows for the years ended  December 31, 2006, 2005 and 2004                           |       | F-8      |       |
|                                                                                                     |       |     |       |
| Notes  to Financial Statements                                                                           |       | F-9      |       |
|                                                                                                     |       |     |       |
| Selected Quarterly Financial Data- Unaudited                                                             |       | F-24     |       |
|                                                                                                     |       |     |       |
| Financial Statement  Schedule:                                                                           |       |     |       |
|                                                                                                     |       |     |       |
| Schedule II: Valuation and Qualifying Accounts   for the years ended December 31, 2006, 2005, and 2004   |       | 43       |       |
|                                                                                                     |

 

F-2

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**Reportof Independent Registered Public Accounting Firm**

To theBoard of Directors and Stockholdersof Retractable Technologies, Inc.

We have audited the accompanying balance sheets ofRetractable Technologies, Inc. as of December 31, 2006 and 2005, and therelated statements of operations, changes in stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2006. Ouraudits also included the financial statement schedule of RetractableTechnologies, Inc., listed in Item 15(a). These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the financial position ofRetractable Technologies, Inc. as of December 31, 2006 and 2005, and theresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2006 in conformity with U.S. generally acceptedaccounting principles.  Also, in ouropinion, the related financial statement schedule when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.
|                    | /s/ CF & Co., L.L.P. |   |
|--------------------|--------------------------|--------|
|               | CF & Co., L.L.P.     |   |
| Dallas, Texas      |                     |   |
| April 2, 2007 |                     |   |

 

F-3

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**RETRACTABLE TECHNOLOGIES, INC.BALANCE SHEETS**
| ** **                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                             |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                   |       | $                     | 46,814,689 |   | $ | 52,513,935 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $87,030 and $267,174, respectively                                                                          |       | 1,956,756             |       | 3,404,908 |   |
| Inventories, net                                                                                                                                                            |       | 6,385,780             |       | 3,297,726 |   |
| Income taxes receivable                                                                                                                                                     |       | 2,355,732             |       | 561,062 |   |
| Current deferred tax asset                                                                                                                                                  |       | —                |       | 1,245,508 |   |
| Other current assets                                                                                                                                                        |       | 267,707               |       | 462,150 |   |
| Total current assets                                                                                                                                                        |       | 57,780,664            |       | 61,485,289 |   |
|                                                                                                                                                                        |       |                  |       |   |   |
| Property, plant,  and equipment, net                                                                                                                                        |       | 12,212,140            |       | 11,925,976 |   |
| Intangible  assets, net                                                                                                                                                     |       | 279,846               |       | 316,926 |   |
| Other assets                                                                                                                                                                |       | 522,294               |       | 27,334 |   |
| Total assets                                                                                                                                                                |       | $                     | 70,794,944 |   | $ | 73,755,525 |   |
|                                                                                                                                                                        |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current  liabilities:                                                                                                                                                       |       |                  |       |   |   |
| Accounts payable                                                                                                                                                            |       | $                     | 4,247,630  |   | $ | 2,345,613 |   |
| Current portion of long-term debt                                                                                                                                           |       | 261,905               |       | 295,417 |   |
| Accrued compensation                                                                                                                                                        |       | 472,573               |       | 388,726 |   |
| Marketing fees payable                                                                                                                                                      |       | 1,419,760             |       | 1,419,760 |   |
| Accrued royalties to shareholder                                                                                                                                            |       | 2,755                 |       | 540,888 |   |
| Other accrued liabilities                                                                                                                                                   |       | 440,253               |       | 467,812 |   |
| Current deferred tax liability                                                                                                                                              |       | 45,697                |       | — |   |
| Total current liabilities                                                                                                                                                   |       | 6,890,573             |       | 5,458,216 |   |
|                                                                                                                                                                        |       |                  |       |   |   |
| Long-term debt,  net of current maturities                                                                                                                                  |       | 4,137,231             |       | 4,350,625 |   |
| Long-term  deferred tax liability                                                                                                                                           |       | 56,828                |       | 711,443 |   |
| Total liabilities                                                                                                                                                           |       | 11,084,632            |       | 10,520,284 |   |
|                                                                                                                                                                        |       |                  |       |   |   |
| Stockholders’  equity:                                                                                                                                                 |       |                  |       |   |   |
| Preferred Stock $1 par value:                                                                                                                                               |       |                  |       |   |   |
| Class B; authorized: 5,000,000 shares                                                                                                                                       |       |                  |       |   |   |
| Series I, Class B; issued: 1,000,000 shares; outstanding:  164,000 and 171,000 shares, respectively (liquidation preference of  $1,025,000 and $1,068,750, respectively)    |       | 164,000               |       | 171,000 |   |
| Series II, Class B; issued: 1,000,000 shares; outstanding  224,700 and 255,200 shares, respectively (liquidation preference of  $2,808,750 and $3,190,000, respectively)    |       | 224,700               |       | 255,200 |   |
| Series III, Class B; issued: 1,160,445 shares; outstanding:  135,245 and 135,245 shares, respectively (liquidation preference of  $1,690,563 and $1,690,563, respectively)  |       | 135,245               |       | 135,245 |   |
| Series IV, Class B; issued: 1,133,800 shares; outstanding  553,500 and 556,000 shares, respectively (liquidation preference of  $6,088,500 and $6,116,000, respectively)    |       | 553,500               |       | 556,000 |   |
| Series V, Class B; issued 2,416,221 shares; outstanding:  1,363,721 and 1,381,221 shares, respectively (liquidation preference of  $6,000,372 and $6,077,372, respectively) |       | 1,363,721             |       | 1,381,221 |   |
| Common Stock, no  par value; authorized: 100,000,000 shares; issued and outstanding: 23,644,164  and 23,511,884 shares, respectively                                        |       | —                |       | — |   |
| Additional  paid-in capital                                                                                                                                                 |       | 54,709,108            |       | 54,307,053 |   |
| Retained  earnings                                                                                                                                                          |       | 2,560,038             |       | 6,429,522 |   |
| Total stockholders’ equity                                                                                                                                             |       | 59,710,312            |       | 63,235,241 |   |
| Total  liabilities and stockholders’ equity                                                                                                                            |       | $                     | 70,794,944 |   | $ | 73,755,525 |   |

 

See accompanying notes to financial statements

F-4

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**RETRACTABLE TECHNOLOGIES, INC.****STATEMENTS OF OPERATIONS**
| ** **                                         | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales, net                                         |       | $                                           | 20,897,207 |   | $ | 21,156,666 |   | $ | 21,135,943 |   |
| Reimbursed discounts                               |       | 4,427,312                                   |       | 3,078,350 |   | 385,757 |   |
| Total sales                                        |       | 25,324,519                                  |       | 24,235,016 |   | 21,521,700 |   |
| Cost of Sales                                      |       |                                        |       |   |   |   |   |
| Costs of  manufactured product                     |       | 15,684,450                                  |       | 13,713,675 |   | 14,564,404 |   |
| Royalty expense  to shareholder                    |       | 2,093,822                                   |       | 1,715,024 |   | 1,846,195 |   |
| Total cost of  sales                               |       | 17,778,272                                  |       | 15,428,699 |   | 16,410,599 |   |
| Gross profit                                       |       | 7,546,247                                   |       | 8,806,317 |   | 5,111,101 |   |
|                                               |       |                                        |       |   |   |   |   |
| Operating expenses:                                |       |                                        |       |   |   |   |   |
| Sales and  marketing                               |       | 5,545,500                                   |       | 4,148,688 |   | 3,648,454 |   |
| Research and  development                          |       | 958,798                                     |       | 934,209 |   | 626,941 |   |
| General and  administrative                        |       | 7,756,647                                   |       | 6,600,133 |   | 8,834,527 |   |
| Total operating  expenses                          |       | 14,260,945                                  |       | 11,683,030 |   | 13,109,922 |   |
| Loss from  operations                              |       | (6,714,698                                  | )          | (2,876,713 | ) | (7,998,821 | ) |
|                                               |       |                                        |       |   |   |   |   |
| Interest income                                    |       | 1,976,406                                   |       | 1,372,715 |   | 475,121 |   |
| Interest expense, net                              |       | (411,154                                    | )          | (339,688 | ) | (243,922 | ) |
| Litigation settlements,  net                       |       | —                                      |       | — |   | 74,635,362 |   |
| Net income (loss)  before income taxes             |       | (5,149,446                                  | )          | (1,843,686 | ) | 66,867,740 |   |
| Provision (benefit) for  income taxes              |       | (1,279,962                                  | )          | (605,363 | ) | 12,176,345 |   |
| Net income  (loss)                                 |       | (3,869,484                                  | )          | (1,238,323 | ) | 54,691,395 |   |
| Preferred Stock  dividend requirements             |       | (1,451,321                                  | )          | (1,502,887 | ) | (1,993,516 | ) |
| Earnings (loss)  applicable to common shareholders |       | $                                           | (5,320,805 | ) | $ | (2,741,210 | ) | $ | 52,697,879 |   |
|                                               |       |                                        |       |   |   |   |   |
| Earnings (loss) per  share -basic                  |       | $                                           | (0.23      | ) | $ | (0.12 | ) | $ | 2.33 |   |
|                                               |       |                                        |       |   |   |   |   |
| Earnings (loss) per  share -diluted                |       | $                                           | (0.23      | ) | $ | (0.12 | ) | $ | 2.08 |   |
|                                               |       |                                        |       |   |   |   |   |
| Weighted average common shares outstanding         |       | 23,591,999                                  |       | 23,332,277 |   | 22,600,166 |   |

 

Seeaccompanying notes to financial statements

F-5

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**RETRACTABLETECHNOLOGIES, INC.****STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
| ** **                                              | ** ** | **Series I Class B** | ** ** | **Series II Class B** | ** ** | **Series III Class B** | ** ** | **Series IV Class B** | ** ** | **Series V Class B** | ** ** | **Common** | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|---------------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Shares**                     | ** ** | **Amount**                      | ** ** | **Shares**                       | ** ** | **Amount**                      | ** ** | **Shares**                     | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Balance as of December  31, 2003                        |       | 229,400                        |       | $                               | 229,400    |                             | 418,500    |                            | $          | 418,500                        |       | 145,245    |       | $ | 145,245 |   | 1,066,000 |   | $ | 1,066,000 |   | 1,732,071 |   | $ | 1,732,071 |   | 22,141,964 |   | $ | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of debt into  Common Stock                   |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   | 40,934 |   | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of Preferred  Stock into Common Stock        |       | (30,000                        | )          | (30,000                         | )          | (129,500                         | )          | (129,500                        | )          | (7,500                         | )          | (7,500     | )          | (510,000 | ) | (510,000 | ) | (342,100 | ) | (342,100 | ) | 1,019,100 |   | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock  option compensation               |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends declared and  paid on Series I Class B Stock  |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends declared and  paid on Series II Class B Stock |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                              |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December  31, 2004                        |       | 199,400                        |       | 199,400                         |       | 289,000                          |       | 289,000                         |       | 137,745                        |       | 137,745    |       | 556,000 |   | 556,000 |   | 1,389,971 |   | 1,389,971 |   | 23,201,998 |   | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of Preferred  Stock into Common Stock        |       | (28,400                        | )          | (28,400                         | )          | (33,800                          | )          | (33,800                         | )          | (2,500                         | )          | (2,500     | )          |   |   |   |   | (8,750 | ) | (8,750 | ) | 73,450 |   | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock  option exercise                   |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   | 236,436 |   | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock  option compensation               |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (loss)                                              |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December  31, 2005                        |       | 171,000                        |       | 171,000                         |       | 255,200                          |       | 255,200                         |       | 135,245                        |       | 135,245    |       | 556,000 |   | 556,000 |   | 1,381,221 |   | 1,381,221 |   | 23,511,884 |   | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of debt into  Common Stock                   |       | (7,000                         | )          | (7,000                          | )          | (30,500                          | )          | (30,500                         | )          |                           |       |       |       | (2,500 | ) | (2,500 | ) | (17,500 | ) | (17,500 | ) | 57,500 |   | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock  option exercise                   |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   | 74,780 |   | — |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock  option compensation               |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                              |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |       |                           |       |                            |       |                             |       |                            |       |                           |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2006                         |       | 164,000                        |       | $                               | 164,000    |                             | 224,700    |                            | $          | 224,700                        |       | 135,245    |       | $ | 135,245 |   | 553,500 |   | $ | 553,500 |   | 1,363,721 |   | $ | 1,363,721 |   | 23,644,164 |   | $ | — |   |

 

Seeaccompanying notes to financial statements

 

F-6

----

**RETRACTABLETECHNOLOGIES, INC.****STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**
| ** **                                              | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Total**  | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------|------------|
|                                                    |       |                             |       |                   |       |       |       |
| Balance as of December  31, 2003                        |       | 51,448,561                       |       | (39,904,967            | )          | 15,134,810 |       |
|                                                    |       |                             |       |                   |       |       |       |
|                                                    |       |                             |       |                   |       |       |       |
| Conversion of debt into  Common Stock                   |       | 163,736                          |       |                   |       | 163,736    |       |
| Conversion of Preferred  Stock into Common Stock        |       | 1,019,100                        |       |                   |       | —     |       |
| Recognition of stock  option compensation               |       | 793,347                          |       |                   |       | 793,347    |       |
| Dividends declared and  paid on Series I Class B Stock  |       |                             |       | (2,550,338             | )          | (2,550,338 | )          |
| Dividends declared and  paid on Series II Class B Stock |       |                             |       | (4,568,245             | )          | (4,568,245 | )          |
| Net income                                              |       | —                           |       | 54,691,395             |       | 54,691,395 |       |
|                                                    |       |                             |       |                   |       |       |       |
| Balance as of December  31, 2004                        |       | 53,424,744                       |       | 7,667,845              |       | 63,664,705 |       |
|                                                    |       |                             |       |                   |       |       |       |
|                                                    |       |                             |       |                   |       |       |       |
| Conversion of Preferred  Stock into Common Stock        |       | 73,450                           |       |                   |       | —     |       |
| Recognition of stock  option exercise                   |       | 236,436                          |       |                   |       | 236,436    |       |
| Recognition of stock  option compensation               |       | 572,423                          |       |                   |       | 572,423    |       |
| Net (loss)                                              |       | —                           |       | (1,238,323             | )          | (1,238,323 | )          |
|                                                    |       |                             |       |                   |       |       |       |
| Balance as of December  31, 2005                        |       | 54,307,053                       |       | 6,429,522              |       | 63,235,241 |       |
|                                                    |       |                             |       |                   |       |       |       |
|                                                    |       |                             |       |                   |       |       |       |
| Conversion of Preferred  Stock into common Stock        |       | 57,500                           |       |                   |       | —     |       |
| Recognition of stock  option exercise                   |       | 74,780                           |       |                   |       | 74,780     |       |
| Recognition of stock  option compensation               |       | 269,775                          |       |                   |       | 269,775    |       |
| Net (loss)                                              |       | —                           |       | (3,869,484             | )          | (3,869,484 | )          |
|                                                    |       |                             |       |                   |       |       |       |
| Balance as of December  31, 2006                        |       | $                                | 54,709,108 |                   | $          | 2,560,038  |       | $ | 59,710,312 |   |
|                                                         |            |                                  |            |                        |            |            |            |  |  |  |

 

See accompanying notes to financial statements

 

F-7

----

**RETRACTABLETECHNOLOGIES, INC.****STATEMENTS OF CASH FLOWS**
| ** **                                                                                        | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                              |       |                                        |       |   |   |   |   |
| **Cash flows from operating  activities:**                                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                                |       | $                                           | (3,869,484 | ) | $ | (1,238,323 | ) | $ | 54,691,395 |   |
| Adjustments to  reconcile net income (loss) to net cash provided (used) by operating  activities: |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                                                    |       | 1,426,748                                   |       | 1,366,907 |   | 1,294,297 |   |
| Capitalized  interest                                                                             |       | (135,857                                    | )          | (104,961 | ) | (52,788 | ) |
| Stock option  compensation                                                                        |       | 372,298                                     |       | 572,423 |   | 793,347 |   |
| Provision for  inventory valuation                                                                |       | (61,296                                     | )          | 13,977 |   | — |   |
| Provision for  doubtful accounts                                                                  |       | 65,362                                      |       | 64,299 |   | 146,049 |   |
| Accreted  interest                                                                                |       | 138,155                                     |       | 101,120 |   | 101,120 |   |
| Deferred income  taxes                                                                            |       | 534,065                                     |       | (88,863 | ) | (445,202 | ) |
| Loss on disposal  of assets                                                                       |       | —                                      |       | 4,474 |   | — |   |
| Change in assets  and liabilities:                                                                |       |                                        |       |   |   |   |   |
| (Increase)  decrease in inventories                                                               |       | (3,026,759                                  | )          | 467,246 |   | 197,635 |   |
| (Increase)  decrease in accounts receivable                                                       |       | 1,382,790                                   |       | (1,604,693 | ) | (840,332 | ) |
| (Increase)  decrease in prepaid income taxes                                                      |       | (1,794,670                                  | )          | 788,082 |   | (1,349,144 | ) |
| (Increase)  decrease in other current assets                                                      |       | 194,443                                     |       | (163,701 | ) | (75,817 | ) |
| Increase  (decrease) in accounts payable                                                          |       | 1,902,016                                   |       | (1,056,423 | ) | 1,066,648 |   |
| Increase  (decrease) in other accrued liabilities                                                 |       | (481,842                                    | )          | 456,621 |   | (595,683 | ) |
| Increase (decrease)  in income taxes payable                                                      |       | —                                      |       | (1,813,084 | ) | 1,547,611 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| Net cash provided  (used) by operating activities                                                 |       | (3,354,031                                  | )          | (2,234,899 | ) | 56,479,136 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| **Cash flows from investing  activities:**                                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchase of  property, plant and equipment                                                        |       | (1,530,357                                  | )          | (2,015,345 | ) | (2,437,847 | ) |
| Investment in  LLC                                                                                |       | (500,000                                    | )          | — |   | — |   |
| Acquisitions of  patents, trademarks, licenses, and intangibles                                   |       | (4,576                                      | )          | — |   | — |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| Net cash used by  investing activities                                                            |       | (2,034,933                                  | )          | (2,015,345 | ) | (2,437,847 | ) |
|                                                                                              |       |                                        |       |   |   |   |   |
| **Cash flows from financing  activities:**                                                        | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Repayments of  long-term debt and notes payable                                                   |       | (385,062                                    | )          | (391,629 | ) | (159,802 | ) |
| Proceeds from  long-term debt                                                                     |       | —                                      |       | 1,050,846 |   | 950,000 |   |
| Proceeds from  the exercise of stock options                                                      |       | 74,780                                      |       | 236,436 |   | — |   |
| Payment of  Preferred Stock dividends                                                             |       | —                                      |       | — |   | (7,118,582 | ) |
|                                                                                              |       |                                        |       |   |   |   |   |
| Net cash provided  (used) by financing activities                                                 |       | (310,282                                    | )          | 895,653 |   | (6,328,384 | ) |
|                                                                                              |       |                                        |       |   |   |   |   |
| Net increase (decrease)  in cash and cash equivalents                                             |       | (5,699,246                                  | )          | (3,354,591 | ) | 47,712,905 |   |
| Cash and cash  equivalents at:                                                                    |       |                                        |       |   |   |   |   |
| Beginning of  period                                                                              |       | 52,513,935                                  |       | 55,868,526 |   | 8,155,621 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| End of period                                                                                     |       | $                                           | 46,814,689 |   | $ | 52,513,935 |   | $ | 55,868,526 |   |
|                                                                                              |       |                                        |       |   |   |   |   |
| Supplemental schedule  of cash flow information:                                                  |       |                                        |       |   |   |   |   |
| Interest paid                                                                                     |       | $                                           | 425,429    |   | $ | 334,127 |   | $ | 202,572 |   |
| Income taxes  paid                                                                                |       | $                                           | 45,893     |   | $ | 2,062,493 |   | $ | 12,439,212 |   |
| Supplemental schedule  of noncash investing and financing activities:                             |       |                                        |       |   |   |   |   |
| Debt assumed to  acquire assets                                                                   |       | $                                           | —     |   | $ | 78,453 |   | $ | 121,837 |   |
| Closing costs  rolled into long-term debt                                                         |       | $                                           | —     |   | $ | — |   | $ | 24,154 |   |
| Conversion of long-term  debt into Common Stock                                                   |       | $                                           | —     |   | $ | — |   | $ | 163,740 |   |

 

See accompanying notes to financial statements

 

F-8

----

**NOTES TO FINANCIAL STATEMENTS**
| **1.** | **BUSINESS  OF THE COMPANY** |
|--------|------------------------------|

 

Retractable Technologies, Inc. (the “Company”) wasincorporated in Texas on May 9, 1994, to design, develop, manufacture andmarket safety syringes and other safety medical products for the healthcareprofession. The Company began to develop its manufacturing operations in 1995.The Company’s manufacturing and administrative facilities are located in LittleElm, Texas. The Company’s primary products are the VanishPoint® 1cc, 3cc, 5cc and 10cc syringes, bloodcollection tube holders, allergy trays, and IV catheters. The Company hasconducted preliminary clinical evaluations and worked with nationaldistributors to encourage healthcare facilities to transition from the use ofstandard syringes to the VanishPoint® syringe.
| **2.** | **SUMMARY  OF SIGNIFICANT ACCOUNTING POLICIES** |
|--------|-------------------------------------------------|

 

**Accounting estimates**

The preparation of financial statements in conformitywith United States generally accepted accounting principles requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ significantly fromthose estimates.

**Cash and cash equivalents**

For purposes of reporting cash flows, cash and cashequivalents include unrestricted cash and investments with original maturitiesof three months or less.

**Accounts receivable**

The Company records trade receivables when revenue isrecognized. No product has been consigned to customers. The Company’s allowancefor doubtful accounts is primarily determined by review of specific tradereceivables. Those accounts that are doubtful of collection are included in theallowance. An additional allowance has been established based on a percentageof receivables outstanding. These provisions are reviewed to determine theadequacy of the allowance for doubtful accounts. Trade receivables are chargedoff when there is certainty as to their being uncollectible. Trade receivablesare considered delinquent when payment has not been made within contract terms.

**Inventories**

Inventories are valued at the lower of cost or market,with cost being determined using a standard cost method, which approximatesaverage cost. A reserve is established for any excess or obsolete inventories.

**Property, plant and equipment**

Property, plant and equipment are stated at cost.Expenditures for maintenance and repairs are charged to operations as incurred.Cost includes major expenditures for improvements and replacements which extenduseful lives or increase capacity and interest cost associated with significantcapital additions. For the years ended December 31, 2006, 2005, and 2004, theCompany capitalized interest of approximately $136,000; $105,000; and $53,000,respectively. Gains or losses from property disposals are included in income.

Depreciation and amortization are calculated using thestraight-line method over the following useful lives:

F-9

----

 

| Production equipment            |   | 3 to 13 years |   |
|---------------------------------|--------|---------------|--------|
| Office furniture and  equipment |   | 3 to 10 years |   |
| Buildings                       |   | 39 years      |   |
| Building improvements           |   | 15 years      |   |
| Automobiles                     |   | 7 years       |   |

 

**Long-lived assets**

The Company assesses the recoverability of long-livedassets using an assessment of the estimated undiscounted future cash flowsrelated to such assets. In the event that assets are found to be carried atamounts which are in excess of estimated gross future cash flows, the assets willbe adjusted for impairment to a level commensurate with a discounted cash flowanalysis of the underlying assets.

**Reclassifications**

Certain prior year amounts have been reclassified toconform with the current year’s presentation.

**Intangible assets**

Intangible assets are stated at cost and consistprimarily of patents, a license agreement granting exclusive rights to usepatented technology, and trademarks which are amortized using the straight-linemethod over 17 years.

**Financial instruments**

The fair value of financial instruments is determinedby reference to various market data and other valuation techniques asappropriate. The Company believes that the fair value of financial instrumentsapproximates their recorded values.

**Concentration risks**

The Company’s financial instruments exposed toconcentrations of credit risk consist primarily of cash, cash equivalents andaccounts receivable. Cash balances, some of which exceed the federally insuredlimits, are maintained in financial institutions; however, management believesthe institutions are of high credit quality. The majority of accountsreceivable are due from companies which are well-established entities. As aconsequence, management considers any exposure from concentrations of credit risksto be limited. The Company had a high concentration of sales with twosignificant customers. For the year ended December 31, 2006, the aforementionedcustomers accounted for $7.9 million, or 31.3%, of net sales. 

The Company purchases mostof its product components from single suppliers, including needle adhesives andpackaging materials. There are multiple sources of these materials. The Companycurrently obtains roughly 72.8% of its finished products through Double Dove, aChinese manufacturer. In the event that the Company was unable to purchase suchproduct from Double Dove, the Company would need to find an alternate supplierfor its 5 cc and 10 cc syringes and increase domestic production for 1 cc and 3cc syringes to avoid a disruption in supply.

**Revenue recognition**

Revenue is recognized for sales to distributors whentitle and risk of ownership passes to the distributor, generally upon shipment.Revenue is recorded on the basis of sales price to distributors, lesscontractual pricing allowances. Contractual pricing allowances consist of(i) rebates granted to distributors who provide tracking reports whichshow, among other things, the facility that purchased the products, and(ii) a provision for estimated contractual pricing allowances for productsthat the Company has not received tracking reports. Rebates are recorded whenissued and are applied against the customer’s receivable balance. The provisionfor contractual pricing allowances is reviewed at the end of each quarter andadjusted for changes in levels of products for which there is no trackingreport. Additionally, if it becomes clear that tracking reports will not beprovided by individual distributors, the provision is further adjusted. Theestimated contractual allowance is netted against individual distributors’accounts receivable balances for financial reporting purposes. The resultingnet balance is reflected in accounts receivable or accounts payable, asappropriate. The terms and 

F-10

----

conditions of contractual pricing allowances aregoverned by contracts between the Company and its distributors. Revenue forshipments directly to end-users is recognized when title and risk of ownershippasses from the Company. Any product shipped or distributed for evaluationpurposes is expensed.

**Marketing fees**

The Company paid Abbott Laboratories, Inc.  (“Abbott”) marketing fees for services theyprovided. The contracted services were to include participation in promotionalactivities, development of educational and promotional materials,representation at trade shows, clinical demonstrations, inservicing andtraining, and tracking reports detailing the placement of the Company’sproducts to end-users. Marketing fees were accrued at the time of the sale ofproduct to Abbott. These fees were paid after Abbott provided the Company atracking report of product sales to end-users. These costs were included insales and marketing expense in the Statements of Operations. No marketing feeshave been accrued since October 15, 2003, the date the National Marketing andDistribution Agreement with Abbott was terminated.

**LitigationProceeds**

Proceeds from litigation settlements in the Company’sfederal antitrust lawsuit, Retractable Technologies, Inc. v. Becton Dickinson& Co., et al. were recognized when realizable. Generally, realization wasnot reasonably assured and expected until proceeds were collected. Such amountswere net of attorneys’ fees, court costs, legal expenses, and amounts payableunder the Covenant Not to Sue. Liability for attorneys’ fees was not incurreduntil proceeds were collected.

**Reimbursed Discounts**

The Company received reimbursed discounts from one ofthe settlement agreements reached in its federal antitrust lawsuit, RetractableTechnologies, Inc. v. Becton Dickinson & Co et al.  Payments under the discount reimbursementprogram were recognized upon invoicing of amounts due under the agreement providedcollection was reasonably assured.  Suchamounts are presented in the Statements of Operations as a separate componentof revenues.  All funds available underthe discount reimbursement program were recognized by the third quarter of2006.

**Incometaxes**

The Company provides for deferred income taxes inaccordance with Statement of Financial Accounting Standard No. 109, *Accounting for Income Taxes* (“SFAS 109”).SFAS 109 requires an asset and liability approach for financial accounting andreporting for income taxes based on the tax effects of differences between thefinancial statement and tax bases of assets and liabilities, based on enactedrates expected to be in effect when such basis differences reverse in futureperiods. Deferred tax assets are periodically reviewed for realizability. TheCompany has sufficient taxable income from prior carryback years to realize allof its current taxable losses.  TheCompany has established a valuation allowance for its net deferred tax asset asfuture taxable income cannot be reasonably assured.

**Earningsper share**

The Company has adopted Statement of FinancialAccounting Standards No. 128, *Earnings PerShare*, which establishes standards for computing and presentingearnings per share. Basic earnings per share is computed by dividing netearnings for the period (adjusted for any cumulative dividends for the period)by the weighted average number of common shares outstanding during the period.The Company’s potentially dilutive Common Stock equivalents, consist ofoptions, convertible debt and convertible Preferred Stock and are dilutive orantidilutive in different periods as shown in the schedule below:

F-11

----

** **

|                                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income  (loss)                                                                |       | $                                           | (3,869,484 | ) | $ | (1,238,323 | ) | $ | 54,691,395 |   |
| Preferred Stock  dividend requirements                                            |       | (1,451,321                                  | )          | (1,502,887 | ) | (1,993,516 | ) |
|                                                                              |       |                                        |       |   |   |   |   |
| Earnings (loss)  available to common shareholders                                 |       | (5,320,805                                  | )          | (2,741,210 | ) | 52,697,879 |   |
| Effect of  dilutive securities:                                                   |       |                                        |       |   |   |   |   |
| Preferred Stock dividend requirements                                             |       | —                                      |       | — |   | 1,993,516 |   |
| Convertible debt interest and loan fees                                           |       | —                                      |       | — |   | (351,860 | ) |
|                                                                              |       |                                        |       |   |   |   |   |
| Earnings (loss)  available to common shareholders after assumed conversions       |       | $                                           | (5,320,805 | ) | $ | (2,741,210 | ) | $ | 54,339,535 |   |
|                                                                              |       |                                        |       |   |   |   |   |
| Average common  shares outstanding                                                |       | 23,591,999                                  |       | 23,332,277 |   | 22,600,166 |   |
|                                                                              |       |                                        |       |   |   |   |   |
| Dilutive stock  equivalents from stock options                                    |       | —                                      |       | — |   | 269,016 |   |
| Shares issuable  upon conversion of Preferred Stock                               |       | —                                      |       | — |   | 2,572,116 |   |
| Shares issuable  upon conversion of convertible debt                              |       | —                                      |       | — |   | 685,855 |   |
|                                                                              |       |                                        |       |   |   |   |   |
| Average common  and common equivalent shares outstanding — assuming dilution |       | 23,591,999                                  |       | 23,332,277 |   | 26,127,153 |   |
|                                                                              |       |                                        |       |   |   |   |   |
| Basic earnings  (loss) per share                                                  |       | $                                           | (0.23      | ) | $ | (0.12 | ) | $ | 2.33 |   |
| Diluted earnings (loss)  per share                                                |       | $                                           | (0.23      | ) | $ | (0.12 | ) | $ | 2.08 |   |

 

**Researchand development costs**

Research and development costs are expensed asincurred.

**Share-basedcompensation**

The Company has issued options under three share-baseddirector, officer and employee compensation plans as well as several individualoption agreements.  The two 1996 planshave terminated; however, the options continue until their expected maturitydates.  The Company adopted the fairvalue recognition provisions of Statement of Financial Accounting Standards No.123, *Accounting for Stock-Based Compensation*,to all awards granted, modified, or settled after December 31, 2001.  Awards generally vest over periods up tothree years.

The Company adopted theprovisions of Statement of Financial Accounting Standards No. 123 (Revised2004) (“SFAS No. 123R”), *Share-Based Payment*,effective January 1, 2006.  It did nothave a material impact on the financial statements of the Company.  In accordance with the disclosurerequirements of SFAS No. 123R, the Company incurred the following share-basedcompensation costs:

|                             | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cost of Sales               |       | $                                           | 67,561     |   | $ | 29,131 |   | $ | 183,026 |   |
| Sales and  marketing        |       | 101,608                                     |       | 182,464 |   | 183,064 |   |
| Research and  development   |       | 12,418                                      |       | 19,432 |   | 15,982 |   |
| General and  Administrative |       | 190,711                                     |       | 341,396 |   | 411,271 |   |
|                        |       | $                                           | 372,298    |   | $ | 572,423 |   | $ | 793,343 |   |

 

F-12

----

**RecentPronouncements**

In July 2006 theFinancial Accounting Standards Board issued FASB Interpretation No. 48 (“FIN 48”),*Accounting for Uncertainty in Income Taxes*.  FIN 48 is intended to clarify the accountingfor uncertainty in income taxes recognized in financial statements inaccordance with SFAS 109*.* ThisInterpretation prescribes two steps in evaluating uncertainty in income taxes.The steps include a recognition threshold and measurement attribute.  In the recognition threshold step the Companydetermines whether it is more-likely-than-not that a tax position will besustained based on the technical merits of the position. The Company shouldpresume that the position will be examined by the appropriate taxing authoritywith their having full knowledge of all relevant information. In themeasurement attribute step, the Company will evaluate its tax position thatmeets the more-likely-than-not recognition threshold.   The benefit is measured to determine theamount to recognize in the financial statements. The tax position is measuredat the largest amount of benefit that is greater than 50 percent likely ofbeing realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-notrecognition threshold should be recognized in the first subsequent financialreporting period in which that threshold is met.  Previously recognized tax positions that nolonger meet the more-likely-than-not recognition threshold should be derecognizedin the first subsequent financial reporting period in which the threshold is nolonger met.  FIN 48 is effective forfiscal years ending after December 15, 2006. The Company is evaluating the effect, if any, that the adoption of FIN48 will have on our financial statements.

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement No. 157, *Fair Value Measurements* (“SFAS 157”).  SFAS 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those years.  Theprovisions of the new standard are to be applied prospectively for mostfinancial instruments and retrospectively for others as of the beginning of thefiscal year in which the standard is initially applied.  The Company is evaluating the effect, if any,that the adoption of SFAS 157 will have on our financial statements.
|  **3.** | **INVENTORIES** |
|--------------|-----------------|

 

Inventories consist of the following:

|                    | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**              | ** ** | **2005** | ** ** |
|               |       |                  |       |   |   |
| Raw materials      |       | $                     | 1,546,288  |   | $ | 865,285 |   |
| Finished goods     |       | 4,889,492             |       | 2,543,737 |   |
|               |       | 6,435,780             |       | 3,409,022 |   |
| Inventory  reserve |       | (50,000               | )          | (111,296 | ) |
|               |       | $                     | 6,385,780  |   | $ | 3,297,726 |   |

 

F-13

----

 
| **4.** | **PROPERTY,  PLANT AND EQUIPMENT** |
|--------|------------------------------------|

 

Property, plant and equipment consist of the following**:**

|                                            | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                       |       |                  |       |   |   |
| Land                                       |       | $                     | 261,893    |   | $ | 261,893 |   |
| Buildings and  building improvements       |       | 5,162,512             |       | 5,162,512 |   |
| Production  equipment                      |       | 14,130,874            |       | 13,928,344 |   |
| Office furniture  and equipment            |       | 1,226,518             |       | 1,258,692 |   |
| Construction in  progress                  |       | 2,238,387             |       | 739,542 |   |
| Automobiles                                |       | 102,321               |       | 105,311 |   |
|                                       |       | 23,122,505            |       | 21,456,294 |   |
| Accumulated  depreciation and amortization |       | (10,910,365           | )          | (9,530,318 | ) |
|                                       |       | $                     | 12,212,140 |   | $ | 11,925,976 |   |

 

Depreciation expense and capital lease amortizationexpense for the years ended December 31, 2006, 2005 and 2004 was $1,380,047;$1,325,174; and $1,258,587, respectively.
| **5.** | **INTANGIBLE  ASSETS** |
|--------|------------------------|

 

Intangible assets consist of the following:

|                           | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                      |       |                  |       |   |   |
| License  agreement        |       | $                     | 500,000    |   | $ | 500,000 |   |
| Trademarks and  patents   |       | 231,423               |       | 226,847 |   |
|                      |       | 731,423               |       | 726,847 |   |
| Accumulated  amortization |       | (451,577              | )          | (409,921 | ) |
|                      |       | $                     | 279,846    |   | $ | 316,926 |   |

 

In 1995, the Company entered into the licenseagreement with the Chief Executive Officer of the Company for the exclusiveright to manufacture, market and distribute products utilizing automatedretraction technology. This technology is the subject of various patents andpatent applications owned by such officer of the Company. The initial licensingfee of $500,000 is being amortized over 17 years. The license agreement alsoprovides for quarterly payments of a 5% royalty fee to the officer on grosssales. The royalty fee expense is recognized in the period in which it isearned. Royalty fees of $2,093,822; $1,715,024; and $1,846,195 are included incost of sales for the years ended December 31, 2006, 2005 and 2004,respectively. Accrued royalties under this agreement aggregated $2,755  and $540,888 at December 31, 2006 and 2005,respectively.

Amortization expense for the years ended December 31, 2006,2005 and 2004, was $41,657; $41,733; and $35,710, respectively. Futureamortization expense for the years 2007 through 2011 is estimated to be $42,000per year.
| **6.** | **OTHER  ASSETS** |
|--------|-------------------|

 

The Company invested $500,000 in a limited liabilitycompany (“LLC”) in which we will be a minority interest holder.  The funds are held in escrow until the LLChas raised the majority of its capital. If such fundraising is not completed by November 2007 the Company hasthe option to have its investment returned. The purpose of this project is to provide information and insight to thepublic regarding healthcare.

F-14

----

| **7.** | **LONG-TERM  DEBT** |
|--------|---------------------|

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Long-term debt  consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                  |       |   |   |
| Note payable to  Katie Petroleum. Interest accrues at prime plus 1%, 9.25% and 8.00% and at  December 31, 2006 and 2005, respectively. Interest only was payable  monthly through February 1, 2004. The original amount of the note of  $3,000,000 was discounted for presentation purposes by $299,346 for stock  options issued in conjunction with the debt and $412,500 for the intrinsic  value of a beneficial conversion feature of the debt. Beginning March 1,  2004, the loan is payable in equal installments of principal and interest  payments (except for changes in the interest rate) of approximately $37,000  and matures on September 30, 2012. Guaranteed by an officer.  Approximately $163,736 of the principal payment was converted into 40,934  shares of Common Stock as of March 1, 2006. Not otherwise  collateralized. Convertible into Common Stock at $4.00 per share at the  option of the holder.                                                          |       | $                     | 1,918,666  |   | $ | 2,059,408 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Note payable to  1st International Bank for $2,500,000. The  proceeds from the loan paid off the remaining $475,000 of a revolving credit  agreement and funded a new warehouse and related infrastructure. Payments  were interest only during the first twelve months. After twelve months,  payments are based on a twenty-year amortization with a five-year maturity on  March 29, 2010. The interest rate at December 31, 2006 and 2005 was 8.25% and  7.25%, respectively and is based on the amount of funds kept on deposit with  the bank. Accordingly, interest will vary from the Wall Street Journal Prime  Rate (the “WSJPR”) to the WSJPR plus 1%, with floors that may range from  4.25% to 6.50%. Compensating balances at 1st International affecting the interest rate  will range from $0 to $500,000. The Company had in excess of $500,000 on  deposit with 1st International Bank throughout the year. The  note is secured by the Company’s land and buildings. |       | 2,428,713             |       | 2,465,077 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Note payable to  DaimlerChrysler Services North America LLC. Sixty (60) monthly payments at  $1,009. Interest is 5.49%. Collateralized by a 2005 Freightliner truck.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 34,284                |       | 44,217 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Note payable to  GMAC. Sixty (60) monthly payments at $427. Interest is zero percent.  Collateralized by a 2005 Chevrolet van.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 17,473                |       | 24,318 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Note payable to  CitiCorp. Vendor Finance; Interest at 4.2%; Collateralized by software;  payable in eight quarterly principal and interests payments of $15,955.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | —                |       | 46,886 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                  |       |   |   |
| Capital lease  obligation was payable in monthly installments of approximately $1,070 until  June, 2006. Interest at 14.87% collateralized by certain equipment.  Guaranteed by an officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | —                |       | 6,136 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 4,399,136             |       | 4,646,042 |   |
| Less: current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (261,905              | )          | (295,417 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | $                     | 4,137,231  |   | $ | 4,350,625 |   |

 

F-15

----

The aggregate maturitiesof long-term debt as of December 31, 2006 are as follows:

| 2007       |   | $         | 261,906   |   |
|------------|--------|-----------|-----------|--------|
| 2008       |   | 362,938   |      |
| 2009       |   | 413,500   |      |
| 2010       |   | 2,589,575 |      |
| 2011       |   | 419,603   |      |
| Thereafter |   | 351,614   |      |
|       |   | $         | 4,399,136 |   |

 
| **8.** | **COMMITMENTS  AND CONTINGENCIES** |
|--------|------------------------------------|

 

The Company was sued byOccupational and Medical Innovations Limited (“OMI”) in August 2006 in FederalCourt of Australia, alleging that two letters written to OMI by the Company’soutside counsel contained unjustified threats. OMI is not seeking monetarydamages in the action. The Company sought preliminary discovery. In December2006, the Court denied the Company’s motion and awarded costs to OMI. TheCompany’s motion for leave to appeal the Court’s interlocutory ruling ispending and no trial date has been set for the original action.

The Company is involvedin other legal proceedings which have arisen in the ordinary course ofbusiness. Management believes that any liabilities arising from these claimsand contingencies would not have a material adverse effect on the Company’sannual results of operations or financial condition.
| **9.** | **INCOME  TAXES** |
|--------|-------------------|

 

The provision for incometaxes consists of the following:

|                                        | ** ** | **For the Years Ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current tax  provision (benefit)       |       |                                                          |       |   |   |   |   |
| Federal                                |       | $                                                             | (1,696,318 | ) | $ | (500,514 | ) | $ | 10,785,856 |   |
| State                                  |       | (117,709                                                      | )          | (15,986 | ) | 1,835,691 |   |
| Total current provision (benefit)      |       | (1,814,027                                                    | )          | (516,500 | ) | 12,621,547 |   |
|                                   |       |                                                          |       |   |   |   |   |
| Deferred tax  provision (benefit)      |       |                                                          |       |   |   |   |   |
| Federal                                |       | 458,232                                                       |       | (13,030 | ) | (399,126 | ) |
| State                                  |       | 75,833                                                        |       | (75,833 | ) | (46,076 | ) |
| Total deferred tax provision (benefit) |       | 534,065                                                       |       | (88,863 | ) | (445,202 | ) |
| Total income tax  provision (benefit)  |       | $                                                             | (1,279,962 | ) | $ | (605,363 | ) | $ | 12,176,345 |   |

 

The income tax benefit ofnet operating loss carry forwards utilized in 2004 aggregated $12.1 million forcurrent federal income taxes and $7.5 million for current state incometaxes.  As of December 31, 2004, theCompany had utilized all of its net operating loss carry forwards.

Deferred taxes areprovided for those items reported in different periods for income tax andfinancial reporting purposes.  The taxeffects of temporary differences that give rise to significant portions of thedeferred tax assets and liabilities are presented below:

F-16

----

The Company has$2,196,832 in tax benefits attributable to carry back losses for federal taxpurposes and $158,900 for current state income tax purposes.  The Company has $160,608 in tax effectedstate carry forward losses that will begin to expire in 2010.

|                                                | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current deferred  tax assets (liabilities)     |       |                  |       |   |   |
| Inventory                                      |       | $                     | 299,233    |   | $ | 214,625 |   |
| Accrued expenses and reserves                  |       | 738,878               |       | 1,030,883 |   |
| Beneficial conversion feature of debt          |       | (45,697               | )          | —   |   |
| Net current deferred tax assets                |       | 992,414               |       | 1,245,508 |   |
| Non-current  deferred tax assets (liabilities) |       |                  |       |   |   |
| Non-employee option expense                    |       | 313,557               |       | 313,557 |   |
| Employee option expense                        |       | 484,212               |       | 412,775 |   |
| Property and equipment                         |       | (1,344,050            | )          | (1,376,033 | ) |
| State net operating loss carry forwards        |       | 160,608               |       | 37,538 |   |
| Beneficial conversion feature of debt          |       | (56,828               | )          | — |   |
| Net non-current deferred tax liabilities       |       | (442,501              | )          | (612,163 | ) |
| Valuation allowance                            |       | (652,438              | )          | (99,280 | ) |
| Net deferred tax  assets (liabilities)         |       | $                     | (102,525   | ) | $ | 534,065 |   |

 

A reconciliation ofincome taxes based on the federal statutory rate and the provision (benefit)for income taxes is summarized as follows:

|                                                     | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income tax  (benefit) at the federal statutory rate |       | (35.0                 | )%         | (35.0 | )% | 35.0 | % |
| State tax  (benefit), net of federal (benefit)      |       | (2.9                  | )          | (2.9 | ) | 2.9 |   |
| Increase  (decrease) in valuation allowance         |       | 10.7                  |       | 5.4 |   | (19.8 | ) |
| Permanent  differences                              |       | 4.0                   |       | 0.4 |   | 0.5 |   |
| Other                                               |       | (1.7                  | )          | (0.7 | ) | (0.4 | ) |
| Effective tax  (benefit) rate                       |       | (24.9                 | )%         | (32.8 | )% | 18.2 | % |

 
| **10.** | **STOCKHOLDERS’  EQUITY** |
|---------|--------------------------------|

 

**Preferred Stock**

The Company has one classof Preferred Stock outstanding: Class B Convertible Preferred Stock (“Class BStock”). The Class B Stock has five series: Series I, Series II, Series III,Series IV, and Series V.

Class B

The Company hasauthorized 5,000,000 shares of $1 par value Class B Stock which have beenallocated among Series I, II, III, IV and V in the amounts of 164,000; 224,700;135,245; 553,500; and 1,363,721 shares, respectively. The remaining 2,558,834authorized shares have not been assigned a series.

Series I Class B

There were 1,000,000shares of $1 par value Series I Class B Convertible Preferred Stock (“Series IClass B Stock”) issued and 164,000 and 171,000 shares outstanding at December31, 2006 and 2005, respectively. Holders of Series I Class B Stock are entitledto receive a cumulative annual dividend of $.50 per share, payable quarterly ifdeclared by the Board of Directors. In 2004, the Company paid $2,550,000 individends.  At December 31, 2006 and 2005approximately $226,000 and $141,000, respectively, of dividends which had notbeen declared were in arrears.

Series I Class B Stock isredeemable after three years from the date of issuance at the option of theCompany at a price of $7.50 per share, plus all accrued and unpaid dividends.Each share of Series I Class B Stock may, at the option of the stockholder, beconverted to one share of Common Stock after three years from the date ofissuance or in the event the Company files an initial registration statementunder the Securities Act of 1933. Pursuant to these terms, a total of 7,000shares of Series I Class B Stock were converted into Common Stock in 2006. Inthe event of voluntary or involuntary dissolution, liquidation or winding up ofthe Company, holders of Series I Class B Stock then outstanding are entitled to$6.25 per share, plus all accrued and unpaid dividends prior to anydistributions to holders of Series II Class B Convertible Preferred Stock (“SeriesII Class B Stock”), Series III Class B Convertible Preferred Stock (“Series IIIClass B Stock”), Series IV Class B 

F-17

----

Convertible PreferredStock (“Series IV Class B Stock”), Series V Class B Convertible Preferred Stock(“Series V Class B Stock”) or Common Stock.

Series II Class B

There were 1,000,000shares of $1 par value Series II Class B Stock issued and there were 224,700and 255,200 shares outstanding at December 31, 2006 and 2005. Holders of SeriesII Class B Stock are entitled to receive a cumulative annual dividend of $1.00per share, payable quarterly if declared by the Board of Directors. Holders ofSeries II Class B Stock generally have no voting rights until dividends are inarrears and unpaid for twelve consecutive quarters. In such case, the holdersof Series II Class B Stock have the right to elect one-third of the Board ofDirectors of the Company. In 2004, the Company paid $4.6 million in dividends.At December 31, 2006 and 2005, approximately $678,000 and $443,000,respectively, of dividends which had not been declared were in arrears.

Series II Class B Stockis redeemable after three years from the date of issuance at the option of theCompany at a price of $15.00 per share plus all accrued and unpaid dividends.Each share of Series II Class B Stock may, at the option of the stockholder, beconverted to one share of Common Stock after three years from the date ofissuance or in the event the Company files an initial registration statementunder the Securities Act of 1933. Pursuant to these terms, 30,500 shares ofSeries II Class B Stock were converted into Common Stock in 2006. In the eventof voluntary or involuntary dissolution, liquidation or winding up of theCompany, holders of Series II Class B Stock then outstanding are entitled to$12.50 per share, plus all accrued and unpaid dividends, after distributionobligations to holders of Series I Class B Stock have been satisfied and priorto any distributions to holders of Series III Class B Stock, Series IV Class BStock, Series V Class B Stock or Common Stock.

Series III Class B

There were 1,160,445shares of $1 par value Series III Class B Stock issued and 135,245 and 135,245shares outstanding at December 31, 2006 and 2005, respectively. Holders ofSeries III Class B Stock are entitled to receive a cumulative annual dividendof $1.00 per share, payable quarterly if declared by the Board of Directors. AtDecember 31, 2006 and 2005, approximately $2,853,000 and $2,718,000,respectively, of dividends which have not been declared were in arrears.

Series III Class B Stockis redeemable after three years from the date of issuance at the option of theCompany at a price of $15.00 per share, plus all accrued and unpaid dividends.Each share of Series III Class B Stock may, at the option of the stockholder,be converted to one share of Common Stock after three years from the date ofissuance or in the event the Company files an initial registration statementunder the Securities Act of 1933. Pursuant to these terms, no shares of SeriesIII Class B Stock were converted into Common Stock in 2006. In the event ofvoluntary or involuntary dissolution, liquidation or winding up of the Company,holders of Series III Class B Stock then outstanding are entitled to $12.50 pershare, plus all accrued and unpaid dividends, after distribution obligations toSeries I Class B Stock and Series II Class B Stock have been satisfied andprior to any distributions to holders of Series IV Class B Stock, Series VClass B Stock or Common Stock.

Series IV Class B

There were 1,133,800shares issued and 553,500 and 556,000 shares outstanding at December 31, 2006and 2005, respectively. Holders of Series IV Class B Stock are entitled toreceive a cumulative annual dividend of $1.00 per share, payable quarterly, ifdeclared by the Board of Directors. Holders of Series IV Class B Stockgenerally have no voting rights. At December 31, 2006 and 2005, approximately$5,924,000 and $5,368,000, respectively, of dividends which have not beendeclared were in arrears.

Series IV Class B Stockis redeemable after three years from the date of issuance at the option of theCompany at a price of $11.00 per share plus all accrued and unpaid dividends.Each share of 

F-18

----

Series IV Class B Stockmay, at the option of the stockholder any time subsequent to three years fromdate of issuance, be converted into one share of Common Stock, or in the eventthe Company files an initial registration statement under the Securities Act of1933. Pursuant to these terms, 2,500 shares of Series IV Class B Stock wereconverted into Common Stock in 2006. In the event of voluntary or involuntaryliquidation, dissolution or winding up of the Company, holders of Series IVClass B Stock then outstanding are entitled to receive liquidatingdistributions of $11.00 per share, plus accrued and unpaid dividends afterdistribution obligations to Series I Class B Stock, Series II Class B Stock,and Series III Class B Stock have been satisfied and prior to any distributionto holders of Series V Class B Stock or Common Stock.

Series V Class B

There were 2,416,221shares issued and 1,363,721 and 1,381,221 outstanding at December 31, 2006 and2005, respectively. Holders of Series V Class B Stock are entitled to receive acumulative annual dividend of $0.32 per share, payable quarterly, if declaredby the Board of Directors. Holders of Series V Class B Stock generally have novoting rights. At December 31, 2006 and 2005, approximately $2,482,000 and$2,041,000, respectively, of dividends which have not been declared were inarrears.

Series V Class B Stock isredeemable after two years from the date of issuance at the option of theCompany at a price of $4.40 per share plus all accrued and unpaid dividends.Each share of Series V Class B Stock may, at the option of the stockholder anytime subsequent to the date of issuance, be converted into Common Stock.Pursuant to the terms of the certificate of designation, 17,500 shares ofSeries V Class B Stock were converted into Common Stock in 2006. In the eventof voluntary or involuntary liquidation, dissolution, or winding up of theCompany, holders of Series V Class B Stock then outstanding are entitled toreceive liquidating distributions of $4.40 per share, plus accrued and unpaiddividends after distribution obligations to Series I Class B Stock, Series IIClass B Stock, Series III Class B Stock and Series IV Class B Stock have beensatisfied and prior to any distribution to the holders of the Common Stock.

**Common stock**

The Company is authorizedto issue 100,000,000 shares of no par value Common Stock, of which 23,644,164and 23,511,884 shares are issued and outstanding at December 31, 2006 and 2005,respectively.
| **11.** | **RELATED  PARTY TRANSACTIONS** |
|---------|---------------------------------|

 

The Company has a leasewith Mill Street Enterprises (“Mill Street”), a sole proprietorship owned by a10% shareholder for offices and storage in Lewisville, Texas. During the yearsended December 31, 2006, 2005 and 2004, the Company paid $34,800; $34,800; and$37,700, respectively, under this lease. This lease term expires in June2007.  Beginning in October 2005 andpursuant to the direction of the owner of Mill Street Enterprises, paymentshave been made to LES Development.   Thefuture lease commitment is $17,400 for 2007.

The Company had aconsulting agreement with MediTrade International Corporation, a companycontrolled by a 10% shareholder. The shareholder was paid $16,667 per month andreimbursed for business expenses incurred on behalf of the Company, not toexceed $5,000 per month without prior approval for the term of the contract.During the years ended December 31, 2005 and 2004, the Company paid $27,217 and$304,282, respectively, under this agreement. During 2006, the Company paid MediTrade$91,883 on a month-to-month consulting agreement whereby MediTrade is paid$6,500 per month plus expenses.

 The Company has alicense agreement with the Chief Executive Officer of the Company. See Note 5.The officer has a Covenant Not to Sue Agreement with the Company. See Note 13.

F-19

----

During the years endedDecember 31, 2006, 2005 and 2004, the Company paid $24,162; $15,618; and$13,578, respectively, to family members of its Chief Executive Officer forvarious consulting services.
| **12.** | **STOCK  OPTIONS** |
|---------|--------------------|

 

**Stock options**

TheCompany had three stock option plans that provided for the granting of stockoptions to officers, employees and other individuals.  During1999, the Company approved the 1999 Stock Option Plan.  The 1999 Plan is the only plan with stock optionscurrently being awarded. The Company has reserved 4,000,000 shares of CommonStock for issuance upon the exercise of options under this plan.

TheCompany also has options for commonshares outstanding under the 1996 Incentive Stock Option Plan and the 1996Stock Option Plan for Directors and Other Individuals.  The two 1996 plans have terminated.  However, options issued under those plans arestill in effect.

Acommittee appointed by the Board of Directors administers all plans anddetermines exercise prices at which options are granted.  Shares exercised come from the Company’sauthorized but unissued Common Stock. The options vest over periods up to three years from the date of grantand generally expire ten years after the date of grant. All unvested optionsissued under the plans expire three months after termination of employment orservice to the Company.

**Employee options**

A summary of director,officer and employee options granted and outstanding under the Plans ispresented below:

|                                                               | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                    | ** ** | **Shares**                                  | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning  of period                           |       | 2,495,125                                   |       | $ | 8.38 |   | 2,634,885 |   | $ | 8.37 |   | 2,589,160 |   | $ | 8.36 |   |
| Granted                                                       |       | —                                      |       | — |   | — |   | — |   | 131,775 |   | 8.61 |   |
| Exercised                                                     |       | (49,780                                     | )          | (1.00 | ) | — |   | — |   | — |   | — |   |
| Forfeited                                                     |       | (28,050                                     | )          | (4.47 | ) | (139,760 | ) | (8.16 | ) | (86,050 | ) | (8.36 | ) |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end  of period                                 |       | 2,417,295                                   |       | $ | 8.58 |   | 2,495,125 |   | $ | 8.38 |   | 2,634,885 |   | $ | 8.37 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable at  end of period                                 |       | 2,325,770                                   |       | $ | 8.57 |   | 1,712,100 |   | $ | 8.25 |   | 1,295,030 |   | $ | 8.74 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair  value of options granted during period |       |                                        |       | $ | — |   |   |   | $ | — |   |   |   | $ | 2.02 |   |

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the followingweighted average assumptions used for grants in 2004: no dividend yield;expected volatility of 37%; risk free interest rate of 4.89%; and an expectedlife of 9.0 years.  No options wereissued in 2005 or 2006.

 

F-20

----

The following table summarizes information aboutdirector, officer and employee options outstanding under the aforementionedplans at December 31, 2006:

|              | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** ** | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** ** | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** ** | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** ** | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
| $5.00        |       | 141,300         |       | 0.32            |       | 141,300         |       |
| $10.00       |       | 872,750         |       | 2.89            |       | 872,750         |       |
| $6.90        |       | 473,420         |       | 5.75            |       | 473,420         |       |
| $8.65        |       | 813,300         |       | 5.72            |       | 813,300         |       |
| $7.50        |       | 25,000          |       | 2.36            |       | 25,000          |       |
| $8.87        |       | 91,525          |       | 7.36            |       | —          |       |

 

**Non-employeeoptions**

A summary of options outstanding during the yearsended December 31 and held by non-employees is as follows:

|                                                              | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                   | ** ** | ** **                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                   | ** ** | ** **                                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                   | ** ** | ** **                                  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                   | ** ** | **Shares**                                  | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at  beginning of period                          |       | 607,200                                     |       | $ | 8.16 |   | 843,639 |   | $ | 6.15 |   | 843,639 |   | $ | 6.15 |   |
| Granted                                                      |       | —                                      |       | — |   | — |   | — |   | — |   | — |   |
| Exercised                                                    |       | (25,000                                     | )          | (1.00 | ) | (236,436 | ) | (1.00 | ) | — |   | — |   |
| Forfeited                                                    |       | (2,500                                      | )          | (1.00 | ) | (3 | ) | (1.00 | ) | — |   | — |   |
|                                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of  period                                |       | 579,700                                     |       | $ | 8.50 |   | 607,200 |   | $ | 8.16 |   | 843,639 |   | $ | 6.15 |   |
|                                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of  period                                |       | 579,700                                     |       | $ | 8.50 |   | 607,200 |   | $ | 8.16 |   | 843,639 |   | $ | 6.15 |   |
|                                                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options granted during period |       |                                        |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |

 

The fair value of each optiongrant is estimated on the date of grant using the Black-Scholes option pricingmodel.  No options were issued in 2006,2005, or 2004.

The following table summarizesinformation about non-employee options outstanding under the aforementionedplan at December 31, 2006:

|              | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** ** | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** ** | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** ** | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** ** | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
| $5.00        |       | 30,000          |       | 0.35            |       | 30,000          |       |
| $10.00       |       | 317,200         |       | 3.11            |       | 317,200         |       |
| $6.90        |       | 232,500         |       | 5.75            |       | 232,500         |       |

 

F-21

----

The Company recorded $372,298, $572,423 and $793,343 as stock-basedcompensation expense in 2006, 2005, and 2004, respectively.  The total intrinsic value of options exercisedwas $207,924; $0; and $0 in 2006, 2005, and 2004, respectively.  The aggregate intrinsic value of optionsoutstanding at December 31, 2006 was zero dollars.  The total compensation cost related tonon-vested stock options to be recognized in the future was $17,791 at December31, 2006.
| **13.** | **LITIGATION  SETTLEMENTS** |
|---------|-----------------------------|

 

In the second quarter of 2003 the Company reachedsettlement agreements with Premier Inc.; Premier Purchasing Partners, L.P.;VHA, Inc.; Novation, L.L.C.; Tyco International (US) Inc.; and Tyco HealthcareGroup L.P. in its federal antitrust lawsuit, Retractable Technologies, Inc. v.Becton Dickinson & Co. et al. As part of the settlements, the litigationagainst Premier, VHA, Novation, and Tyco has been dismissed.

Although specific terms are confidential, theagreements include cash payments and other financial consideration as well asprovisions that are intended to facilitate the sale of our VanishPoint®products to Premier and Novation member facilities. In exchange for thesettlement provisions, the Company has agreed to give up its claims againstthese companies.

The initial cash payment of $29,125,000 was paid in2003. The Company received net cash payments of $13,879,511 of the cash paymentin 2003. These proceeds were net of attorneys’ fees, court costs, legalexpenses, and amounts paid to Mr. Shaw.

Pursuant to a Covenant Not to Sue agreement enteredinto on September 19, 2001, between the Company and Thomas J. Shaw,individually, Mr. Shaw received $728,609 of the initial cash payment in 2003.

Total attorneys’ fees, court costs, and legal expenseswere $14,516,880 paid in May 2003.  Anadditional payment of $4,250,000 was made by the defendants to the attorneys inDecember 2003.

As part of the settlement agreements, a discountreimbursement program of $8,000,000, which is net of legal fees, wasestablished whereby the Company is being provided quarterly reimbursements forcertain discounts given to participating facilities. The Company offers certaindiscounts to participating facilities and is being reimbursed for suchdiscounts. These payments are recognized upon delivery of products providedcollection is reasonably assured.** **Cumulative reimbursements of$8,000,000 were recorded through the third quarter of 2006.  The termination of the discount reimbursementprogram resulted in a negative impact to the Company’s profit margin during thesecond half of 2006.  The discountprogram ended December 31, 2006.

In April 2004, $14,125,000 was paid into the registryof the court in the second quarter of 2003 under the terms of settlementagreements reached with Premier Inc; Premier Purchasing Partners, L.P.; VHA,Inc.; Novation, L.L.C.; Tyco International (US) Inc; and Tyco Healthcare GroupL.P. in its federal antitrust lawsuit, Retractable Technologies, Inc. v. BectonDickinson & Co. (“BD”) et al. The Company received $8,051,250 in connectionwith this payment. The amount received by the Company is net of attorneys’fees, court costs, legal expenses, and the amount paid to Mr. Shaw.

Pursuant to a Covenant Not to Sue agreement, Mr. Shawreceived $423,750 as a result of this payment to the Company under thesettlement agreements.

The Company’s litigation attorneys received $5,650,000of the April 2004 payment.

F-22

----

Effective July 2, 2004, the Company entered into aSettlement Agreement and Release with BD (the “Settlement Agreement”). Pursuantto the Settlement Agreement, BD delivered One Hundred Million Dollars($100,000,000.00) into the registry of the Court. This amount was received onJuly 7, 2004. The Company received $65.5 million of the proceeds which is netof attorney fees and expenses and approximately $3.4 million paid to Thomas J.Shaw, President and CEO, under a Covenant Not to Sue.

The Company realized an additional $433,808 inDecember 2004 as the proceeds from the BD Settlement Agreement weredistributed. The amount realized is net of $22,832 realized by Mr. Shawpursuant to a Covenant Not to Sue.

Effective as of April 27, 2004, the Company and ThomasJ. Shaw entered into a Settlement Agreement and Release (the “NMT SettlementAgreement”) with New Medical Technology, Inc.; New Medical Technology, LTD. andNMT Group PLC (collectively “NMT”). Pursuant to the NMT Settlement AgreementNMT and all parties acting in concert with them are enjoined from importing theNMT Safety Syringe into the United States and from making, using, selling, oroffering to sell the NMT Safety Syringe within the United States until thelapse or expiration of the subject patents. In addition NMT paid One MillionDollars ($1,000,000.00) to the Company.
| **14.** | **401(k)  PLAN** |
|---------|------------------|

 

The Company implemented an employee savings andretirement plan (the “401(k) Plan”) in 2005 that is intended to be atax-qualified plan covering substantially all employees.  Under the terms of the 401(k) Plan, employeesmay elect to contribute up to 90% of their compensation, or the statutoryprescribed limit, if less.  The Companymay, at its discretion, match employee contributions.  The Company did not make any matchingcontributions in 2006 and 2005.
| **15.** | **BUSINESS SEGMENTS** |
|---------|-----------------------|

 

|                      | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**   | ** ** |
|----------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic sales       |       | $         | 22,240,347 |      | $          | 22,310,150 |       | $ | 20,193,999 |   |
| International  sales |       | 3,084,172 |       | 1,924,866 |       | 1,327,701  |       |
| Total sales          |       | $         | 25,324,519 |      | $          | 24,235,016 |       | $ | 21,521,700 |   |
|                 |       |      |       |      |       |       |       |
| Long-lived  assets   |       |      |       |      |       |       |       |
| Domestic             |       | $         | 12,212,140 |      | $          | 11,925,976 |       | $ | 11,056,865 |   |
| Foreign              |       | $         | —     |      | $          | —     |       | $ | — |   |

 

The Company does not operate in separate reportablesegments. The Company has no long-lived assets in foreign countries. Shipmentsto international customers generally require a prepayment either by wiretransfer or an irrevocable confirmed letter of credit.  The Company does extend credit to internationalcustomers on some occasions depending upon certain criteria, including, but notlimited to, the credit worthiness of the customer, the stability of thecountry, banking restrictions, and the size of the order.  All transactions are in United States currency.
| **16.** | **SUBSEQUENT  EVENTS** |
|---------|------------------------|

 

On March 27, 2007, the Board of Directors declared adividend on the Series I and Series II Class B Convertible Preferred Stock tobe paid on July 24, 2007 to Shareholders of Record on July 2, 2007.  Arrearages will be paid through June 30, 2007in the amount of $1.1 million.

 

F-23

----

| **17.** | **SELECTED  QUARTERLY FINANCIAL DATA - UNAUDITED** |
|---------|----------------------------------------------------|

 

The selected quarterlyfinancial data for the periods ended December 31, 2006 and 2005, have beenderived from our unaudited financial statements and include all adjustments,consisting only of normal recurring adjustments, necessary for a fairpresentation of the results of the interim periods.

|                                         | ** ** | **(In thousands, except for per share and   outstanding stock amounts)** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------|------------|
|                                         | ** ** | **2006**                                                                 | ** ** |
| ** **                              | ** ** | **Quarter 1**                                                       | ** ** | **Quarter 2** | ** ** | **Quarter 3** | ** ** | **Quarter 4** | ** ** |
| Sales, net                              |       | $                                                                        | 3,882      |   | $ | 5,302 |   | $ | 5,332 |   | $ | 6,381 |   |
| Reimbursed discounts                    |       | 1,641                                                                    |       | 2,135 |   | 651 |   | — |   |
| Total sales                             |       | 5,523                                                                    |       | 7,437 |   | 5,983 |   | 6,381 |   |
| Cost of Sales                           |       | 3,611                                                                    |       | 4,713 |   | 4,650 |   | 4,804 |   |
| Gross profit                            |       | 1,912                                                                    |       | 2,724 |   | 1,333 |   | 1,577 |   |
| Total operating  expenses               |       | 3,152                                                                    |       | 3,489 |   | 3,472 |   | 4,148 |   |
| Loss from operations                    |       | (1,240                                                                   | )          | (765 | ) | (2,139 | ) | (2,571 | ) |
| Interest income                         |       | 462                                                                      |       | 489 |   | 513 |   | 512 |   |
| Interest expense, net                   |       | (111                                                                     | )          | (128 | ) | (128 | ) | (44 | ) |
| Loss before income  taxes               |       | (889                                                                     | )          | (404 | ) | (1,754 | ) | (2,103 | ) |
| Benefit for income  taxes               |       | (289                                                                     | )          | (201 | ) | (531 | ) | (259 | ) |
| Net loss                                |       | (600                                                                     | )          | (203 | ) | (1,223 | ) | (1,844 | ) |
| Preferred stock  dividend requirements  |       | (367                                                                     | )          | (364 | ) | (361 | ) | (359 | ) |
| Loss applicable to  common shareholders |       | $                                                                        | (967       | ) | $ | (567 | ) | $ | (1,584 | ) | $ | (2,203 | ) |
| Loss per share-basic                    |       | $                                                                        | (0.04      | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.09 | ) |
| Loss per share-diluted                  |       | $                                                                        | (0.04      | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.09 | ) |
| Weighted average shares  outstanding    |       | 23,521,551                                                               |       | 23,594,117 |   | 23,618,164 |   | 23,634,164 |   |
|                                    |       |                                                                     |       |   |   |   |   |   |   |
| Profit margin                           |       | 34.6                                                                     | %          | 36.6 | % | 22.3 | % | 24.7 | % |

 

|                                                    | ** ** | **2005**           | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **Quarter 1** | ** ** | **Quarter 2** | ** ** | **Quarter 3** | ** ** | **Quarter 4** | ** ** |
| Sales, net                                         |       | $                  | 4,064      |   | $ | 4,517 |   | $ | 6,139 |   | $ | 6,437 |   |
| Reimbursed discounts                               |       | 180                |       | 498 |   | 900 |   | 1,500 |   |
| Total sales                                        |       | 4,244              |       | 5,015 |   | 7,039 |   | 7,937 |   |
| Cost of sales                                      |       | 2,732              |       | 4,003 |   | 4,106 |   | 4,588 |   |
| Gross profit                                       |       | 1,512              |       | 1,012 |   | 2,933 |   | 3,349 |   |
| Total operating  expenses                          |       | 2,515              |       | 2,826 |   | 3,104 |   | 3,238 |   |
| Income (loss) from  operations                     |       | (1,003             | )          | (1,814 | ) | (171 | ) | 111 |   |
| Interest income                                    |       | 252                |       | 334 |   | 370 |   | 417 |   |
| Interest expense, net                              |       | (62                | )          | (61 | ) | (116 | ) | (101 | ) |
| Net income (loss)  before income taxes             |       | (813               | )          | (1,541 | ) | 83 |   | 427 |   |
| Provision (benefit) for  income taxes              |       | (290               | )          | (481 | ) | 55 |   | 111 |   |
| Net income (loss)                                  |       | (523               | )          | (1,060 | ) | 28 |   | 316 |   |
| Preferred Stock  dividend requirements             |       | (381               | )          | (377 | ) | (375 | ) | (370 | ) |
| Earnings (loss)  applicable to common shareholders |       | $                  | (904       | ) | $ | (1,437 | ) | $ | (347 | ) | $ | (54 | ) |
| Earnings (loss) per  share-basic                   |       | $                  | (0.04      | ) | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.00 | ) |
| Earnings (loss) per  share-diluted                 |       | $                  | (0.04      | ) | $ | (0.06 | ) | $ | (0.01 | ) | $ | (0.00 | ) |
| Weighted average shares  outstanding               |       | 23,203,665         |       | 23,251,998 |   | 23,371,562 |   | 23,501,884 |   |
| Profit margin                                      |       | 35.6               | %          | 20.2 | % | 41.7 | % | 42.2 | % |

 

F-24

----

**Item 9.Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure.**

The Company has had no change in accountants in thelast two fiscal years.

**Item 9A.Controls and Procedures.**

Pursuant to paragraph (b) of Rule 13a-15 or Rule 15d-15of the Securities Exchange Act of 1934 (the “Exchange Act”) and on March 29, 2007,our President, Chairman, and Chief Executive Officer, Thomas J. Shaw (the “CEO”),and our Vice President and Chief Financial Officer, Douglas W. Cowan (the “CFO”),acting in their capacities as our principal executive and financial officers,evaluated the effectiveness of our disclosure controls and procedures, asdefined in Rule 13a-15(e) or Rule 15d-15(e), and determined that, as ofDecember 31, 2006, and based on the evaluation of these controls and proceduresas required by paragraph (b) of Rule 13a-15, or Rule 15d-15 there were nosignificant deficiencies in these procedures. The CEO and CFO determined thatour disclosure controls and procedures are effective.

Also, the CEO and CFO did not identify fraud thatinvolved our management or any other employee who had a significant role in ourinternal controls.  There was a materialweakness identified whereby a significant entry was initially made in the wrongperiod.  The error was corrected andcorrective action will be implemented. They did not find any other deficiencies or weaknesses which wouldrequire changes to be made or corrective actions to be taken related to ourinternal controls.****There havebeen no changes during the fourth quarter of 2006 or subsequent to December 31,2006, in our internal controls over financial reporting or in any other factorthat has materially affected or is reasonably likely to materially affect ourinternal controls over financial reporting.

**Item 9B.Other Information.**

We will hold our annual meeting on September 28, 2007at Little Elm City Hall; 100 West El Dorado Parkway; Little Elm, Texas, 75068.

**PART III**

**Item 10.Directors and Executive Officers of the Registrant.**

The following table sets forth information concerningour Directors, executive officers, and certain of our significant employees asof the date of this filing. Our Board of Directors consists of a total of seven(7) members, two (2) members of which are Class 1 Directors and five (5) ofwhich are Class 2 Directors which serve for two-year terms.

| Name                 | ** ** | ** ** | ** ** | **Age**                                                                      | ** ** | **Position** | ** ** | **Term as  Director Expires** |
|----------------------|------------|------------|------------|------------------------------------------------------------------------------|------------|--------------|------------|-------------------------------|
| **EXECUTIVES**       | ** ** | ** ** | ** ** | ** **                                                                   | ** ** | ** **   |
| Thomas J. Shaw       |       | 56         |       | Chairman, President,  Chief Executive Officer, and Class 2 Director          |       | 2008         |
| Douglas W. Cowan     |       | 63         |       | Vice President, Chief  Financial Officer, Treasurer, and Class 2 Director    |       | 2008         |
| Kathryn M.  Duesman  |       | 44         |       | Executive Director,  Global Health                                           |       | N/A          |
| Russell B.  Kuhlman  |       | 53         |       | Vice President, Sales                                                        |       | N/A          |
| Michele M.  Larios   |       | 40         |       | Vice President, General  Counsel, and Secretary                              |       | N/A          |
| Lawrence G.  Salerno |       | 47         |       | Director of Operations                                                       |       | N/A          |
| Steven R. Wisner     |       | 49         |       | Executive Vice President, Engineering &  Production and Class 2 Director |       | 2008         |

 

22

----

 

| **INDEPENDENT DIRECTORS**  | ** ** | ** ** | ** ** | ** **                                | ** ** | ** ** |
|----------------------------|------------|------------|------------|-------------------------------------------|------------|------------|
| Marco Laterza              |       | 59         |       | Class 1 Director                          |       | 2007       |
| Marwan Saker               |       | 51         |       | Class 2 Director                          |       | 2008       |
| Jimmie Shiu                |       | 78         |       | Class 1 Director                          |       | 2007       |
| Clarence Zierhut           |       | 78         |       | Class 2 Director                          |       | 2008       |
|                       |       |       |       |                                      |       |       |
| **SIGNIFICANT  EMPLOYEES** | ** ** | ** ** | ** ** | ** **                                | ** ** | ** ** |
| Shayne Blythe              |       | 38         |       | Director of Sales and Marketing Logistics |       | N/A        |
| John W. Fort III           |       | 38         |       | Director of Accounting                    |       | N/A        |
| James A. Hoover            |       | 59         |       | Director of Quality Assurance             |       | N/A        |
| R. John Maday              |       | 46         |       | Production Manager                        |       | N/A        |
| Judy Ni Zhu                |       | 48         |       | Research and Development Manager          |       | N/A        |
| Phillip L. Zweig           |       | 60         |       | Communications Director                   |       | N/A        |

 

**EXECUTIVES**

Thomas J. Shaw, the Founder of the Company, has servedas Chairman of the Board, President, Chief Executive Officer, and Directorsince the Company’s inception. In addition to his duties overseeing themanagement of the Company, he continues to lead our design team in productdevelopment of other medical safety devices that utilize his unique patentedfriction ring technology. Mr. Shaw has over 25 years of experience inindustrial product design and has developed several solutions to complicatedmechanical engineering challenges. He has been granted multiple patents and hasadditional patents pending. Mr. Shaw received a Bachelor of Science in CivilEngineering from the University of Arizona and a Master of Science inAccounting from the University of North Texas.

Douglas W. Cowan is a Vice President and our ChiefFinancial Officer, Treasurer, and a Director. Mr. Cowan joined the Company asChief Financial Officer and was elected to the Board of Directors in 1999. Heis responsible for the financial, accounting, risk management and forecastingfunctions of the Company. Mr. Cowan has a Bachelor of Business Administrationfrom Texas Technological College. He is a CPA licensed in Texas.

Kathryn M. Duesman, RN, joined us in 1996 andcurrently serves as the Executive Director, Global Health. She providesclinical expertise on existing VanishPoint® products as well as those in development. Shehas been instrumental in developing training and marketing materials and hasspoken and been published on needle safety issues. Ms. Duesman works withinternational agencies to promote the use of safe technologies in developingcountries.  Ms. Duesman is a 1985graduate of Texas Woman’s University with a Bachelor of Science in Nursing. Ms.Duesman’s clinical background as a registered nurse includes diagnostic, acute,and home healthcare nursing.

     RussellB. Kuhlman joined us in February 1997 and is our Vice President, Sales. Mr.Kuhlman is responsible for management of the sales force and liaison with GPOsand product training for our sales organization, as well as distribution. Mr.Kuhlman’s efforts with us have resulted in bringing onboard SpecialtyDistributors, influencing legislation, and educating influential healthcarerepresentatives about the benefits of the VanishPoint® product line. Mr. Kuhlman is respectedthroughout the industry and is a main contributor to the safety effort in thiscountry. He has a sales background in the medical service industry thatincludes his most recent work for ICU Medical (formerly Bio-Plexus), a medicaldevice manufacturing company, from 1994 to 1997, where he developed strategicmarketing plans for new safety products. Prior to his work there, Mr. Kuhlmanworked as Director of Sales and Marketing for Ryan Winfield Medical, Inc., amedical device manufacturing company, from 1989 to 1994, where he launchedseveral new products, developed strategic sales territories, and was thetrainer for Sales and Regional Managers. Mr. Kuhlman also worked for BDVacutainer® Systems, a medical products company, inseveral territories from 1980 to 1989, where he was recognized as the NationalSales Representative for the year 1987. Mr. Kuhlman holds a Bachelor of Sciencein Finance from the University of Tennessee.

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Michele M. Larios joined us in February 1998 andcurrently serves as a Vice President, General Counsel and Secretary of theCompany. Ms. Larios is responsible for the legal and legislative, qualityassurance, human resource and regulatory functions of the Company. In additionto working on legal matters and with outside counsel, Ms. Larios works withlegislators on pertinent issues and relevant legislation. Ms. Larios received aBachelor of Arts in Political Science from Saint Mary’s College in Moraga,California, and a Juris Doctorate from Pepperdine University School of Law inMalibu, California.

Lawrence G. Salerno has been employed with us since1995 and has served as Director of Operations for us since 1998. He isresponsible for the manufacture of all VanishPoint® products, as well as all product developmentand process development projects. In addition, he supervised all aspects of theconstruction of our facilities in Little Elm, Texas. Mr. Salerno is the brotherof Lillian E. Salerno, a shareholder holding more than 10 percent of the CommonStock.

Steven R. Wisner joined us in October 1999 asExecutive Vice President, Engineering and Production and Director. Mr. Wisner’sresponsibilities include the management of engineering, production,  Chinese operations, and international sales.Mr. Wisner has over 30 years of experience in product design, development, andmanufacturing. Mr. Wisner holds a Bachelor of Science in Computer Engineeringfrom Iowa State University.

**INDEPENDENT DIRECTORS**

Marco Laterza joined us as a Class 1 Directoreffective as of March 22, 2005. Since 1988, Mr. Laterza has owned and operateda public accounting practice. His practice includes corporate, partnership andindividual taxation, compilation/review of financial statements, financialplanning, business consulting, and trusts and estates. From 2004 to the presentMr. Laterza has also served as the Chief Financial Officer for EZ Blue SoftwareCorporation, a development stage software company. Formerly, Mr. Laterza wasemployed in a number of positions from 1977 to 1985 with El Paso Natural GasCompany eventually serving as its Director of Accounting. Mr. Laterza receivedhis Bachelors of Business Administration in Accounting from Pace University in1972. He is a Certified Public Accountant and has received a Certificate ofEducational Achievement in Personal Financial Planning from the AmericanInstitute of CPAs.

Marwan Saker first joined our Board of Directors inJune 2000. Since 1983, Mr. Saker has served as Chief Executive Officer ofSovana, Inc., an export management company that supplies to overseas markets.Since 2000, he has served as Director of Consolidated Food Concepts Inc.  Since 1986, he has served as President ofInternational Exports & Consulting Inc., an export management, consulting,and distribution company. Since 2000, he has served as Vice President ofHanneke Corp., an overseas sourcing company. From 1998 to 2001, he served as aMember of My Investments, LLC, an equity investment company. Since 1999, he hasserved as President of Saker Investments Inc., a company that manages aninvestment portfolio. Since 1998, he has served as a General Partner of MayaInvestments, Ltd., an investment management limited partnership. He also servesas a Member of MMDA, LLC, a real estate development company. Mr. Saker hasacted as a representative for United States companies seeking distribution,licensing, and franchising in the Middle East, Europe, and North Africa. Mr.Saker was instrumental in developing successful partnerships in more than 15countries. He offices in Dallas, Texas.

Jimmie Shiu, M.D. joined us again as a class 1Director effective as of March 15, 2005. He previously served as a Director forthe Company from 1996 to 2002 (both generally elected and elected by the SeriesA Convertible Preferred Stockholders). Prior to retirement in 1998, Dr. Shiuwas in private practice as a Board Certified Otolaryngologist at PresbyterianHospital in Dallas for 31 years. Dr. Shiu completed his undergraduate work atAbilene Christian University and received his medical degree from theUniversity of Texas Southwestern Medical Center at Dallas, Texas.

Clarence Zierhut has served on our Board of Directorssince April 1996. Since 1955, Mr. Zierhut has operated an industrial designfirm, Zierhut Design, now Origin Design, that develops new products fromconcept through final prototypes.****During hisprofessional career, Mr. Zierhut has created over 3,000 

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product designs for more than 350 companies worldwide,in virtually every field of manufacturing, and has won many internationalawards for design excellence. His clients have included Johnson & Johnson,Abbott Laboratories, Gould, and McDonnell Douglas. He received a Bachelor of Artsfrom Art Center College of Design in Los Angeles, California.

**SIGNIFICANT EMPLOYEES**

Shayne Blythe has been with the Company for over tenyears and is our Director of Sales and Marketing Logistics.  She is responsible for developing andimplementing strategic directions, objectives, comprehensive sales andmarketing plans, and programs.  Inaddition, she directs and oversees all aspects of the distribution process andcustomer service policies in order to monitor and maintain customersatisfaction.  Prior to joining us, Ms.Blythe served as Office Manager for Checkmate Engineering where she assistedwith the original 3cc syringe and other SBIR grant projects.  Ms. Blythe has a Bachelors of BusinessAdministration in management from American International University.

John W. Fort III is our Director of Accounting. Mr.Fort joined us in March of 2000 as a Financial Analyst and has served as ourDirector of Accounting since October of 2002. His primary responsibilitiesinclude managing the day-to-day operations of the Accounting and FinanceDepartment, coordination of the annual audits, and interim reviews by ourindependent accountants, as well as the cost accounting and forecastingfunctions of the Company. Prior to joining us, he served as the Manager ofFinancial Planning for the product-marketing department of ExcelCommunications. Mr. Fort also served as the Manager of Budgeting andProjections for Snelling and Snelling, Inc., an international personnelservices firm. Mr. Fort holds a Bachelor of Business Administration inAccounting from Tarleton State University.

James A. Hoover joined us in February 1996 and is ourDirector of Quality Assurance. Prior to his becoming Director of QualityAssurance he was Production Manager. He is responsible for quality assurancefunctions of the Company. Mr. Hoover has also developed and implemented FDArequired procedures and has been involved in the FDA inspection process. Mr.Hoover joined us after working for Sherwood for 26 years. During his tenurewith Sherwood, a medical device manufacturing company, he gained hands-onexperience in all aspects of the medical device manufacturing process. Mr.Hoover began his career with Sherwood as a materials handler and worked his wayup through a series of positions with added responsibilities to his finalposition there as Production Manager of Off-Line Molding, OperatingRoom/Critical Care. In this capacity, he managed several departments, ranseveral product lines, and hired and supervised over 200 employees. While atSherwood, he also gained experience with one of the country’s first safetysyringes, the Monoject®.

R. John Maday joined us in July 1999 and is ourProduction Manager. He is responsible for supervision of the production of ourproducts. Prior to becoming Production Manager on January 1, 2005, he served asour Production General Supervisor. Mr. Maday has 23 years of manufacturingexperience in both class II and III medical devices. He spent three years withMentor Corp. supervising two production departments and 13 years with SherwoodMedical in which he gained hands-on experience in all aspects of medical devicemanufacturing including managing the Kit and Packaging department with over 225employees. Mr. Maday’s formal training includes FDA, and Total QualityManagement Systems and is certified as a Black Belt of Six Sigma Methodology.

Judy Ni Zhu joined us in 1995 and is our Research andDevelopment Manager. Her primary focus is on new product development andimprovement of current products. Prior to joining us, Ms. Zhu worked withCheckmate Engineering, an engineering firm, as a design engineer on theoriginal 3cc syringe and other SBIR grant projects. Ms. Zhu received herBachelor of Science from Northwest Polytechnic University in Xian, China, andher Master of Engineering from University of Texas at Arlington. Ms. Zhu hasassisted in design modifications for the 3cc syringe, which have maximized bothproduct reliability and production efficiency. She also designed and developeda manual needle assembly machine and an automatic lubricating and cappingsystem for the 3cc syringe and developed and assisted in the design ofautomated blood collection tube holder assembly equipment. Ms. Zhu hascollaborated with Ms. Duesman and Mr. Shaw in the filing of several patent applications.

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Phillip L. Zweig joined us in December 1999 asCommunications Director.  In that role,he has worked with the media, including *60 Minutes* and *The New York Times*, on major stories involving theCompany.  He has also advanced theCompany’s interests in Washington on key issues such as hospital grouppurchasing organizations (GPO’s) and unsafe healthcare in Africa.  Mr. Zweig is a prize-winning financialjournalist who has worked as a staff reporter at *The AmericanBanker*, *The Wall Street Journal*,*Bloomberg Business News*, and other mediaorganizations.  From 1993 to 1998, heserved as corporate finance editor at *Business Week*where he wrote a major article on the Company. He is also the author of two books: “Belly Up: The Collapse of the PennSquare Bank” (Crown, 1985) and “Wriston: Walter, Wriston, Citibank, and theRise and Fall of American Financial Supremacy” (Crown, 1996).  Before joining us, he worked as a freelancefinancial writer and editorial consultant. His clients included Accenture and Boston Consulting Group.  Mr. Zweig received a Bachelor of Arts inBehavioral Psychology from Hamilton College and a Master of BusinessAdministration from the Baruch College Graduate School of Business.

FAMILY RELATIONSHIPS

There are no family relationships among the abovepersons except as set forth above.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None of the above persons or any business in whichsuch person was an executive officer have been involved in a bankruptcypetition, been subject to a criminal proceeding (excluding traffic violationsand other minor offenses), been subject to any order enjoining or suspendingtheir involvement in any type of business, or been found by a court oradministrative body to have violated a securities law.

DIRECTORSHIPS IN OTHERCOMPANIES

No Directors hold Directorships in reporting companiesother than as set forth above.

SECTION 16(a) BENEFICIALOWNERSHIP REPORTING COMPLIANCE

Section 16 of the Exchange Act requires our Directors,executive officers, and persons who own more than 10 percent of a registeredclass of our equity securities to file with the Commission initial reports ofbeneficial ownership (Form 3) and reports of changes in beneficial ownership(Forms 4 and 5) of our Common Stock and our other equity securities. Officers,Directors, and greater than 10 percent shareholders are required by theCommission’s regulations to furnish us with copies of all Section 16(a) reportsthey file.

Ms. Suzanne August, a 10% shareholder, filed a Form 3late.  The Form 3 addressed onetransaction (her receipt of 2,800,000 shares of Common Stock).  The Form 3 was filed on December 5, 2006.

CODE OF ETHICS

Effective as of March 9,2004, we adopted a code of ethics that applies to all employees, including, butnot limited to, the Company’s principal executive and financial officers.  Our Code of Business Conduct and Ethics isdesigned to deter wrongdoing and to promote:

1.                                       Honestand ethical conduct, including the ethical handling of actual or apparentconflicts of interests between personal and professional relationships; 

2.                                       Full,fair, accurate, timely, and understandable disclosure in reports and documentsthat we file with, or submit to, the Commission and in other publiccommunications; 

3.                                       Compliancewith applicable governmental laws, rules, and regulations; 

4.                                       Theprompt, internal reporting of violations of the code to an appropriate personor persons identified in the code; and 

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5.                                       Accountabilityfor adherence to the code. 

We have posted a copy of the code on our website atwww.vanishpoint.com/investor.asp.  Pleasefollow link to Governance then follow link to Charters, then click RVPCorporate Code of Conduct. Any amendment to this code or waiver of itsapplication to the principal executive officer, principal financial officer,principal accounting officer, or controller or similar person shall bedisclosed to investors by means of a Form 8-K filing with the Commission. Wewill provide to any person without charge, upon request, a copy of such code ofethics. Such requests should be submitted in writing to Mr. Douglas W. Cowan at511 Lobo Lane, P.O. Box 9, Little Elm, Texas 75068-0009.

AUDIT COMMITTEE

We have a separately-designated standing AuditCommittee established in accordance with Section 3(a)(58)(A) of the Exchange Actconsisting of Messrs. Clarence Zierhut, Marco Laterza, and Marwan Saker. Eachof the members of the Audit Committee is independent as determined by The AMEXrules and Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

Audit Committee FinancialExpert 

The Board of Directors has determined that we have atleast one financial expert serving on the Audit Committee.  Mr. Marco Laterza serves as the Company’sdesignated Audit Committee Financial Expert. Mr. Laterza is independent as defined for Audit Committee members by thelisting standards of the AMEX.

**Item 11.Executive Compensation.**

COMPENSATION DISCUSSION AND ANALYSIS

The Objectives ofOur Compensation Program

Ourexecutive officer compensation program (the “Compensation Program”) is based onthe belief that competitive compensation is essential to attract, retain,motivate, and reward highly qualified and industrious executive officers.  Our Compensation Program is intended toaccomplish the following purposes:

attractand retain highly talented and productive executive officers;

provideincentives and rewards for superior performance by the executive officers; and

alignthe interests of executive officers with the interests of our stockholders.

What theCompensation Program is Designed to Award

OurCompensation Program is designed to award both superior long-term performanceby our executive officers and their loyalty.

Summary of EachElement of Compensation

Toachieve these objectives, the Compensation and Benefits Committee has approvedan executive officer compensation program that consists of four basiccomponents:

base salary;

periodic short-termincentive compensation in the form of cash bonuses;

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periodic long-termincentive compensation in the form of stock options; and

general medical, life,and benefit programs (which are generally available on the same terms to allemployees).

Why We Choose toPay Each Element of Our Compensation Program

*BaseSalary*

Wechoose to pay a significant component of our compensation in base salary due tothe fact that our financial performance is constrained by the monopolisticactivities of BD.  We have been blockedfrom access to the market by exclusive marketing practices engaged in by BD whodominates the market. We believe that their monopolistic business practicescontinue despite their paying $100 million to settle a lawsuit with the Companyfor anticompetitive practices, business disparagement, and tortiousinterference. Until such time as we believe that the Company has access to themarket, we believe that it is appropriate to weigh our Compensation Programheavily in favor of base salaries rather than in incentive compensation.

*CashBonuses*

Fromtime to time and when our cash reserves allow (taking into account thecontinued need to compete in this monopolistic environment and the continuedneed for significant cash reserves) we grant cash bonuses in order to rewardsignificant efforts or the accomplishment of short term goals. The last bonuseswere granted in 2003.  The CEO has neverbeen granted any bonuses of any kind.

*Long-TermIncentives: Stock Options*

Long-termincentives are provided through grants of stock options primarily under theCompany’s 1999 Stock Option Plan.  Thegrants are designed to align the interests of executive officers with those ofstockholders and to provide each executive officer with a significant incentiveto manage the Company from the perspective of an owner with an equity stake inthe Company.

How  We determine the Amount or Formula forPayment in Light of Our Objectives

Executivecompensation remains the same until there is a review of such compensation bythe Compensation and Benefits Committee. Compensation, other than that of the Chief Executive Officer, is notreviewed annually.  Under the terms ofMr. Shaw’s employment agreement, his compensation is reviewed annually.  In the past, when there is a review ofexecutive compensation, we have retained an outside consulting firm, TrinityExecutive Recruiters, to provide benchmarks for similar compensation given themultiple and varied positions each executive fulfills as well as the size ofthe Company and the hostile environment in which it operates.

*BaseSalary*

Thebase salary for each of the Company’s executive officers is subjectivelydetermined primarily on the basis of the following factors:  experience, individual performance,contribution to the Company’s performance, level of responsibility, duties andfunctions, salary levels in effect for comparable positions within and withoutthe Company’s industry, and internal base salary comparability considerations.These base salaries are reviewed periodically and may be adjusted in thediscretion of the Compensation and Benefits Committee, based upon the factorsdiscussed in the previous sentence, as well as upon individual performanceduring the previous fiscal year, changes in the duties, responsibilities andfunctions of the executive officer, and general changes in the compensationpeer group in which the Company competes for executive talent.  The relative weight given to each of thesefactors differs from individual to individual, as the Compensation and BenefitsCommittee deems appropriate.

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*PeriodicCash Bonuses*

For2006, the Company did not grant bonuses to its executive officers.  These bonuses, when paid, are paid on adiscretionary basis, as determined by the Compensation and Benefits Committee.  Factors considered by the Compensation andBenefits Committee in determining discretionary cash bonuses are personalperformance, level of responsibility, as well as many of the same factorsconsidered by the Compensation and Benefits Committee and discussed above whenit reviews and sets base salaries, except with a greater focus on the priorfiscal year.

*Long-Term Incentive: StockOptions*

Thenumber of shares subject to each stock option grant is subjectively determinedby the Compensation and Benefits Committee or the Board of Directors primarilyrelated to the executive officer’s anticipated contributions to the Company’sfuture success, the size of comparable awards made to individuals in similarpositions within the industry, the individual’s potential for increasedresponsibility over the option term and the individual’s personal performancein recent periods.  The Compensation andBenefits Committee also considers the number of unvested stock options held bythe executive officer in order to maintain an appropriate level of equityincentive for that individual.  However,the Compensation and Benefits Committee does not adhere to any specificguidelines as to the relative stock option holdings of the Company’s executiveofficers.  The Company granted no optionsto executive officers during 2006.

Eachstock option grant allows the executive officer to acquire shares of CommonStock at a fixed price per share (typically, and never less than, the closingstock price of the Common Stock on the date of grant) for a fixed period(usually ten years).  Each optiongenerally becomes exercisable after three years, contingent upon the executiveofficer’s continued employment with the Company.  Accordingly, the stock option grant willprovide a return to the executive officer only if the executive officer remainsemployed by the Company during the vesting period, and then only if the marketprice of the underlying Common Stock appreciates.

Allocation BetweenLong-Term/Current and Between Cash/ Non-Cash Compensation

Allof our long-term compensation consists of non-cash compensation in the form ofstock options.  We believe that thegranting of stock options incentivizes executives to maximize the long-termstrengths of the Company as well as its stock price.  However, because we are operating in amonopolistic environment and the Company’s stock price has little relationshipwith the Company’s performance, the most significant component of compensationis base salary and not stock options. Management is incented to maximize shareholder value and will be rewardedif they do so.  However, a significantbase salary enables us to retain this competent management despite the currentinability to provide valuable equity incentives.

Weexpense all of our option costs as we do the costs of salaries andbonuses.  Accordingly, the impact of taxtreatment of various compensation forms does not impact our compensationdecisions.

How DeterminationsAre Made as to When Awards Are Granted

Generally,option awards are granted at the discretion of the Board.  The exercise price is equal to the closingprice of the Company’s stock on the date of the grant.

Unfortunately,our stock price does not always react as expected to Company achievements.  Accordingly, at times options have beengranted to aid in retaining competent and experienced executives without regardto the then current stock price.

Inaddition, there is no relationship between the date of grant of options and theCompany’s possession of material non-public information.  Because we are competing in a contentiousantitrust environment, we are often in possession of material non-publicinformation.  However, all optionsgranted to executives require a minimum three year vesting period.  Furthermore, it is the Company’s policy with 

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regard to options that (although the options could beexercised) the underlying shares could not be sold into the market while theexecutive was in possession of material non-public information under ourinsider trading policy.   Accordingly, webelieve that there is minimal risk of the executive profiting from suchmaterial nonpublic information.

What SpecificItems of Corporate Performance Are taken Into Account in Making CompensationDecisions and How It Affects the Structure of Compensation

Cashreserves as well as trends in sales and costs are taken into account whenconsidering the advisability of increasing base salaries or granting cashbonuses.  At such times that any of thesefactors make it inadvisable to increase salaries or grant bonuses, then considerationis given to increasing option awards taking into account the value of prioroption awards.

Awardsare granted on the basis of historical performance.  Accordingly, there is no discretion to changethe awards.

Factors WeConsider in Determining to Change Compensation Materially

We considerthe cash position of the Company, current liquidity trends, and the short termand long term needs for cash reserves (especially in light of the hostileenvironment in which we operate) when evaluating whether we can changecompensation materially at a given time.

Onan individual by individual basis, we also consider the value of past optioncompensation, the competitiveness of that individual’s base salary, and theirindividual contribution to the Company’s goals.

How AmountsRealized From Past Compensation Affect Future Compensation

Weare very aware that the vast majority of options granted to our executives aresignificantly out of the money and that they may remain so until we are able toobtain real access to the market. Accordingly, future compensation will likely continue to be dominated bybase salary as well as periodic bonuses when possible.

The Impact of theAccounting and Tax Treatments of Our Types of Compensation

Stockoptions granted to executives and other employees are expensed for accountingpurposes under FAS 123(R). Stock option expense is not recognized for taxpurposes, except in the case of non-qualified stock options.  For non-qualified stock options, theintrinsic value of the option is recognized when the option is exercised.   Incentive stock options do not qualify forany tax deduction.

Bases forSelecting Events as Payment Triggers Under the Employment Agreement with ThomasShaw

Please see Potential Payments Upon Termination Or ChangeIn Control for a discussion of our Employment Agreement with Mr. Shawincluding a discussion of certain triggers that would cause the Company toimmediately pay Mr. Shaw certain lump sum payments in the event of a change incontrol.

Benchmarking ofOur Compensation Program

In 2003, theCompany hired Trinity Executive Recruiters, Inc. to assist us in providingbenchmarks for compensation by similarly sized companies in similar industriesfor persons that hold positions which are currently fulfilled by variousmembers of our executive team.   TrinityExecutive Recruiters performed a survey of other publicly held companies with$20-$50 million in revenues in the Medical Equipment and SuppliesIndustry.  49 companies were included inthe search with a total of 346 executives. However, for each executive, the list of executives to use ascomparisons was tailored to correspond to each executive’s particular jobfunctions.

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Thesebenchmarks supported the Compensation and Benefit Committee’s recommendations(and Board’s approval of) an increase in the base salary of Mr. Wisner, Mr.Cowan, and Ms. Larios in 2003 and in 2005.

Althoughwe have obtained benchmarking information with regard to the CEO’s position,such benchmarks were not utilized as a basis for increasing Mr. Shaw’s salaryin 2005.  His salary was increased at therecommendation of the Compensation and Benefits Committee as well as aunanimous vote of the Board of Directors due to the fact that he had never beengranted options or any bonuses and had not had a material increase in salary inmany years.  However, such benchmarkssupport an increase of at least the amount made.

The Role of OurExecutives in Determining Compensation

Managementestablishes the initial proposed recommendations regarding compensation for allemployees, including themselves.  Suchproposal is then submitted to the Compensation and Benefits Committee.  In the event that the proposal is affirmed inits entirety, the proposal is then recommended to the entire Board of Directorsfor a vote.

CompensationPursuant to Employment Agreement

Wehave an Employment Agreement with Mr. Thomas J. Shaw.  However, this agreement may be altered in2007 due to changes in the tax laws.  Noother executives (or Directors) are compensated pursuant to employmentagreements.

TheEmployment Agreement with Mr. Shaw (the “Employment Agreement’) provides for aninitial period of three years which ended September 2002 that automatically andcontinuously renews for consecutive two-year periods. The Employment Agreementis terminable either by us or Mr. Shaw upon 30 days’ written notice. TheEmployment Agreement provides for an annual salary of at least $150,000 with anannual salary increase equal to no less than the percentage increase in theConsumer Price Index during the previous calendar year. (However, the Board hasauthorized a salary increase to $400,000.) The Employment Agreement requires that Mr. Shaw’s salary be reviewed bythe Board of Directors each January, which shall make such increases as itconsiders appropriate. Mr. Shaw is also entitled to participate in allexecutive bonuses as the Board of Directors, in its sole discretion, shalldetermine.  The Employment Agreement isbeing modified to avoid adverse tax consequences to Mr. Shaw created by thepassage of the American  Jobs CreationAct of 2004.

Underthe Employment Agreement, we will also provide certain fringe benefits,including, but not limited to, participation in pension plans, profit-sharingplans, employee stock ownership plans, stock appreciation rights,hospitalization and health insurance, disability and life insurance, paidvacation, and sick leave. We also reimburse him for any reasonable andnecessary business expenses, including travel and entertainment expenses,necessary to carry on his duties. Pursuant to the Employment Agreement, we haveagreed to indemnify Mr. Shaw for all legal expenses and liabilities incurredwith any proceeding involving him by reason of his being an officer or agent.We have further agreed to pay reasonable attorney fees and expenses in the eventthat, in Mr. Shaw’s sole judgment, he needs to retain counsel or otherwiseexpend his personal funds for his defense.

Mr.Shaw has agreed to a one-year non-compete, not to hire or attempt to hireemployees for one year, and to not make known our customers or accounts or tocall on or solicit our accounts or customers in the event of termination of hisemployment for one year unless the termination is without cause or pursuant toa change of control of the Company. Furthermore, Mr. Shaw has the right toresign in the event that there is a change in control which is defined as achange in the majority of directors within any 12 month period withouttwo-thirds approval of the shares outstanding and entitled to vote, or a mergerwhere less than 50 percent of the outstanding stock survives and a majority ofthe Board of Directors remains, or the sale of substantially all of our assets,or any other person acquires more than 50 percent of the voting capital. Mr.Shaw retained the right to participate in other businesses as long as they donot compete with us and so long as he devotes the necessary working time to theCompany.

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SUMMARY OF TOTALCOMPENSATION

The following Summary Compensation Table sets forththe total compensation paid or accrued by us over the prior three years to or for the account of the principalexecutive officer, the principal financial officer, and the three highest paidadditional executive officers: 
| SUMMARY COMPENSATION TABLE          | ** ** |
|-----------------------------------------------|------------|
| **Name and  principal position(a)** | ** ** | ** ** | ** ** | **Year  (b)** | ** ** | **Salary  ($)  (c)** | ** ** | **Bonus  ($)  (d)** | ** ** | **Stock  Awards  ($)  (e)** | ** ** | **Option  Awards**(1)  ($)  (f) | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)  (g)** | ** ** | **Nonqualified  Deferred  Compensation  Earnings  ($)  (h)** | ** ** | **All Other  Compensation  ($)  (i)** | ** ** | **Total  ($)  (j)** | ** ** |   |
| Thomas J. Shaw                                |       |   | 2004 |   |   | 259,632 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   |   |   |   |   |   | 259,632 |   |
| President and CEO                             |       |   | 2005 |   |   | 307,702 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   |   |   |   |   |   | 307,702 |   |
| (principal executive  officer)                |       |   | 2006 |   |   | 400,000 |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   | 0 |   |   |   |   |   |   |   |   | 400,000 |   |
|                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Douglas W. Cowan                              |       |   | 2004 |   |   | 249,231 |   |   | 0 |   |   |   | 0 |   |   |   | 112,950 |   |   |   | 0 |   |   |   |   |   |   |   |   | 362,181 |   |
| Vice  President, CFO                          |       |   | 2005 |   |   | 248,318 |   |   | 0 |   |   |   | 0 |   |   |   | 114,260 |   |   |   | 0 |   |   |   |   |   |   |   |   | 362,578 |   |
| (principal  financial                         |       |   | 2006 |   |   | 290,130 |   |   | 0 |   |   |   | 0 |   |   |   | 58,372 |   |   |   | 0 |   |   |   |   |   |   |   |   | 348,502 |   |
| officer)                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Steven R. Wisner                              |       |   | 2004 |   |   | 249,231 |   |   | 0 |   |   |   | 0 |   |   |   | 12,939 |   |   |   | 0 |   |   |   |   |   |   |   |   | 262,170 |   |
| Executive  Vice President,                    |       |   | 2005 |   |   | 247,693 |   |   | 0 |   |   |   | 0 |   |   |   | 14,240 |   |   |   | 0 |   |   |   |   |   |   |   |   | 261,933 |   |
| Engineering  and Production                   |       |   | 2006 |   |   | 290,000 |   |   | 0 |   |   |   | 0 |   |   |   | 8,367 |   |   |   | 0 |   |   |   |   |   | 6,750 |   |   | 305,117 |   |
|                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Michele M. Larios                             |       |   | 2004 |   |   | 249,231 |   |   | 0 |   |   |   | 0 |   |   |   | 112,631 |   |   |   | 0 |   |   |   |   |   |   |   |   | 361,862 |   |
| Vice  President, General                      |       |   | 2005 |   |   | 258,676 |   |   | 0 |   |   |   | 0 |   |   |   | 113,977 |   |   |   | 0 |   |   |   |   |   |   |   |   | 372,653 |   |
| Counsel                                       |       |   | 2006 |   |   | 351,299 |   |   | 0 |   |   |   | 0 |   |   |   | 58,265 |   |   |   | 0 |   |   |   |   |   |   |   |   | 409,564 |   |
|                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Russell B. Kuhlman                            |       |   | 2004 |   |   | 120,692 |   |   | 5,000 |   |   |   | 0 |   |   |   | 71,603 |   |   |   | 0 |   |   |   |   |   |   |   |   | 197,295 |   |
| Vice  President, Sales                        |       |   | 2005 |   |   | 122,067 |   |   | 0 |   |   |   | 0 |   |   |   | 12,182 |   |   |   | 0 |   |   |   |   |   |   |   |   | 134,249 |   |
|                                               |       |   | 2006 |   |   | 132,593 |   |   | 0 |   |   |   | 0 |   |   |   | 36,615 |   |   |   | 0 |   |   |   |   |   |   |   |   | 169,208 |   |

----

(1)             Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions used for grants in 2004: no dividend yield; expected volatility of37%; risk free interest rate of 4.89%; and an expected life of 9.0 years.  No options were issued in 2005 or 2006.

32

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GRANTS OFPLAN-BASED AWARDS

TheCompany did not grant any plan-based awards during 2006.  

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following Outstanding Equity Awards at FiscalYear-End Table sets forth information regarding unexercised options currentlyheld by the principal executive officer, the principal financial officer, andthe three highest paid additional executive officers.  There have been no stock awards.  
| OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END OF 2006 | ** ** |
|-----------------------------------------------------------------------------------------|------------|
| **OPTION AWARDS**                                                                  | ** ** | **STOCK AWARDS** | ** ** |
| **Name(a)**                                                                             | ** ** | ** ** | ** ** | **Number of  Securities  Underlying  Unexercised  Options   (#)   Exercisable  (b)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options   (#)   Unexercisable  (c)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options  (#)  (d)** | ** ** | **Option  Exercise  Price  ($)  (e)** | ** ** | **Option  Expiration  Date  (f)** | ** ** | **Number of  Shares or  Units of  Stock That  Have Not  Vested  (#)  (g)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have Not  Vested  ($)  (h)** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Unearned  Shares,  Units or  Other  Rights  That Have  Not Vested  (#)  (i)** | ** ** | **Equity  Incentive  Plan  Awards:  Market or  Payout  Value of  Unearned  Shares,  Units or  Other  Rights That  Have Not  Vested  (#)   (j)** | ** ** |
| Thomas J. Shaw                                                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| President and CEO                                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (principal executive officer)                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Douglas W. Cowan                                                                        |       |   | 25,000 | (1) |   |   |   |   |   |   |   |   | 10 |   |   | 06/30/09 |   |   |   |   |   |   |   |   |   |
| Vice President, CFO                                                                     |       |   | 25,000 | (2) |   |   |   |   |   |   |   |   | 10 |   |   | 11/01/10 |   |   |   |   |   |   |   |   |   |
| (principal financial                                                                    |       |   | 25,000 | (3) |   |   |   |   |   |   |   |   | 6.90 |   |   | 09/30/12 |   |   |   |   |   |   |   |   |   |
| officer)                                                                                |       |   | 125,000 | (4) |   |   |   |   |   |   |   |   | 8.65 |   |   | 06/23/13 |   |   |   |   |   |   |   |   |   |
|                                                                                         |       |   |   |   |   |   |   |   | 4,000 | (5) |   |   | 8.87 |   |   | 05/11/14 |   |   |   |   |   |   |   |   |   |
|                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Steven R. Wisner                                                                        |       |   | 150,000 | (6) |   |   |   |   |   |   |   |   | 10 |   |   | 10/24/09 |   |   |   |   |   |   |   |   |   |
| Executive  Vice President,                                                              |       |   | 15,000 | (7) |   |   |   |   |   |   |   |   | 10 |   |   | 11/01/10 |   |   |   |   |   |   |   |   |   |
| Engineering  and                                                                        |       |   | 20,000 | (8) |   |   |   |   |   |   |   |   | 6.90 |   |   | 09/30/12 |   |   |   |   |   |   |   |   |   |
| Production                                                                              |       |   | 12,500 | (9) |   |   |   |   |   |   |   |   | 8.65 |   |   | 06/23/13 |   |   |   |   |   |   |   |   |   |
|                                                                                         |       |   |   |   |   |   |   |   | 3,900 | (10) |   |   | 8.87 |   |   | 05/11/14 |   |   |   |   |   |   |   |   |   |

 

33

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| Michele M. Larios  Vice President, General Counsel |   |   | 5,000   | (11)   |   |   |   |   |   |   |   |   | 10     |   |   | 07/09/08 |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------|--------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|----------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                    |   |   | 5,000   | (12)   |   |   |   |   |   |   |   |   | 10     |   |   | 03/09/08 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 15,400  | (13)   |   |   |   |   |   |   |   |   | 10     |   |   | 06/30/09 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 25,000  | (14)   |   |   |   |   |   |   |   |   | 10     |   |   | 11/01/10 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 25,000  | (15)   |   |   |   |   |   |   |   |   | 6.90   |   |   | 09/30/12 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 124,600 | (16)   |   |   |   |   |   |   |   |   | 8.65   |   |   | 06/23/13 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   |    |   |   |   |   |   | 4,100  | (17)   |   |   | 8.87   |   |   | 05/11/14 |   |   |   |   |   |   |   |   |   |
|                                               |   |   |    |   |   |   |   |   |   |   |   |   |   |   |   |     |   |   |   |   |   |   |   |   |   |
| Russell B. Kuhlman  Vice President, Sales          |   |   | 10,000  | (18)   |   |   |   |   |   |   |   |   | 5      |   |   | 05/05/07 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 7,500   | (19)   |   |   |   |   |   |   |   |   | 10     |   |   | 07/08/08 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 15,600  | (20)   |   |   |   |   |   |   |   |   | 10     |   |   | 06/30/09 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 10,000  | (21)   |   |   |   |   |   |   |   |   | 10     |   |   | 11/01/10 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 20,000  | (22)   |   |   |   |   |   |   |   |   | 6.90   |   |   | 09/30/12 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   | 79,400  | (23)   |   |   |   |   |   |   |   |   | 8.65   |   |   | 06/23/13 |   |   |   |   |   |   |   |   |   |
|                                                    |   |   |    |   |   |   |   |   | 1,900  | (24)   |   |   | 8.87   |   |   | 05/11/14 |   |   |   |   |   |   |   |   |   |

----

(1)             Optionsfor the purchase of 12,500 shares vested on July 1, 2001 and for the remainingshares vested on July 1, 2002.

(2)             Theseoptions vested on November 1, 2003.

(3)             Theseoptions vested on September 30, 2005.

(4)             Theseoptions vested on June 23, 2006.

(5)             Theseincentive stock options will vest on May 11, 2007 assuming the recipient isstill employed by the Company.  At suchtime, these options will be reflected in future filings under column “b” in theabove chart.

(6)             Onehalf vested on October 25, 2001  and theremainder vested on October 25, 2002.

(7)             Theseshares vested on November 1, 2003.

(8)             Theseshares vested on September 30, 2005.

(9)             Theseshares vested on June 23, 2006.

(10)       Theseincentive stock options will vest on May 11, 2007 assuming the recipient isstill employed by the Company.  At suchtime, these options will be reflected in future filings under column “b” in theabove chart.

(11)       Theseshares vested on July 9, 2001.

(12)       Theseshares vested on March 9, 2001.

(13)       Onehalf vested on July 1, 2001 while the remainder vested on July 1, 2002.

(14)       Theseshares vested on November 1, 2003.

(15)       Theseshares vested on September 30, 2005.

(16)       Theseshares vested on June 23, 2006.

34

----

(17)       Theseincentive stock options will vest on May 11, 2007 assuming the recipient isstill employed by the Company.  At suchtime, these options will be reflected in future filings under column “b” in theabove chart.

(18)       Theseshares vested on May 5, 2000.

(19)       Theseshares vested on July 9, 2001.

(20)       Onehalf of these shares vested on July 1, 2001 and the remainder vested on July1,2002.

(21)       Theseshares vested on November 1, 2003.

(22)       Theseshares vested on September 30, 2005.

(23)       Theseshares vested on June 23, 2006.

(24)       Theseincentive stock options will vest on May 11, 2007 assuming the recipient isstill employed by the Company.  At suchtime, these options will be reflected in future filings under column “b” in theabove chart.

Option exercises and stockvested 

The following Option Exercises and Stock Vested Tablesets forth information regarding the exercise of stock options during the lastfiscal year by the principal executive officer, the principal financialofficer, and the three highest paid additional executive officers.

**2006 OPTION EXERCISES AND STOCK VESTED TABLE**

|                           | ** ** | **OPTION AWARDS** | ** ** | **STOCK AWARDS**                                                              | ** ** |
|---------------------------|------------|------------------------|------------|------------------------------------------------------------------------------------|------------|
| **Name  (a)**             | ** ** | ** **             | ** ** | **Number of   Shares  Acquired   on Exercise  (#)   (b)** | ** ** | **Value   Realized   on   Exercise   ($)   (c)** | ** ** | **Number of   Shares   Acquired   on   Vesting   (#)   (d)** | ** ** | **Value   Realized   on   Vesting   ($)  (e)** | ** ** |
| Thomas J. Shaw            |       |                   |       |                                                                               |       |   |   |   |   |
| President and CEO         |       |                   |       |                                                                               |       |   |   |   |   |
| (principal executive      |       |                   |       |                                                                               |       |   |   |   |   |
| officer)                  |       |                   |       |                                                                               |       |   |   |   |   |
|                      |       |                   |       |                                                                               |       |   |   |   |   |
| Douglas W. Cowan          |       |                   |       |                                                                               |       |   |   |   |   |
| Vice President, CFO       |       |                   |       |                                                                               |       |   |   |   |   |
| (principal financial      |       |                   |       |                                                                               |       |   |   |   |   |
| officer)                  |       |                   |       |                                                                               |       |   |   |   |   |
|                      |       |                   |       |                                                                               |       |   |   |   |   |
| Steven R. Wisner          |       | 2,500                  |       | $                                                                                  | 6,750      | (1) |   |   |   |   |
| Executive Vice President, |       |                   |       |                                                                               |       |   |   |   |   |
| Engineering and           |       |                   |       |                                                                               |       |   |   |   |   |
| Production                |       |                   |       |                                                                               |       |   |   |   |   |
|                      |       |                   |       |                                                                               |       |   |   |   |   |
| Michele M. Larios         |       |                   |       |                                                                               |       |   |   |   |   |
| Vice President,           |       |                   |       |                                                                               |       |   |   |   |   |
| General Counsel           |       |                   |       |                                                                               |       |   |   |   |   |
|                      |       |                   |       |                                                                               |       |   |   |   |   |
| Russell B. Kuhlman        |       |                   |       |                                                                               |       |   |   |   |   |
| Vice President, Sales     |       |                   |       |                                                                               |       |   |   |   |   |
|                           |            |                        |            |                                                                                    |            |  |  |  |  |  |  |  |

----

(1)             Thisvalue is calculated by subtracting the cost to purchase the shares via exerciseof the option ($2,500) from the market price of the underlying securities(based on the closing price of $3.70 on the date of exercise).

35

----

Pension benefits

The Company does not have a pension plan other thanthe 401(k) plan available to all employees. 

401(k) Plan

We implemented an employee savings and retirementplan (the “401(k) Plan”) in 2005 that is intended to be a tax-qualified plancovering substantially all employees. Under the terms of the 401(k) Plan, employees may elect to contribute upto 90% of their compensation, or the statutory prescribed limit, if less.  We may, at our discretion, match employeecontributions.  As of December 31, 2006,we made no matching contributions.

NON-QUALIFIEDDEFERRED COMPENSATION

The Company does not have a Non-Qualified Deferred Compensation plan.

Potential Payments Upon Termination or Change inControl

The following table identifies the types and amountsof payments that shall be made to Mr. Thomas Shaw, our Chief Executive Officer,in the event of a termination of his employment or a change in control of theCompany.  Such payments shall be made bythe Company and shall be one-time, lump sum payments.

**SUMMARYOF PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL**
| Payment Triggering Event                  | ** ** | ** ** | ** ** | **Salary  Through  Trigger  Event Date** | ** ** | **Amounts  Owed Under  Benefit  Plans**(1) | ** ** | **Pro-Rata  Portion of  Eligible  Bonus** | ** ** | **A Payment  Equal to the  Greater of  Salary Through  Trigger Date or  for 24 Months** | ** ** | **Payment  Equal to  90 Days’  Salary** | ** ** | **Value of  Payments**(2) | ** ** |
|-----------------------------------------------------|------------|------------|------------|-----------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------|------------|
| Death                                               |       | x          |       | x                                             |       | x                                               |       | —                                         |       |                                                                                                                                 |       |                                                   |       |
|                                                |       |       |       |                                          |       |                                            |       |                                           |       |                                                                                                                                 |       |                                                   |       |
| Disability                                          |       | x          |       | x                                             |       | x                                               |       | 800,000                                        |       |                                                                                                                                 |       | 800,000                                                |       |
|                                                |       |       |       |                                          |       |                                            |       |                                           |       |                                                                                                                                 |       |                                                   |       |
| Termination With Cause                              |       | x          |       |                                          |       | x                                               |       | —                                         |       |                                                                                                                                 |       |                                                   |       |
|                                                |       |       |       |                                          |       |                                            |       |                                           |       |                                                                                                                                 |       |                                                   |       |
| Termination Without  Cause                          |       | x          |       | x                                             |       | x                                               |       | 800,000                                        |       |                                                                                                                                 |       | 800,000                                                |       |
|                                                |       |       |       |                                          |       |                                            |       |                                           |       |                                                                                                                                 |       |                                                   |       |
| Resignation (Other Than  After a Change in Control) |       | x          |       | x                                             |       | x                                               |       | —                                         |       | 98,630                                                                                                                               |       | 98,630                                                 |       |
|                                                |       |       |       |                                          |       |                                            |       |                                           |       |                                                                                                                                 |       |                                                   |       |
| Resignation (After a Change in Control)             |       | x          |       | x                                             |       | x                                               |       | 800,000                                        |       |                                                                                                                                 |       | 800,000                                                |       |

----

(1)             Mr.Shaw participates in the Company’s benefit plans which do not discriminate inscope, terms, or operation in favor of executive officers.  Such plans are generally available to allsalaried employees.  Accordingly, thevalue of such payments is not included in the “Value of Payments” column.

(2)             Thisvalue does not include payments under the Company’s benefit plans for reasonsset forth in footnote 1 above.  Inaddition, it does not include a value for a bonus as bonuses are authorizedonly periodically and there is currently no authorized bonus program.  Furthermore, Mr. Shaw has never been given abonus.  In addition, this value assumesthat the triggering event occurred on December 29, 2006.  Authorized payments under the Agreement arealso capped to one dollar less than the amount that would cause Mr. Shaw to bethe recipient of a parachute payment under Section 280G(b) of the InternalRevenue Code of 1986.

36

----

Mr. Shaw is obligated under the Agreement for oneyear not to compete with the Company, to recruit or attempt to recruit ouremployees or to solicit our customers or accounts or otherwise to make knownour customers and accounts to others unless his termination was without causeor occurs after a change in control.  

COMPENSATION OF DIRECTORS

The following table identifies the types and amountsof compensation earned by our Directors (with the exception of those that arenamed Executive Officers as described in footnote 1 to the table) in the lastFiscal Year:

**2006 DIRECTOR COMPENSATION TABLE**
| **Name  (a)**(1)                 | ** ** | ** ** | ** ** | **Fees  Earned or  Paid in  Cash   ($)   (b)** | ** ** | **Stock  Awards  ($)  (c)** | ** ** | **Option  Awards  ($)  (d)**(2) | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)  (e)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred   Compensation  Earnings   ($)  (f)** | ** ** | **All   Other   Compensation  ($)  (g)** | ** ** | **Total  ($)   (j)** | ** ** |
|----------------------------------|------------|------------|------------|--------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------|------------|
| Marco Laterza                    |       |       | $          | 2,500                                                              |       |                        |       |                            |       | —                                                  |       |                                                                                                              |       |                                               |       |                      |       |   |   |   | $ | 2,500 |   |
| Marwan Saker                     |       |       | $          | 1,500                                                              |       |                        |       |                            |       | —                                                  |       |                                                                                                              |       |                                               |       |                      |       |   |   |   | $ | 1,500 |   |
| Pattie S. King,  Former Director |       |       | $          | 1,000                                                              |       |                        |       |                            |       | —                                                  |       |                                                                                                              |       |                                               |       |                      |       | $ | 139,882 | (3) |   | $ | 140,882 |   |
| Jimmie Shiu                      |       |       | $          | 2,500                                                              |       |                        |       |                            |       | —                                                  |       |                                                                                                              |       |                                               |       |                      |       |   |   |   | $ | 2,500 |   |
| Clarence Zierhut                 |       |       | $          | 2,500                                                              |       |                        |       |                            |       | —                                                  |       |                                                                                                              |       |                                               |       |                      |       |   |   |   | $ | 2,500 |   |
|                                  |            |            |            |                                                                    |            |                             |            |                                 |            |                                                         |            |                                                                                                                   |            |                                                    |            |                           |            |  |  |  |  |  |  |  |  |  |

----

(1)             Messrs.Thomas J. Shaw, Douglas W. Cowan and Steven Wisner are Named Executive Officerswho are also Directors.  Theircompensation is reflected in the Summary Compensation and other tablespresented earlier.  Mr. Kuhlman, a formerDirector, is also included in the prior disclosures as a Named Executive.

(2)             Thefollowing identifies the aggregate number of option awards outstanding for eachof the above persons as of year end:

OPTIONS HELD BY DIRECTORS AT FISCAL YEAR END 2006

| Director                     | ** ** | ** ** | ** ** | **No.  Awards  Outstanding** | ** ** | **No.  Shares  Underlying  Option Awards** | ** ** | **No.  Shares  Currently  Underlying  Exercisable  Options** | ** ** |
|------------------------------|------------|------------|------------|------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Marco Laterza                |       | 0          |       | 0                            |       | NA                                              |       |
| Marwan Saker                 |       | 5          |       | 106,000                      |       | 106,000                                         |       |
| Patti King, Former  Director |       | 0          |       | 0                            |       | NA                                              |       |
| Jimmie Shiu                  |       | 5          |       | 255,000                      |       | 255,000                                         |       |
| Clarence Zierhut             |       | 6          |       | 56,000                       |       | 56,000                                          |       |

 

(3)             Ms.Patti King, a former Director, has also received $139,882 in payments in 2006for her services as a consultant.  Only afraction of these payments were incurred during her tenure as director in 2006.

37

----

Narrative Explanation of2006 Director Compensation Table and Supplementary Options Table

In 2006 we paid each non-employee Director a fee of$500 per meeting and reimbursed travel expenses.  In the past, we have granted to each Director(except Mr. Shaw) stock options for Common Stock. We do not pay any additionalamounts for committee participation or special assignment. 

Generally, employee Directors are compensated asdiscussed in the Compensation Discussion Analysis.  However, one employee, Mr. Thomas J. Shaw,our President and CEO, is compensated pursuant to an employment agreement.  Please see the Compensation DiscussionAnalysis for an in depth summary of the terms of such agreement. 

Compensation Committee Interlocks and InsiderParticipation

The Compensation and Benefits Committee is currentlycomposed of Messrs. Clarence Zierhut and Marco Laterza and Jimmie Shiu,M.D.  From January 2006 through May 9,2006, Ms. Patti King served on the committee instead of Dr. Shiu.  Dr. Shiu was appointed to the committee onAugust 8, 2006.  Each of these currentand former members of this committee is/was an independent Board member at thetime of their service on the committee and none have ever been employees.  Ms. King currently serves the Company as anemployee.  However, she was not compensatedin excess of $60,000 until after resignation from the Board of Directors.  

There are no interlocking Directors or executiveofficers between our Company and any other public Company.  Accordingly, none of our executive officersor Directors served as a Director for another entity one of whose executives orDirectors served on our Board of Directors.

Compensation CommitteeReport

The Compensation and Benefits Committee has reviewedand discussed the Compensation Discussion and Analysis with Management and,based on the review and discussions, has recommended to the Board of Directorsthat the Compensation Discussion and Analysis be included in this report.

The Compensation and Benefit Committee’s members’names are Mr. Clarence Zierhut, Mr. Marco Laterza, and Jimmie Shiu, M.D. 

**Item12. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**

EQUITY COMPENSATION PLANINFORMATION 

The following table sets forth information relating toour equity compensation plans as of December 31, 2006: 

| Plan category                                           | ** ** | ** ** | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants, and rights  (a)** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants, and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected  in column (a))  (c)** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation  plans approved by security holders      |       |       | 2,710,995  |                                                                                                                                                       |       |                                                                                                                   | $          | 8.67                                                                                                                                                                                                              |       |   |   | 2,289,005 |   |   |
|                                                         |       |       |       |                                                                                                                                                       |       |                                                                                                                   |       |                                                                                                                                                                                                              |       |   |   |   |   |
| Equity compensation  plans not approved by security holders* |       |       | 286,000    |                                                                                                                                                       |       |                                                                                                                   | $          | 7.56                                                                                                                                                                                                              |       |   |   | N/A |   |   |
|                                                         |       |       |       |                                                                                                                                                       |       |                                                                                                                   |       |                                                                                                                                                                                                              |       |   |   |   |   |
| Total                                                        |       |       | 2,996,995  |                                                                                                                                                       |       |                                                                                                                   | N/A        |                                                                                                                                                                                                              |       |   | 2,289,005 |   |   |

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*                    Inconjunction with a $3 million Loan Agreement and the purchase of 525,000 SeriesV shares by Katie Petroleum, we issued options for the purchase of 136,439shares of Common Stock of the Company at an exercise price of $1 per share toKatie Petroleum and two affiliates. Options for 136,436 shares were exercisedin 2005. 

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In conjunction with a$2.5 million working capital loan, purchase of a real estate note and a$1,000,000 construction loan (which was never drawn on) we issued an option toKatie Petroleum for the purchase of 100,000 shares of Common Stock of theCompany at an exercise price of $1 per share. The options were exercised in2005. 

We authorized theissuance of an option for the purchase of 200,000 shares of Common Stock toJimmie Shiu, M.D., for his past services in introducing the Company topurchasers of various series of Preferred Stock as well as for introducing theCompany to Mr. Jack Jackson, who controlled Katie Petroleum. The option isexercisable at $6.90 per share and will terminate in 2012. 

We  authorized the issuance of an option for the purchase of 25,000shares of Common Stock to Mr. Harry Watson for his past services in assistingthe Company in protecting its intellectual property. The option is exercisableat $6.90 per share and will terminate in 2012. 

In connection with aConsulting Agreement with International Export and Consulting, we issued anoption for the purchase of 61,000 shares of Common Stock to Marwan Saker, aDirector. The option is exercisable at $10.00 and will expire in 2010. 

SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS 

The following table sets forth certain informationregarding the beneficial ownership of our capital stock as of March 1, 2007,for each person known by us to own beneficially 5 percent or more of the votingcapital stock. Each shareholder identified in the table possesses sole votingand investment power with respect to his or her shares except as noted below. 

| Title of Class | ** ** | ** **                                                                | ** ** | **Name and Address of  Beneficial Owner** | ** ** | **Amount and Nature of  Beneficial Ownership** | ** ** | **Percent of  Class**(1) | ** ** |
|--------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------|------------|
| Common Stock             |       |                                                                      |       |                                                          |       |                                                               |       |                          |       |
|                     |       | Thomas  J. Shaw(2)  511 Lobo Lane,  P.O. Box 9  Little Elm, TX 75068-0009 |       |                                                          | 11,280,000 |                                                               |       | 47.5                          | %(2)       |
|                          |       | Suzanne  M. August(3)  5310 Buena Vista Drive  Frisco, TX 75034           |       |                                                          | 2,800,000  |                                                               |       | 0                             | %(3)       |
|                     |       | Lillian  E. Salerno(4)  432 Edwards  Lewisville, TX 75067                 |       |                                                          | 2,494,500  |                                                               |       | 10.5                          | %          |
| Class B Stock            |       |                                                                      |       |                                                          |       |                                                               |       |                          |       |
|                     |       | Thomas  J. Shaw                                                           |       |                                                          | 80,000     |                                                               |       | 3.3                           | %          |
|                          |       | Lillian E. Salerno                                                        |       |                                                          | 12,500     |                                                               |       | Less than 1                   | %          |

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(1)             Thepercentages of Common Stock are based on 23,766,664 shares of Common Stockequivalents consisting of 23,674,164 shares of Common Stock outstanding and92,500 shares of Preferred Stock convertible by the above persons within 60days of this Report. The percentages of Class B Stock are based on 2,381,166shares of Class B Stock outstanding.  

39

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(2)             80,000of the shares identified as Common Stock are preferred shares which areeligible for conversion into Common Stock within 60 days of the Report.  2,800,000 of the shares are owned by Ms.Suzanne August (see footnote 3) but are controlled by Mr. Shaw, pursuant to aVoting Agreement.  These shares arepermanently controlled by Mr. Shaw until such time as they are sold by Ms.August.  These shares are included incalculating Mr. Shaw’s Common Stock equivalents and percentages in the abovetable.  

(3)             Ms.August’s 2,800,000 shares are controlled by Mr. Thomas J. Shaw, pursuant to avoting agreement.  See footnote 2 for amore detailed explanation.  Accordingly,they are also included in the Common Stock equivalents and percentages forThomas Shaw in the above table.

(4)             12,500of the shares identified as Common Stock are preferred shares which areeligible for conversion into Common Stock within 60 days of the Report.  

Thereare no arrangements the operation of which would result in a change in controlof the Company other than the fact that Ms. August’s shares shall cease to becontrolled by Mr. Shaw under their Voting Agreement upon their sale to a thirdparty.

SECURITY OWNERSHIPOF MANAGEMENT 

| Title of Class | ** ** | ** **              | ** ** | **Name of   Beneficial Owner** | ** ** | **Amount and  Nature of  Beneficial  Ownership** | ** ** | **Percent of   Class**(1) | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------------------|------------|
| Common Stock             |       |                    |       |                                          |       |                                                       |       |
| As a Group               |       | Officers  and Directors |       | 12,761,500                                    |       | 52.81                                                      | %          |
| As Individuals           |       | Thomas  J. Shaw(2)      |       | 11,280,000                                    |       | 46.68                                                      | %          |
|                     |       | Marwan  Saker(3)        |       | 461,000                                       |       | 1.90                                                       | %          |
|                          |       | Clarence  Zierhut(4)    |       | 66,000                                        |       | Less than 1                                                | %          |
|                     |       | Douglas  W. Cowan(5)    |       | 204,000                                       |       | Less than 1                                                | %          |
|                          |       | Steve  R. Wisner(6)     |       | 206,400                                       |       | Less than 1                                                | %          |
|                     |       | Jimmie  Shiu(7)         |       | 320,000                                       |       | 1.32                                                       | %          |
|                          |       | Michele  M. Larios(8)   |       | 214,100                                       |       | Less than 1                                                | %          |
|                     |       | Marco  Laterza          |       | 10,000                                        |       | Less than 1                                                | %          |
|                     |       |                    |       |                                          |       |                                                       |       |
| Class B Stock            |       |                    |       |                                          |       |                                                       |       |
| As a Group               |       | Officers  and Directors |       | 475,000                                       |       | 19.82                                                      | %          |
| As Individuals           |       | Thomas  J. Shaw         |       | 80,000                                        |       | 3.34                                                       | %          |
|                          |       | Marwan  Saker           |       | 355,000                                       |       | 14.81                                                      | %          |
|                     |       | Jimmie  Shiu            |       | 40,000                                        |       | 1.67                                                       | %          |

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(1)             Thepercentages of Common Stock are based on 24,149,164 shares of Common Stockequivalents consisting of 23,674,164 shares of Common Stock outstanding atMarch 1, 2007, 475,000 shares of Preferred Stock convertible by the abovepersons and options for the purchase of 1,026,500 shares of Common Stockobtainable by the above persons within 60 days of this Report. The percentagesof Class B stock are based on 2,381,166 shares of Class B Stock outstanding.

40

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(2)             80,000of the shares identified as Common Stock are preferred shares which areeligible for conversion into Common Stock within 60 days of the Report.2,800,000 of the shares are Common Stock shares owned by Ms. Suzanne August butare controlled by Mr. Shaw, pursuant to a Voting Agreement.  These shares are permanently controlled byMr. Shaw until such time as they are sold by Ms. August.  These shares are included in calculating Mr.Shaw’s Common Stock equivalents and percentages in the above table.  

(3)             355,000shares identified as Common Stock are preferred shares which are eligible forconversion into Common Stock within 60 days of this Report. The shares are heldas follows: Saker Investments holds 15,500 shares of Series IV Stock and 25,000shares of Series V Stock, Sovana Cayman Islands, Inc. holds 300,000 shares ofSeries IV Stock, and My Investments holds 14,500 shares of Series IV Stock.Mr. Saker is an Officer or Director and shareholder for each of thesecompanies. The remaining 106,000 shares identified as Common Stock are sharesobtainable through the exercise of options held by Mr. Saker within 60days of the Report

(4)             56,000of these shares identified as Common Stock are shares acquirable by theexercise of stock options within 60 days of the Report. 

(5)             Theseshares identified as Common Stock are shares acquirable by the exercise ofstock options within 60 days of the Report. 

(6)             201,400of these shares identified as Common Stock are shares acquirable by theexercise of stock options within 60 days of the Report. 

(7)             255,000shares identified as Common Stock are shares acquirable through the exercise ofoptions within 60 days of the Report and 40,000 shares are acquirable throughconversion of Preferred Stock within 60 days of the Report. 

(8)             204,100of the shares identified as Common Stock are shares acquirable by the exerciseof stock options within 60 days of the Report. 

**Item13. Certain Relationships and Related Transactions.**

Related PartyTransactions

We believe that all of the transactions set forthbelow were made on terms no less favorable to us than could have been obtainedfrom unaffiliated third parties. In accordance with our Audit CommitteeCharter, the Audit Committee has reviewed and approved all related partytransactions.** **Inparticular, the Audit Committee reviews all transactions where the amountinvolved exceeded $120,000.

Thomas J. Shaw, ourPresident and Chief Executive Officer who beneficially owned 35.8% percent ofthe outstanding Common Stock (and controlled another 11.8% pursuant to a votingagreement with Ms. Suzanne August) as of March 1, 2007, was paid a licensingfee of $500,000 (amortized over 17 years) by us for the exclusive worldwidelicensing rights to manufacture, market, sell, and distribute retractablemedical safety products. In addition, Mr. Shaw receives a 5 percent royalty ongross sales of all 

41

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licensed products sold to customers over the life ofthe technology licensing agreement. Mr. Shaw was paid a royalty of $2,631,955for 2006.

Director Independence

The Board of Directors has the responsibility forestablishing corporate policies and for the overall performance of the Company,although it is not involved in day-to-day operations. Currently, a majority(four of seven) of the Directors serving on our Board of Directors areindependent Directors as defined in Section 121(A) of the listing standards ofThe American Stock Exchange (the “AMEX”). Our current independent Directors areMessrs. Clarence Zierhut, Marwan Saker, Marco Laterza, and Jimmie Shiu, M.D.

The Board, in reviewing the independence of itsmembers, further considered the fact that Ms. Patti King, a former Director,was compensated as a consultant while a Director.  The Board determined that Ms. King was paidless than $60,000 as a consultant while a Director and, accordingly, determinedthat her independence was not compromised.

**Item 14.Principal Accounting Fees and Services.**

AUDIT FEES

The aggregate fees billed by CF & Co., L.L.P. forprofessional services rendered for the audit of the Company’s annual financialstatements for 2006 and 2005 and the reviews of the financial statementsincluded in the Company’s Forms 10-Q or services normally provided by theaccountant in connection with statutory and regulatory filings for those fiscalyears were $160,671 and $146,125, respectively.

AUDIT RELATED FEES

The audit related fees for the Form S-8 Registration Statementfiled in 2005 were $4,060.   There wereno such fees in 2006.

 TAX FEES

The aggregate fees billed by CF & Co., L.L.P. forpreparation of federal and state income tax returns and tax consulting costsrelated to notices from taxing authorities for 2006 and 2005 were $56,118 and$36,360, respectively.

ALL OTHER FEES

There were no fees incurred with any accounting firmother than those mentioned above.

PRE-APPROVAL POLICIES ANDPROCEDURES

The engagement of CF & Co., L.L.P. wasentered into pursuant to the approval policies and procedures of the AuditCommittee. The engagement is for audit and tax services which were detailedseparately. The Audit Committee implemented its approval procedures i.e. theywere not delegated to any other party. All of the services provided werepre-approved by the Audit Committee.

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**PART IV**

**Item15. Exhibits, Financial Statement Schedules.**

(a)          1.     Financial Statements:  See Retractable Technologies, Inc. Index toFinancial Statements on Page F-12.

Financial Statement Schedules required to be filed:Schedule II—Schedule of Valuation and Qualifying Accounts:  *Schedule II—Scheduleof Valuation and Qualifying Accounts:*
| ** **                          | **Balance at  beginning  of period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at  end of period** | ** **  |
|-------------------------------------|------------------------------------------------|------------|---------------|------------|----------------|------------|----------------------------------------------|-------------|
| Provision for  Inventories          |                                           |       |          |       |           |       |                                         |        |
| Fiscal year  ended 2004             | $                                              | 97,319     |          | $          | —         |       | $                                            | —      |   | $ | 97,319 |   |
| Fiscal year  ended 2005             | $                                              | 97,319     |          | $          | 25,273         |       | $                                            | (11,296     | ) | $ | 111,296 |   |
| Fiscal year  ended 2006             | $                                              | 111,296    |          | $          | —         |       | $                                            | (61,296     | ) | $ | 50,000 |   |
|                                |                                           |       |          |       |           |       |                                         |        |
| Provision for Accounts  Receivables |                                           |       |          |       |           |       |                                         |        |
| Fiscal year  ended 2004             | $                                              | 146,452    |          | $          | 50,000         |       | $                                            | (132        | ) | $ | 196,320 |   |
| Fiscal year  ended 2005             | $                                              | 196,320    |          | $          | 70,854         |       | $                                            | —      |   | $ | 267,174 |   |
| Fiscal year  ended 2006             | $                                              | 267,174    |          | $          | —         |       | $                                            | 180,144     |   | $ | 87,030 |   |
|                                |                                           |       |          |       |           |       |                                         |        |
| Deferred tax valuation              |                                           |       |          |       |           |       |                                         |        |
| Fiscal year  ended 2004             | $                                              | 13,679,891 |          | $          | —         |       | $                                            | (13,679,891 | ) | $ | — |   |
| Fiscal year  ended 2005             | $                                              | —     |          | $          | 99,280         |       | $                                            | —      |   | $ | 99,280 |   |
| Fiscal year ended 2006              | $                                              | 99,280     |          | $          | 541,143        |       | $                                            | —      |   | $ | 640,423 |   |

 

Allother schedules have been omitted as they are not required, not applicable, orthe required information is otherwise included.

3.                                       Exhibits:

The following exhibits are filed herewith or areincorporated herein by reference to exhibits previously filed with theCommission.

 (b)          EXHIBITS
| Exhibit No. | ** ** | ** **                                                                                                                             | ** ** | **Description of Document** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|
| 3(i)        |       | Third Amended and  Restated Articles of Incorporation of RTI filed on November 1, 2004*                                                |
|        |       |                                                                                                                                   |
| 3(ii)       |       | Amended and Restated  Bylaws of RTI dated as of the 12th day of July, 2004**                                                           |
|        |       |                                                                                                                                   |
| 10.1        |       | Sample United States  Distribution Agreement***                                                                                        |
|        |       |                                                                                                                                   |
| 10.2        |       | Sample Foreign  Distribution Agreement***                                                                                              |
|        |       |                                                                                                                                   |
| 10.3        |       | Employment Agreement  between RTI and Thomas J. Shaw dated as of September 28, 1999 *** (This is a  management compensation contract.) |
|        |       |                                                                                                                                   |
| 10.4        |       | Technology License  Agreement between Thomas J. Shaw and RTI dated the 23rd day of June 1995***                                   |
|        |       |                                                                                                                                   |

 

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| Exhibit No. | ** ** | ** **                                                                                                                                                                                    | ** ** | **Description of Document** |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|
| 10.5        |       | Loan Agreement among  RTI, Katie Petroleum and Thomas J. Shaw as of the 30th day of September, 2002 and Promissory Note****                                                              |
|        |       |                                                                                                                                                                                          |
| 10.6        |       | RTI’s 1999 Stock Option  Plan***                                                                                                                                                         |
|        |       |                                                                                                                                                                                          |
| 10.7        |       | First Amendment to 1999  Stock Option Plan**** *                                                                                                                                              |
|        |       |                                                                                                                                                                                          |
| 10.8        |       | 1996 Incentive Stock  Option Plan of RTI***                                                                                                                                                   |
|        |       |                                                                                                                                                                                          |
| 10.9        |       | 1996 Stock Option Plan  for Directors and Other Individuals***                                                                                                                                |
|        |       |                                                                                                                                                                                          |
| 10.10       |       | Settlement Agreement  and Release by and among RTI, Thomas J. Shaw, New Medical Technology, Inc.,  New Medical Technology, LTD and NMT Group PLC dated effective as of April 27,  2004**** ** |
|        |       |                                                                                                                                                                                          |
| 10.11       |       | Covenant Not to Sue  between Thomas J. Shaw and Retractable Technologies, Inc.**                                                                                                              |
|        |       |                                                                                                                                                                                          |
| 10.12       |       | Settlement Agreement  and Release between Retractable Technologies, Inc. and Becton Dickinson and  Company, Inc. dated effective July 2, 2004†                                           |
|        |       |                                                                                                                                                                                          |
| 10.13       |       | License Agreement by  and between RTI and Baiyin Tonsun Medical Device Co., Ltd. dated as of May  13, 2005††                                                                        |
|        |       |                                                                                                                                                                                          |
| 23          |       | Consent of Independent  Registered Public Accounting Firm††††                                                                                                             |
|        |       |                                                                                                                                                                                          |
| 31.1        |       | Certification of  Principal Executive Officer††††                                                                                                                         |
|        |       |                                                                                                                                                                                          |
| 31.2        |       | Certification of  Principal Financial Officer††††                                                                                                                         |
|        |       |                                                                                                                                                                                          |
| 32          |       | Section 1350 Certifications††††                                                                                                                                           |

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*                                         Incorporatedherein by reference to RTI’s Form 10-Q filed on November 14, 2005

**                                  Incorporatedherein by reference to RTI’s Form 10-QSB filed on August 16, 2004

***                           Incorporatedherein by reference to RTI’s Registration Statement on Form 10-SB filed on June23, 2000

****                    Incorporatedherein by reference to RTI’s Form 8-K filed on October 10, 2002

*****             Incorporated hereinby reference to RTI’s Form 10-KSB filed on March 31, 2003

******      Incorporated herein byreference to RTI’s Form 8-K filed on April 29, 2004

†                                          Incorporatedherein by reference to RTI’s Form 8-K filed on July 6, 2004

††                                    Incorporatedherein by reference to RTI’s Form 10-Q filed on August 15, 2005

†††                              Incorporatedherein by reference to RTI’s Form 10KSB-A2 filed on September 24, 2004

††††                        Filedherewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|        | RETRACTABLE  TECHNOLOGIES, INC. |
|--------|---------------------------------|
|   | (Registrant)                    |
|   |                            |   |
|   | By:                             | /s/ Thomas J. Shaw |
|   |                            | THOMAS J. SHAW |
|   |                            | CHAIRMAN, PRESIDENT, AND |
|   |                            | CHIEF EXECUTIVE OFFICER |
|   |                            |   |
|   | Date:                           | April 2, 2007 |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.
|        |   |                                        |
|--------|--------|---------------------------------------------|
|   |   | /s/ Steven R. Wisner                        |
|   |   | Steven R. Wisner                            |
|   |   | Executive Vice President, Engineering & |
|   |   | Production and Director                     |
|   |   |                                        |
|   |   | April 2, 2007                               |

 
|        |   |                                                               |
|--------|--------|--------------------------------------------------------------------|
|   |   | /s/ Douglas W. Cowan                                               |
|   |   | Douglas W. Cowan                                                   |
|   |   | Vice President, Chief Financial Officer, Treasurer,  and  Director |
|   |   |                                                               |
|   |   | April 2, 2007                                                      |

 
|        |   |                 |
|--------|--------|----------------------|
|   |   | /s/ Clarence Zierhut |
|   |   | Clarence Zierhut     |
|   |   | Director             |
|   |   |                 |
|   |   | April 2, 2007        |

 
|        |   |            |
|--------|--------|-----------------|
|   |   | /s/ Jimmie Shiu |
|   |   | Jimmie Shiu     |
|   |   | Director        |
|   |   |            |
|   |   | April 2, 2007   |

 
|        |   |              |
|--------|--------|-------------------|
|   |   | /s/ Marco Laterza |
|   |   | Marco Laterza     |
|   |   | Director          |
|   |   |              |
|   |   | April 2, 2007     |

 
|        |   |          |
|--------|--------|---------------|
|   |   |          |
|   |   | Marwan Saker  |
|   |   | Director      |
|   |   |          |
|   |   | April 2, 2007 |

 

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