** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K/A**

 

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**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

** **
| **For  the fiscal year ended December 31, 2006** |
|-------------------------------------------------------|

** **

** **

**o**                                 TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

** **
| **For  the transition period from                      to** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

**Commission file number 000-30885**

 

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**RetractableTechnologies, Inc.**

(Name of registrant as specified 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 telephone number, including area code **(972) 294-1010**

 

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Securities registered pursuant to Section 12(b) ofthe Act:

 

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

 

Securities registered pursuant to Section 12(g) ofthe Act:

 

**Preferred Stock**

(Title of Class)

 

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Indicate by check mark if the registrant is awell-known, seasoned issuer, as defined in Rule 405 of the SecuritiesAct.    Yes  o    No  x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.    Yes  o    No  x

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A.    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 theExchange Act (check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct)    Yes  o    No  x

 

 

State the aggregatemarket value of the voting and non-voting common equity held by non-affiliatescomputed by reference to 

the price at which the common equity was last sold, orthe average bid and asked price of such common equity, as of the last business dayof the registrant’s most recently completed second fiscal quarter.  The aggregate market value of the commonequity held by non-affiliates is $36,649,107, assuming a price of $3.70, whichwas computed with reference to the closing price as of June 30, 2006.

 

APPLICABLE ONLY TOREGISTRANTS 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 thedistribution of securities under a plan confirmed by a court.    Yes  o    No  o

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

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

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None except exhibits

 

**EXPLANATORYNOTE**

 

This amendment to theAnnual Report of Retractable Technologies, Inc. for the fiscal year 2006 filedon Form 10-K/A is being filed primarily: 1) to amend **Item 9A.Controls and Procedures** to provide greater detail regarding thedisclosed material weakness discovered regarding the initial booking of asignificant entry in the wrong period and 2) to amend Exhibit No. 31.2 to re-insert the introductory language toparagraph 4 which was inadvertently deleted from the certification.

 

This Form 10-K/A has alsobeen amended where necessary to reflect material events that have occurredsubsequent to April 2, 2007, including but not limited to, the conclusion ofthe 2007 fiscal year, the termination of a lease from an affiliate, changes inkey employees, subsequent litigation filed by us against Becton, Dickinson& Company (“BD”) and by BD and MDC Investment Holdings, Inc. against us,our annual meeting, the resignation of an independent Director, and theappointment of an independent Director. 

 

 

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**TABLE OFCONTENTS**

 
| **PART I**                                                                                                                        | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                                                              |       |       | ** ** |
| **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

 

Wedesign, develop, manufacture, and market innovative patented safety needledevices for the healthcare industry. Our VanishPoint® productsutilize a unique friction ring mechanism patented by Thomas J. Shaw, ourFounder, President, and Chief Executive Officer. VanishPoint®products are designed specifically to prevent needlestick injuries and toprevent reuse. The friction ring mechanism permits the automated retraction ofthe syringe needle into the barrel of the syringe, directly from the patient,after delivery of the medication is completed. The VanishPoint®blood collection tube holder utilizes the same mechanism to retract the needleafter blood has been drawn from the patient. Closure of an attached end cap ofthe blood collection tube holder causes the needle to retract directly from thepatient into the closed tube holder. The IV catheter also operates with afriction ring mechanism whereby the needle is retracted after insertion of thecatheter into the patient.  We introducedan IV safety catheter in the first quarter of 2006.  ** **Advantages of our products includeprotection from needlestick injuries, prevention of cross contamination throughreuse, and reduction of disposal and other associated costs. Federal regulationnow requires the use of safe needle devices. We have an exclusive license fromThomas J. Shaw, our President and Chief Executive Officer, for the patentrights for our safety needle products.

 

We andThomas J. Shaw entered into a Technology License Agreement dated effective asof the 23rd day of June 1995, whereby Mr. Shaw granted us a worldwideexclusive license to manufacture, market, sell, and distribute ‘LicensedProducts’ and ‘Improvements’ until the expiration of the last to expire of thelast ‘Licensed Patents’ unless sooner terminated under certain conditionswithout right to sublicense. ‘Licensed Products’, ‘Improvements’, and ‘LicensedPatents’ are all terms that are extensively defined in the Technology LicenseAgreement. In exchange, we paid Mr. Shaw a $500,000 initial licensing feeand a 5 percent royalty on gross sales after returns of ‘Licensed Products’.  Mr. Shaw entered into an agreementwhereby Suzanne August, his former spouse, is entitled to $100,000 per quarterout of any royalty payments. See “Patents, Licenses and Proprietary Rights”for a more detailed discussion. Our goal is to become a leading provider ofautomated retraction safety devices.

 

Development of theCompany

 

Whileowning and operating Checkmate Engineering, a sole proprietorship, Thomas J.Shaw, our President and Chief Executive Officer, developed and patented theidea and early prototypes of the syringe that were to become the VanishPoint®safety syringe. On May 9, 1994, the Company was incorporated in Texas todesign, develop, manufacture, and market medical safety devices for thehealthcare industry.

 

Wehave been manufacturing and marketing our products into the market place 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 Becton Dickinson and Company, Inc.(“BD”) who dominates our market.

 

Wecontinue to attempt to gain access to the market through our sales efforts, ourinnovative technology, and introduction of new products. We are focusing onmethods of upgrading our manufacturing capability and efficiency in order toenable us to offer 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.

 

Principal Products

 

Our productswith Notice of Substantial Equivalence to the 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 tube adapter. Syringe sales comprised97.5%, 98.6%, and 98.8% of revenues in 2004, 2005, and 2006.

 

Wealso have begun selling allergy trays with 25 syringes per tray. The traysaccounted for approximately 1.4% of U.S. sales in 2006. The tray designeliminates the need to individually unwrap each syringe.

 

Weintroduced the IV safety catheter into the market in the first quarter of2006.  We have completed the constructionof automated assembly equipment in the first quarter of 2007 and we expect itwill be placed in service in the second quarter of 2007.

 

Ourproducts (without Notice of Substantial Equivalence to the FDA) also include adental syringe, a butterfly IV, and an autodisable syringe.****From1999 to 2001 and in 2003 ECRI (formerly known as the Emergency Care ResearchInstitute), a recognized authority in evaluating medical devices, awarded theVanishPoint® syringe and blood collection tube holder its highestpossible rating.

 

Principal Markets

 

TheVanishPoint® syringe and needle device products are sold to and usedby healthcare providers primarily in the United States (with 12.2% of revenuesin 2006 generated from sales outside the United States) which include, but arenot limited to, acute care hospitals, alternate care facilities, doctors’offices, clinics, emergency centers, surgical centers, convalescent hospitals,Veterans Administration facilities, military organizations, public healthfacilities, and prisons.

 

Thesyringe and needle device market continues to be a market in transition. Thenature of the products comprising the market is slowly****changingfrom standard to safety devices. The impetus for the change to safety devicesis the risk that is carried with each needlestick injury which includes thetransmission of over 20 bloodborne pathogens, including the humanimmunodeficiency virus (“HIV,” which causes AIDS), hepatitis B, and hepatitisC. Because of the occupational and public health hazards posed by conventionaldisposable syringes, public health policy makers, domestic organizations andgovernment agencies have been involved in the effort to get more effectivesafety needle products to healthcare workers. Federal legislation was signedinto law on November 6, 2000, by former President Clinton. Thislegislation, which became effective for most states on April 12, 2001, nowrequires safety needle products be used for the vast majority ofprocedures.  However, even with thisrequirement, many hospitals are neglecting to follow the law intended toprotect healthcare workers.

 

Accordingto Greystone Associates, the worldwide market for safety syringes was a littleover $1 billion in 2003 and is projected to be approximately $1.6 billion by2007.  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

 

Underthe current supply chain system in the U.S. acute care market, the vastmajority of decisions relating to the contracting for and purchasing of medicalsupplies are made by the representatives of group purchasing organizations (“GPOs”)rather than the end-users of the product (nurses, doctors, and testingpersonnel). The GPOs and manufacturers often enter into long-term exclusivecontracts which can prohibit entry in the marketplace by competitors.

 

Wedistribute our products throughout the United States and its territoriesthrough general line and specialty distributors. We also utilize internationaldistributors. We have developed a national direct marketing network in order tomarket our products to health care customers and their purchaserrepresentatives. Our marketers make calls on target markets that are users ofsyringes, blood collection tube holders and IV safety catheters.  Our marketers make contact with all of thedepartments that affect the decision-making process for safety products,including the purchasing agents. They call on acute care and alternate caresites and speak directly with the decision-makers of these facilities. Weemploy 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 theneedle and syringe market, the market share leader, BD, has utilized, amongother things, long-term exclusive contracts which have restricted our entryinto the market.

 

Wehave numerous agreements with organizations for the distribution of ourproducts in foreign markets. Sales to these markets increased from 7.9% to12.2% of revenues in 2006. The total population of Western Europe exceeds 310million, and the recognition for the urgency of safe needle devices in parts ofEurope has followed the United States model. In France, England, Germany, andItaly, organized healthcare worker unions have taken action to force hospitalsand government agencies to place safety as a priority. Regions within Asia andAfrica are also recognizing the need for our products. 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 quartersdue principally to logistical requirements for the orders.  We are hopeful that these awards willcontinue although there is currently no funding to continue this program.

 

Keycomponents of our strategy to increase our market share are to: (a) focuson methods of upgrading our manufacturing capability and efficiency in order toenable us to offer products at a reduced price and improved profit margins; (b) continuemarketing emphasis in the U.S.; (c) continue to add VeteransAdministration facilities, health departments, emergency medical services,federal prisons, long-term care and home healthcare facilities as customers; (d) educatehealthcare providers, insurers, healthcare workers, government agencies,government officials, and the general public on the reduction of risk and thecost effectiveness afforded by our VanishPoint® products; (e) supplyproduct through GPOs and Integrated Delivery Networks where possible; (f) considerpossibilities for future licensing agreements and joint venture agreements forthe manufacture and distribution of safety products in the United States andabroad; (g) introduce new products where market access is possible; and (h) continueto increase international sales.

 

Status of New Products

 

Wehave patented and are in the process of developing additional safety needleproducts. Such products include a 1⁄2 cc insulin syringe, an autodisposablesyringe, a dental syringe, and a winged butterfly IV for which we havedeveloped early stage prototypes.  Wehave preproduction prototypes for our autodisable syringe. Our limited accessto the market has slowed the introduction of these products into themarket.  We launched an IV safetycatheter in the first quarter of 2006.

 

Competitive Conditions

 

Webelieve 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.

 

Foundedin 1897, BD is headquartered in New Jersey. BD’s safety-engineered device salesaccounted for approximately 11.3 percent of BD’s total 2006 sales. BD currentlymanufactures the SafetyLokTM, a syringe that utilizes a tubularplastic sheath that must be manually slid over the needle after an injection,and the SafetyGlideTM, a needle which utilizes a hinged lever tocover the needle tip. BD also manufactures a safety blood collection and hypodermicneedle that utilizes the EclipseTM needle cover. BD also manufacturesa 3cc and 1cc retracting needle product based on a license agreement withSpecialized Health Products International, Inc. (formerly the Med-DesignCorporation).  The Integra, a retractablesyringe offered by BD, does not offer a full product line and cannot be usedwith highly viscous medication due to leakage (as described on their labels).The introduction of this syringe has had little impact on our sales due to BD’shistoric market dominance.  BD’s “Vacutainer®”blood collection products are commonly used as industry jargon to refer toblood collection products in general.

 

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Sherwoodwas acquired by Tyco International Ltd., a company headquartered in Bermuda.Sherwood manufactures the Monoject®, a safety syringe that utilizesa sheath similar to the BD SafetyLokTM syringe. Sherwood alsomanufactures the Magellan safety syringe, a product similar to the BDSafetyGlideTM.

 

Foundedin 1974, Terumo was the first company to sell disposable syringes in Japan.Today Terumo manufactures standard syringes and blood collection tube holders,operates internationally, and has sales in some 120 countries.

 

BothBD’s SafetyLokTM and Sherwood’s Monoject® safety syringesrequire the use of two hands and several extra steps to activate the tubularplastic shield which must be slid and locked into place to protect the needle.These products must be removed from the patient in order for the safety mechanismto be activated.  In contrast, use of theVanishPoint® syringe is identical to that of a standard syringeuntil the end of an injection, when the automated retraction mechanism retractsthe needle directly from the patient safely into the barrel of the syringe.This allows both hands to remain safely out of harm’s way. BD’s Integraoperates in a similar way but may have to be removed from the patient in orderto have retraction of the needle occur.

 

BD andSherwood have controlling market share, greater financial resources, larger andmore established sales, marketing and distribution organizations, and greatermarket influence, including the long-term and/or exclusive contracts with GPOsdescribed earlier. The current conditions have restricted competition in theneedle and syringe market. BD may be able to use its resources to improve itsproducts through research or acquisitions or develop new products, which maycompete more effectively with our products. We continue to attempt to gainaccess to the market through our sales efforts and our innovative technology.We are focusing on methods of upgrading our manufacturing capability andefficiency in order to enable us to compete by offering our technology at areduced price. We believe our current capitalization provides the resourcesnecessary to implement these changes and greatly improve our manufacturingcapacity and efficiency, thereby reducing our unit cost.

 

Ourcompetitive strengths include that the VanishPoint® syringe is oneof four syringes given the highest possible rating by ECRI.****Ourblood collection tube holder is one of only two safety products given thehighest possible rating. Our products also have an advantage overnon-retracting safety needles because minimal training and changes to practitioners’normal routines are required. Use of our products also prohibits unfortunateand improper reuse. Several factors could materially and beneficially affectthe marketability 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.

 

Ourcompetitive weaknesses include our current lack of market share because twowell-established companies control most of the market. Our competitive positionis also weakened by the method that providers use for making purchasingdecisions and the fact that our initial price per unit may be higher. However,our price per unit is competitive or even lower than the competition once allthe costs incurred during the life cycle of a syringe are considered. Such lifecycle costs include disposal costs, testing and treatment costs for needlestickinjuries, and treatment for contracted illnesses through needlestick injuries.Demand for our products could decrease due to the introduction of the Integra,a retractable syringe manufactured by BD, which dominates the market.  Although, to date, the introduction of theIntegra has not noticeably impacted our sales, BD has a wider range of productofferings and more capital resources.

 

Principal Suppliers andSources of Raw Materials

 

Wepurchase most of our product components from single suppliers, including needleadhesives and packaging materials. There are multiple sources of thesematerials. We own the molds that are used to manufacture the plastic componentsof our products. Our suppliers include Magor Mold, 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

 

Twodistributors accounted for an aggregate of 31.3% of our revenue in 2006. Wehave numerous other distributors that sell our products in the U.S. andinternationally.

 

Backlog Orders

 

Order backlog isnot material to our business inasmuch as orders for our products generally arereceived and filled on a current basis, except for items temporarily out ofstock.

 

Patents, Licenses, andProprietary Rights

 

ThomasJ. Shaw and the Company entered into a Technology License Agreement datedeffective as of the 23rd day of June, 1995, whereby Mr. Shawgranted us “... a worldwide exclusive license and right under the ‘LicensedPatents’ and ‘Information’, to manufacture, market, sell and distribute ‘LicensedProducts’ and ‘Improvements’ without right to sublicense and subject to suchnonexclusive rights as may be possessed by the Federal Government...” ‘LicensedPatents’, ‘Information’, ‘Licensed Products’, and ‘Improvements’ are alldefined extensively in the Technology License Agreement. We may enter intosublicensing arrangements with Mr. Shaw’s written approval of the termsand conditions of the licensing agreement. The ‘Licensed Products’ include allretractable syringes and retractable fluid sampling devices and componentsthereof, assembled or unassembled, which comprise an invention described in ‘LicensedPatents’, and improvements thereof including any and all ‘Products’ whichemploy the inventive concept disclosed or claimed in the ‘Licensed Patents’.

 

Inexchange, we paid Mr. Shaw a licensing fee and agreed to pay a 5 percentroyalty on gross sales after returns. The license terminates upon expiration ofthe last licensed patents unless sooner terminated under certain circumstances.The licensing fees have been paid in accordance with this agreement with theexception of $1,500,000 in fees which were waived by Mr. Shaw and hiswife.

 

Wehave the right and obligation to obtain protection of the invention, includingprosecution of patent properties. The license unilaterally changes to anonexclusive license in the event of a hostile takeover. Also, if Mr. Shawinvoluntarily loses control of the Company, the license becomes a nonexclusivelicense and a right to information.

 

Wehave sought foreign patent protection through the Patent Cooperation Treaty andhave filed applications for regional and national patent protection inselective countries where we believe the VanishPoint® syringe can beutilized most.

 

Wehold numerous United States patents related to our automated retractiontechnology, including patents for dental syringes, IV safety catheters, wingedIV sets, syringes, and blood collection tube holders. In addition, we havemultiple applications for patents currently pending. The principal syringepatents in the U.S., as well as their foreign counterparts, will expire in May 2015.

 

Wehave also registered the following trade names and trademarks: VanishPoint®,VanishPoint® logos, RT with a circle mark, the Spiral Logo used inpackaging our products, and the color coded spots on the ends of our syringes.We also have trademark protection for the phrase “The New Standard for Safety.”

 

Thereare currently no patent infringement claims pending against the VanishPoint®retraction technology other than those set forth in **Item 3.Legal Proceedings**. We have decided, on the advice of patent counsel,not to purchase patent insurance because it would require inappropriatedisclosure of information that is currently proprietary and confidential.

 

Wecurrently obtain roughly 72.8% of our finished products through Double Dove, aChinese manufacturer.  We believe wecould make up any long-term disruption 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 have a LicensingAgreement with Baiyin Tonsun Medical Device Co., Ltd. (“BTMD”) which expires onMay 13, 2008. Royalties that were expected in 2007 were not received due to thetime needed to build the factory, assembly equipment, and the relatedinfrastructure as well as the need of BTMD to meet the requisite governmentrequirements. The facility has been completed and BTMD is in the process ofmeeting government requirements. We are in the process of formally extendingour agreement with BTMD. Accordingly, although we still continue to expectroyalty payments we are unable to predict the date we will begin to receivesuch royalties. Royalties will begin once government requirements are met andBTMD is able to produce and sell products.

 

Seasonal Effect onBusiness

 

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

 

Working Capital Practices

 

Cashand cash equivalents include unrestricted cash and investments with originalmaturities of three months or less.

 

Ourcredit policy has provided for negligible reserve requirements on our AccountsReceivable.  Outstanding accounts arereviewed regularly and reserves provided for potential write off, ifapplicable.

 

Inventoriesare valued at lower of cost or market. We maintain a reserve for potential write-downs or write offs, andobsolete inventory is written off.

 

Receivablesare established for federal and state taxes where we have determined we areentitled to a refund for overpayments of estimated taxes or loss carry backs.

 

Accountspayable and other short-term liabilities include amounts that we believe wehave an obligation for at the end of year. These included charges for goods or services received in 2006 but notbilled to us at the end of the year.  Italso included estimates of potential liabilities such as rebates and otherfees.

 

Ourdomestic return policy is set forth in our standard Distribution Agreement, acopy of which is incorporated by reference in Exhibit number 10.1.  This policy provides that a customer mayreturn incorrect shipments within 10 days following arrival at the distributor’sfacility.  In all such cases thedistributor must obtain an authorization code from us and affix the code to thereturned product.  We will not acceptreturned goods without a returned goods authorization number.  We may refund the customer’s money or replacethe product.

 

Our internationalcontracts do not provide for any returns.

 

Our return policy also provides that a customermay return product that is overstocked. Overstocking returns are limited to two times in each twelve month period up to 1% of distributor’s totalpurchase 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 andEffect of Regulation

 

We and our products are regulated by the FDA. The syringe and the IVsafety catheter are Class II medical devices which require assurance bythe manufacturer that the device is safe and effective and that they meetcertain performance standards. The FDA issued its Notice of SubstantialEquivalence declaring the VanishPoint® syringe products to besubstantially equivalent to a legally marketed predicate device (i.e., grantedus permission to market our safety syringes in interstate commerce) theVanishPoint® blood collection tube holder and small tubeadapter.  In September 2005, the FDAgranted permission to market our IV safety catheter in interstate commerce.

 

Inaddition to the Notice of Substantial Equivalence, we must register with theFDA on an annual basis and provide the FDA with a list of commerciallydistributed products. Texas has similar registration requirements. The FDA triesto inspect all medical device manufacturing facilities at least once every twoyears to determine the extent to which they are complying with Quality SystemRegulation. The most recent inspection occurred in July 2005 after whichthe auditor determined “No Action Indicated.”

 

TUV-USA,a member of the TUV Nord Group, performs our quality management systemcertification. We were originally certified to ISO 9001:1994 in 1997 andreceived annual surveillance audits, maintaining that certification until March of2004 with no major non-conformances. We received certification to ISO13485:2000, CAN/CSA:13485:1996 and EN 13485:2000 in August 2004.  We have since received certification to themost 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 ofResearch and Right to License

 

ThomasJ. Shaw developed his initial version of a safety syringe with the aid ofgrants by the National Institute of Drug Abuse, a subsidiary of the NationalInstitutes of Health. As a result, the federal government has the right, wherethe public interest justifies it, to disperse the technology to multiplemanufacturers so that the safety syringe can be made widely available to thepublic. However, the funding was only used to develop and patent the earliersyringe design as of 1991. That syringe was a bulkier, less effective, and moreexpensive version of the current product. Accordingly and on the advice ofcounsel, Management believes that the risk of the government demandingmanufacture of this alternative product is minimal.

 

Research and Development

 

Wespent $626,941, $934,209, and $958,798 in fiscal 2004, 2005, and 2006respectively, on research and development. Costs in 2006 were primarily forcompensation, validation and engineering costs, and consulting costs.****Our ongoing research and developmentactivities are performed by an internal research and development staff. Thisteam of engineers is developing process improvements for current and futureautomated machines. Products currently in development by our internal teaminclude the winged butterfly IV, the dental syringe, a 1⁄2 cc insulin syringe andan 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

 

Webelieve that we do not incur material costs in connection with compliance withenvironmental laws. We are considered a Conditionally Exempt Small QuantityGenerator because we generate less than 100 kilograms (220 lbs.) of hazardouswaste per month. Therefore, we are exempt from the reporting requirements setforth by the Texas Commission on Environmental Quality. The waste that isgenerated at our facility is primarily made up of flammable liquids andpaint-related waste and is sent for fuel blending

 

7

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

 

Othernonhazardous production waste includes clean polypropylene regrind that is soldfor recycling. The Company also grinds dirty plastics, syringes, and needlesfor disposal by Waste Management. All other nonhazardous waste produced isconsidered municipal solid waste and sent to a sanitary landfill by WasteManagement.

 

Wealso produce small amounts of regulated biohazardous waste from contaminatedsharps and laboratory wastes. This waste is sent for incineration byStericycle.

 

Employees

 

As of March 1,2007, we had 146 full-time employees, 5 part-time employees, and 6independently contracted consultants. Of the 146 full-time employees, 5 personswere engaged in research and development activities, 61 persons were engaged inmanufacturing and engineering, 18 persons were engaged in quality assurance andregulatory affairs, 42 persons were engaged in sales and marketing, 19 personswere engaged in general and administrative 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

 

Wehave no long-lived assets in foreign countries. Shipments to internationalcustomers generally require a prepayment either by wire transfer or anirrevocable confirmed letter of credit. We do extend credit to international customers on some occasionsdepending upon certain criteria, including, but not limited to, the creditworthiness of the customer, the stability of the country, banking restrictions,and the size of the order.  Alltransactions are in United States currency.

 
| ** **           | ** ** | **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 financialstatements in Item 8 for information about our revenues, profits and losses forthe last three years, and total assets for the last two years.

 

**Item 1A. Risk Factors.**

 

You shouldcarefully consider the following material risks facing the Company.  If any of these risks occur, our business,results of operations or financial condition could be materially adverselyaffected.

 

The Majority of ourInternational Sales are Filled using one Supplier

 

Mostinternational sales are filled by production from Double Dove. In the eventthat we were unable to purchase such product from Double Dove, we would need tofind an alternate supplier for the 5 cc and 10 cc syringes and increasedomestic production for 1 cc and 3 cc syringes to avoid a disruption in supply.Currently, approximately 72.8% of our production is provided by Double Dove.

 

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Our Cash Position isDecreasing

 

Due tocontinuing barriers to the market place, coupled with the completion of thediscount reimbursement program and increases in accounts receivable andinventory, mitigated by an increase in accounts payable, the Company’s cashposition declined $5.7 million.  Thenegative impact in the third and fourth quarter of the ending of the discountreimbursement program is approximately $6.0 million.

 

In theevent we continue to have only limited market access and the cash provided bythe litigation settlements and generated from operations becomes insufficientand royalties from BTMD are not forthcoming, the Company would take costcutting measures to reduce cash requirements. Such measures could result inreduction of units being produced, reduction of workforce, reduction ofsalaries of officers and other nonhourly employees, and deferral of royaltypayments.

 

We Compete in aMonopolistic Marketplace

 

We operate in anenvironment that is dominated by the major syringe manufacturer in the UnitedStates, BD.  We believe that itsmonopolistic business practices continue despite its paying the Company $100million to settle a lawsuit for anticompetitive practices, businessdisparagement, and tortious interference. Although we made limited progress in some areas, such as the alternatecare and international markets, our volumes are not as high as they should begiven the nature and quality of our product, the federal and state legislationrequiring use of safe needle devices, and the Senate Subcommittee hearings onGPOs.

 

We Have Generally BeenUnable 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.

 

Our Patent Protection IsAging

 

Our maincompetitive strength is our technology. As it ages (and the associated patent life expires), our competitiveposition in the marketplace will weaken. The initial patents protecting our revolutionary spring action syringewill expire beginning in May 2015. Patent life may be extended, not through the original patents, butrelated 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.

 

9

 

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 in Suppliesof Inventory Could Temporarily Increase Costs

 

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.

 

We Face Inherent Product Liability Risks

 

As a manufacturerand provider of safety needle products, we face an inherent business risk ofexposure to product liability claims in the event of product failure or claimof harm caused by product operation. Product failure could result in injury tothe patient or loss of blood and could expose healthcare workers to the risk ofblood borne pathogens.  If any of ourproducts prove to be defective, we may be required to recall thoseproducts.  If a product liability claimis made and damages are in excess of our product liability coverage, ourcompetitive position could be weakened by the amount of money we could berequired 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 coverageup to $2,000,000 in the aggregate. Each claim is subject to a $25,000deductible.  Additionally, we haveadditional products liability protection under an Umbrella LiabilityPolicy.  This policy provides anadditional $10,000,000 per occurrence and aggregate limits in the event claimsexceed the primary commercial general liability policy limit.  We have not had any product liability claims.

 

We Have Limited Access tothe Capital Markets

 

The volume oftrading in our Common Stock on the American Stock Exchange (the “AMEX”) islow.  Accordingly, it is unclear if thereis any significant market for our shares. This may reduce our ability to raise cash through public or privateofferings 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 theCommon Stock as of March 1, 2007. The shares held by Ms. August are controlled by Mr. Shawpursuant to a voting agreement, which terminates upon sale of all the sharesfor value or if terminated by both parties in writing.  These shareholders will, therefore, have theability to direct our operations and financial affairs and to substantiallyinfluence the election of members of our Board of Directors.  The interests of these persons may not alwayscoincide 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 ordiscouraging a potential acquirer from making a tender offer or otherwiseattempting to obtain control of the Company, which in turn could materiallyadversely affect the market price of the Common Stock.  Of the 23,674,164 shares of Common Stockoutstanding as of March 1, 2007, Officers and Directors owned 12,761,500****of the shares.

 

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

 

On March 15,2006, the Senate Judiciary Subcommittee on Antitrust, Competition Policy andConsumer Rights held its fourth hearing on the anti-competitive practices ofGPOs.  As the Senate’s four-year inquiryhas revealed, these purchasing cartels, in collusion with the dominant medicalsupply manufacturers, have harmed competition, stifled innovation, andincreased the cost of healthcare. Senate testimony, government studies, andmedia reports have exposed a long list of abuses, including conflicts ofinterest, kickbacks, sole-source and long-term contracts, and other exclusionarypractices that have kept patients and healthcare workers in GPO-memberhospitals from gaining access to better, safer, and more

 

10

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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

 

**Item 2. Properties.**

 

Our22,500 square foot headquarters is located at 511 Lobo Lane, on 35 acres, whichwe own, overlooking Lake Lewisville in Little Elm, Texas. The building is amodular portion of a larger planned building for which the engineering designhas been finalized which could be expanded with minimal disruption ofproduction. The headquarters are in good condition and house our administrativeoffices and manufacturing facility. We put a 45,000 square foot warehouse inservice in March 2005.   Themanufacturing facility produced approximately 27.2% of the units that were soldin 2006.  In the event of a disruption inservice of our outside supplier, we believe we could produce quantitiessufficient to meet demand under current circumstances except for demand for 5ccand 10cc syringes which are sold principally in the international market.  In that event, we would attempt to engageanother manufacturer.

 

TheCompany obtained a loan from 1st International Bank (“1stInternational”) for $2,500,000, secured by the land and existing buildings,which provided interim funding for the construction of the 45,000 square footwarehouse. The proceeds from the loan were used to pay off the remaining$475,000 of the revolving credit agreement with 1st International inaddition to funding the new warehouse and related infrastructure. Payments onthe note were interest only during the first twelve months. The payments forthe permanent funding are based on a twenty-year amortization with a five-yearmaturity. Interest rates are based on the amount of funds kept on deposit withthe bank. Accordingly, interest will vary from the Wall Street Journal PrimeRate (the “WSJPR”) to the WSJPR plus 1 percent, with floors that may range from4.25 percent to 6.50 percent. Compensating balances at 1stInternational affecting the interest rate will range from $0 to $500,000.

 

Additionalcapital expenditures may include additional assembly lines, molding equipment,manufacturing space, warehousing, and related infrastructure.  The expansion could include those productsthat have been developed but not yet marketed, as well as expandingmanufacturing capacity for existing products.

 

In theopinion of Management, the property and equipment are suitable for theirintended use and are adequately covered by an insurance policy.

 

**Item 3. Legal Proceedings.**

 

OnAugust 12, 2005, we filed a lawsuit against Abbott Laboratories Inc. in theUnited States District Court in the Eastern District of Texas, TexarkanaDivision. We are alleging fraud and breach of contract in connection with theNational Marketing and Distribution Agreement dated as of May 4, 2000 which wasterminated on October 15, 2003. We are seeking damages which we estimate to bein millions of dollars of lost profits, out of pocket expenses and otherdamages. In addition, we are seeking punitive damages, pre-judgment andpost-judgment interest and attorney’s fees. Abbott has appealed a trial courtdetermination that the dispute does not need to be decided by arbitration. Oralargument is scheduled for March 3, 2008. 

 

InAugust 2006, we were sued by Occupational and Medical Innovations Limited(“OMI”) in Federal Court of Australia, alleging that two letters written to OMIby our outside counsel contained unjustified threats. OMI is not seekingmonetary damages in the action, but was awarded its costs. The Courtsubsequently held that one of the letters written by outside counsel containedan unjustified threat. OMI amended its complaint to seek a declaratory judgmentthat OMI’s syringe does not infringe RTI’s Australian patents. Trial of thatclaim is set for April 2008.

 

OnJune 15, 2007, we filed a lawsuit against BD in the United States DistrictCourt for the Eastern District of Texas, Marshall Division.  We are alleging antitrust violations,violations of the Lanham Act and patent infringement. Please see Exhibit No. 99to our Form 8-K filed on June 19, 2007 for details regarding the factual basisunderlying  the action as well as therelief sought.  BD has counterclaimed fora declaration that our patents are invalid and unenforceable.  All other claims have been stayed untilresolution of the patent claims.  Thepatent case is set for trial in March 2009.

 

OnSeptember 6, 2007, BD and MDC Investment Holdings, Inc. filed a complaintagainst us  in the United States DistrictCourt for the Eastern District of Texas, Texarkana Division.  Plaintiffs allege that our VanishPoint®product line infringes U.S. patent nos. 6,179,812 and 7,090,656.  Plaintiffs seek a declaration ofinfringement, an injunction against further infringement, compensatory damages(with interest), the costs of the litigation, and such other relief as theCourt deems just and proper.  We havecounterclaimed for a declaration that the asserted patents are invalid andunenforceable.  We believe that we havemeritorious defenses to such allegations and we intend to defend this lawsuitvigorously. No trial date has been set.

** **

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

 

Nomatters were submitted to a vote during the fourth quarter 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

 

OurCommon Stock has been listed on the AMEX since May 4, 2001. Shown beloware the high and low sales prices of our Common Stock as reported by the AMEXfor 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 of Common Stock held by 297 shareholders ofrecord not including shareholders who beneficially own Common Stock held innominee or “street name.”

 

DIVIDENDS

 

Wehave not ever declared or paid any dividends on the Common Stock. We have nocurrent plans to pay any cash dividends on the Common Stock. We intend toretain all earnings, except those required to be paid to the holders of thePreferred Stock, to support operations and future growth.

 

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

 

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

 

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EQUITY COMPENSATION PLANINFORMATION

 

See **Item 12****Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**for a chart describing compensation plans under which equity securities areauthorized.

 

RECENT SALES OFUNREGISTERED SECURITIES

 

Salesof unregistered securities in the first and second quarters of 2006 werereported in the Company’s Form 10-Q quarterly reports filed with theUnited States Securities and Exchange Commission (the “Commission”) which areavailable via EDGAR.   There were nosales 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 totalreturns for the Russell Microcap and Becton Dickinson (“BD”), a peer issuer.The graph assumes an investment of $100 in Common Stock and in the RussellMicrocap index as of January 1, 2001, and that all dividends arereinvested.

 

 

Thecomparisons in the graph are required by the SEC. You should be careful aboutdrawing any conclusions from the data contained in the graph, because pastresults do not necessarily indicate future performance. The information containedin this graph shall not be deemed to be “soliciting material” or “filed” withthe SEC or subject to the liabilities of Section 18 of the Exchange Act,except to the extent that we specifically incorporate it by reference into adocument filed under the Securities Act of 1933, as amended or the ExchangeAct.

 

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** **

**Item 6. Selected Financial Data.**

 

Thefollowing selected financial data are qualified by reference to, and should beread in conjunction with, our audited financial statements and the notes tothose statements and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” appearing elsewhere herein.  The selected Statement of Operations datapresented below for the years ended December 31, 2003 and 2002, and the BalanceSheet data as of December 31, 2004, 2003, and 2002, have been derived fromour audited financial statements, which are not included herein.

 

(In thousands except for earnings per share, shares outstanding andpercentages)

 
| ** **                                         | ** ** | **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 FinancialCondition and Results of Operation.**

 

FORWARD-LOOKING STATEMENTWARNING

 

Certainstatements included by reference in this filing containing the words “could,” “may,”“believes,” “anticipates,” “intends,” “expects,” and similar such wordsconstitute 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

 

We have beenmanufacturing and marketing our products into the marketplace since 1997. Ourproducts have been and continue to be distributed nationally through numerousdistributors. However, we have been blocked from access to the market byexclusive 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 the marketthrough our sales efforts and innovative technology.

 

We are focusing onmethods of upgrading our manufacturing capability and efficiency in order toenable us to offer our technology at a reduced price.  We believe our current capitalizationprovides the resources necessary to implement these changes, improve profitmargins, and greatly improve our manufacturing capacity and efficiency, therebyreducing our unit cost. We are also marketing more products internationally.  Beginning in 2004, we were awarded a federalcontract to supply syringes to various African countries. The 2004 award fromPATH was for 1,530,000 units.  The 2005award was for 11,700,000 units.  The 2006award was for 16,400,000 units.  Allawards were filled over multiple quarters****dueprincipally to logistical requirements for the orders.    We are hopeful that these awards willcontinue although there is currently no funding to continue 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.

 

Productpurchases from Double Dove have enabled us to increase manufacturing capacitywith little capital outlay and provided a competitive manufactured cost.  These purchases have enabled improved profitmargins in spite of limited revenues. The cost of production per unit has generally declined as volumesincreased. We currently obtain roughly 72.8% of our finished products throughDouble Dove, a Chinese manufacturer. We believe we could make up any long-termdisruption in these supplies by utilizing more of the capacity at the LittleElm facility, except for 5cc and 10cc syringes which comprised about 5.8% ofour 2006 revenues.

 

We have a LicensingAgreement with BTMD which expires on May 13, 2008. Royalties that were expectedin 2007 were not received due to the time needed to build the factory, assemblyequipment, and the related infrastructure as well as the need of BTMD to meetthe requisite government requirements. The facility has been completed and BTMDis in the process of meeting government requirements. We are in the process offormally extending our agreement with BTMD. Accordingly, although we still continueto expect royalty payments we are unable to predict the date we will begin toreceive such royalties. Royalties will begin once government requirements aremet and BTMD is able to produce and sell products.

 

15

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Historically,unit sales have increased in the latter part of the year due, in part, to thedemands for syringes during the flu season.

 

RESULTS OFOPERATIONS

 

Thefollowing discussion contains trend information and other forward-lookingstatements that involve a number of risks and uncertainties. Our actual futureresults could differ materially from our historical results of operations andthose discussed in the forward-looking statements. All period references are toour fiscal years ended December 2006, 2005 or 2004. Dollar amounts havebeen rounded for ease of reading.

 

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

 

Revenues increased4.5%, due principally to increased sales in the alternate care andinternational markets.  Domestic saleswere 87.8% of revenues with international sales comprising the remainder.  Unit sales of the 1cc syringe increased 39.1%and 3cc unit sales increased 19.7%.  Unitsales of all products increased 32.6%. The hospital market continues to lag despite very favorable promotionalpricing under the discount program.  Theincrease in discount reimbursements in 2006 is due principally to the reductionof the promotional prices initiated in April 2005, resulting in largerreimbursements, mitigated by the ending of the reimbursement of the discountsin the third quarter of 2006.  Thediscount reimbursement program expired since the settlement agreement underwhich it was established provided for a total of $8.0 million inreimbursements.  We had recognized $8.0million in cumulative discount reimbursements in the third quarter of2006.  Sales to two distributorsaccounted for 31.3% and 34.8% of our revenues in 2006 and 2005, respectively.

 

Cost of sales as apercentage of revenues increased due to the lower average selling priceresulting from the ending of the discount reimbursement program mitigated byhigher volumes of product produced and sold. The increased volume of production resulted in a lower unit cost.  The effect of the reduction in staff in August 2005also contributed to the lower unit cost in 2006.  Royalty expenses were higher due to anincrease in gross revenues.

 

As a result, grossprofits decreased, and gross profit margins declined from 36.3% in 2005 to29.8% in 2006.

 

Operating expensesincreased from the prior year due to increases in sales and marketing costs andgeneral and administrative costs.

 

Sales andmarketing expenses increased as we continued to grow our sales force, resultingin higher compensation costs, marketing and promotional costs, and travel andentertainment.  We also had increasedconsulting expense mitigated 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 anddevelopment costs were flat. We had increases in consulting costs and decreasesin engineering costs due principally to validation testing and the developmentwork on the IV safety catheter in 2005. We began marketing the IV safety catheter in the first quarter of2006.  We anticipate that until we reacheconomies of scale in manufacturing this product, we will incur losses on itssale.

 

General andadministrative costs increased due principally to higher legal costs,compensation costs, consulting, and taxes other than income taxes.  Decreases in expenses include stock optionexpense, shareholder expenses, outside accounting costs, severance pay andtraining.   The legal costs incurred in2006 in regard to the Abbott Laboratories litigation are higher than those in2005.  We expect such costs to continueuntil the litigation is resolved. We also have litigation expenses concerningOMI, an Australian company, which is discussed elsewhere herein.  Compensation costs increased as officers andother salaries were brought into a more appropriate range in 2005, the fulleffect being reflected in 2006.  TheCompany also awarded merit increases to our employees in 2006.  Consulting costs increased due to ourcontinuing

 

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

 

Interest incomeincreased due to higher interest rates. Interest expense increased due to higher interest rates mitigated bylower debt balances.

 

Provision forincome tax benefits consists primarily of federal tax subject to carry backprovisions.  State income taxes are alsosubject to the various states’ carry back rules.  The Company also has a valuation reserve forall deferred taxes, with the exception of deferred taxes on the beneficialconversion feature associated with its note payable to Katie Petroleum, Inc.

 

Cash flow fromoperations was negative for 2006 due principally to the loss for the year.  The effect of non-cash expenses and thechange in working capital were a positive $500,000.  Investing activities utilized $2.0 million incash.

 

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

 

Revenuesincreased, due principally to increased sales in the alternate care andinternational market.  Domestic saleswere 92.1% of revenues with international sales comprising the remainder.  Unit sales of the 1cc syringe increased 20.9%and 3cc unit sales increased 12.7%.  Unitsales of all products increased 19.1%. The hospital market continued to lag despite very favorable promotionalpricing under the discount reimbursement program.  The increase in discount reimbursements in2005 was due principally to the reduction of the promotional prices in April 2005.  We recognized $3.5 million in discountreimbursements through December 31, 2005. Sales to two distributors accounted for 34.8% of our revenues in 2005and sales to one distributor accounted for 16.6% of our revenues in 2004.

 

Cost of sales as apercentage of revenues improved as higher volumes of product were produced andsold.  The increased volume resulted in alower unit cost of production.  Theeffect of the reduction in staff in August 2005 also contributed to thelower unit cost.  Royalty expensesdeclined due to a reduction in gross revenues.

 

Operating expensesdecreased from the prior year due to decreases in general and administrativecosts, mitigated by increases in sales and marketing costs as well as anincrease in research and development costs.

 

Sales andmarketing expenses increased as we continued to grow our sales force, resultingin higher compensation and travel expense. This increase in sales and marketing costs was mitigated by a reductionin consulting expenses.

 

Research anddevelopment costs increased due principally to validation testing and thedevelopment work on the IV safety catheter. We began marketing the IV safety catheter in the first quarter of2006.  We also anticipate that until wereach economies of scale in manufacturing this product, we will incur losses onits sale.

 

General andadministration costs decreased significantly due principally to lower legalcosts incurred in 2005.   The legal costsincurred in 2005 in regard to the Abbott Laboratories litigation weresubstantially less than the legal costs we incurred for the BD and NMTlitigation in 2004.  However, we expectsuch costs to increase as our litigation against Abbott continues.

 

17

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Preferred Stockdividend requirements declined due to conversions of Preferred Stock intoCommon Stock.  The dividend arrearage at December 31,2005, on all classes of Preferred Stock was approximately $10,700,000.

 

Interest incomeincreased due to a higher average outstanding cash balance and higher interestrates.  Interest expense increased due tohigher debt balances incurred for the warehouse financing and higher interestrates.

 

Provision forincome tax benefits consisted primarily of federal tax subject to carry backprovisions.  State income taxes were alsosubject to the various states’ carry back rules.

 

Cash flow fromoperations was negative for 2005 due principally to the loss for the year andchanges in working capital.

 

SIGNIFICANT ACCOUNTINGPOLICIES

 

Weconsider the following to be our most significant accounting policies. Carefulconsideration and Company review is given to these and all accounting policieson a routine basis to ensure that they are accurately and consistently applied.

 

**AccountsReceivable**

 

The Company records trade receivables whenrevenue is recognized. No product has been consigned to customers.  The Company’s allowance for doubtful accountsis primarily determined by review of specific trade receivables.  Those accounts that are doubtful ofcollection are included in the allowance. An additional allowance has been established based on a percentage ofreceivables outstanding.  Theseprovisions are reviewed to determine the adequacy of the allowance for doubtfulaccounts.  Trade receivables are chargedoff when there is certainty as to their being uncollectible.  Trade receivables are considered delinquentwhen payment has not been made within contract terms.

 

**RevenueRecognition**

 

Revenue isrecognized for sales to distributors when title and risk of ownership passes tothe distributor, generally upon shipment. Revenue is recorded on the basis ofsales price to distributors, less contractual pricing allowances. Contractualpricing allowances consist of (i) rebates granted to distributors whoprovide tracking reports which show, among other things, the facility thatpurchased the products, and (ii) a provision for estimated contractualpricing allowances for products that the Company has not received trackingreports. Rebates are recorded when issued and are applied against the customer’sreceivable balance. The provision for contractual pricing allowances isreviewed at the end of each quarter and adjusted for changes in levels ofproducts for which there is no tracking report. Additionally, if it becomesclear that tracking reports will not be provided by individual distributors,the provision is further adjusted. The estimated contractual allowance isnetted against individual distributors’ accounts receivable balances forfinancial reporting purposes. The resulting net balance is reflected inaccounts receivable or accounts payable, as appropriate. The terms andconditions of contractual pricing allowances are governed by contracts betweenthe Company and its distributors. Revenue for shipments directly to end-usersis recognized when title and risk of ownership passes from the Company. Anyproduct shipped or distributed for evaluation purposes is expensed.

 

**Inventories**

 

Inventories are valued at the lower of costor market, with cost being determined using a standard cost method, whichapproximates average cost.  Provision ismade for any excess or obsolete inventories.

 

18

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**MarketingFees**

 

Undera sales and marketing agreement with Abbott, the Company paid marketing feesuntil the Company terminated the contract for breach.  The contracted services were to includeparticipation 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.

 

**LitigationProceeds**

 

Proceedsfrom litigation settlements in our federal antitrust lawsuit, RetractableTechnologies, Inc. v. BD, et al. were recognized when realized. Generally,realization was not reasonably assured and expected until proceeds werecollected. Such amounts were net of attorneys’ fees, court costs, legalexpenses, and amounts payable under the Covenant Not to Sue. Liability forattorneys’ fees was not incurred until proceeds were collected.

 

**ReimbursedDiscounts**

 

TheCompany received reimbursed discounts from one of the settlement agreementsreached in its federal antitrust lawsuit, Retractable Technologies, Inc.v. BD, et al. Payments under the discount reimbursement program were recognizedupon delivery of the product, provided collection was reasonably assured. Suchamounts are presented in the Statements of Operations as a separate componentof revenues.  The program reimbursed $8.0million for discounts, the limit provided by the settlement agreement.  This limit was reached during the thirdquarter of 2006 and negatively affected profit margin for the third and fourthquarters.  The discount program ended on December 31,2006.

 

LIQUIDITY AND FUTURECAPITAL REQUIREMENTS

 

Historical Sources ofLiquidity

 

Wehave historically funded operations primarily from proceeds from privateplacements, loans, and litigation settlements. We were capitalized withapproximately $52,600,000 raised from six separate private placement offerings.We raised $47,375,600 in cash from the private sales of an aggregate of11,710,221 shares of Convertible Preferred Stock. In addition, we obtained acancellation of $3,679,284 in debt and $1,550,000 in Accounts Payable inexchange for Series V Class B Convertible Preferred Stock.

 

Weobtained $3,910,000 in 2000 from bank loans of which $3,435,000 has been repaidand $475,000 was refinanced with a new note with 1st International.Additionally, we received a Small Business Administration loan of $1,000,000 in1996 to pay for portions of automated assembly equipment, multi-cavity molds,and other equipment. This loan has been repaid. Furthermore, we borrowed$5,000,000 in 2000 under our Credit Agreement with Abbott Laboratories. In October 2002we repaid the Abbott Laboratories note with proceeds from a new note from KatiePetroleum, Inc. (“Katie Petroleum”) for $3,000,000 and a portion of theproceeds from a private placement.

 

Weobtained a loan from 1st International for $2,500,000 for interimand long-term financing of our warehouse. Principal and interest payments beganin the first part of 2005. See Note 7 to the Financial Statements for adiscussion of the terms of the note.

 

19

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Internal Sources ofLiquidity

 

Beginning in early 2004we began to receive shipment of product from Double Dove, a Chinesemanufacturer.  Fluctuations in the costand availability of raw materials and inventory and the ability to maintainfavorable supplier arrangements and relationships could result in the need tomanufacture all (as opposed to 27.2%) of the products in the United States.  This could temporarily increase unit costs aswe ramp up domestic production.

 

To achieve break evenquarters we need minimal access to hospital markets which has been difficult toobtain due to the monopolistic marketplace which was the subject of our antitrustlawsuit against BD. We will continue to attempt to gain access to the marketthrough our sales efforts and innovative technology. We are focusing on methodsof upgrading our manufacturing capability and efficiency in order to enable usto offer 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.

 

We have a LicensingAgreement with BTMD which expires on May 13, 2008. Royalties that were expectedin 2007 were not received due to the time needed to build the factory, assemblyequipment, and the related infrastructure as well as the need of BTMD to meetthe requisite government requirements. The facility has been completed and BTMDis in the process of meeting government requirements. We are in the process offormally extending our agreement with BTMD. Accordingly, although we stillcontinue to expect royalty payments we are unable to predict the date we willbegin to receive such royalties. Royalties will begin once governmentrequirements are met and BTMD is able to produce and sell products.

 

Historically,unit sales have increased in the latter part of the year due, in part, to thedemand for syringes during the flu season.

 

At thepresent time Management does not intend to raise equity capital. Due to thelitigation settlements, we have sufficient cash reserves and intend to rely onoperations, cash reserves, and debt financing as the primary ongoing sources ofcash.

 

In theevent we continue to have only limited market access and cash generated fromoperations and cash reserves become insufficient to support operations, theCompany would take cost cutting measures to reduce cash requirements. Suchmeasures could result in reduction of units being produced, reduction of workforce,reduction of salaries of officers and other nonhourly employees, and deferralof royalty payments.

 

TheCompany had a reduction in force in August 2005.

 

External Sources ofLiquidity

 

Wehave obtained several loans over the past seven****years,which have, together with proceeds from the sales of equities and litigationsettlements, enabled us to pursue development and production of our products.Currently we believe we could obtain additional funds through loans if needed.Furthermore, the shareholders have previously authorized an additional5,000,000 shares of a Class C stock that could, if necessary, beauthorized and used to raise funds through the sale of equity.

 

Contractual Obligationsand Commercial Commitments

 

Thefollowing chart summarizes all of our material obligations and commitments tomake future payments under contracts such as debt 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

 

Assumingwe are able to access the market, we may obtain additional capital to fundcapital expenditures and working capital needs. Management would fund theseexpenditures through debt and equity offerings. Capital expenditures couldinclude additional assembly lines, manufacturing space, warehousing, andrelated infrastructure. The expansion could include those products that havebeen developed but not yet marketed, as well as expanding manufacturingcapacity for existing products.

 

We had $1.5 million incapital 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.  TheCompany has the option to have its investment returned.  The purpose of this project is to provideinformation and insight to the public regarding healthcare.  Capital expenditures in 2007 are dependentupon several factors, including, but not limited to, projects to decreaseproduction costs, the introduction of new products, and access to debtfinancing.

 

On March 27,2007, the Board of Directors declared a dividend on the Series I and Series IIClass B Convertible Preferred Stock that was paid on July 24, 2007 toShareholders of Record on July 2, 2007. Arrearages were paid through June 30, 2007 in the amount of $1.1million.

 

OFF-BALANCE SHEETARRANGEMENTS

 

Wehave no off-balance sheet transactions.

 

**Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk.**

 

We believe that our market risk exposures are immaterial as we do nothave instruments for trading purposes and reasonable possible near-term changesin market rates or prices will not result in material near-term losses inearnings.

 

21

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** **

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

 

**RETRACTABLETECHNOLOGIES, INC.**

 

**FINANCIALSTATEMENTS AND****REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

 

**DECEMBER31, 2006 AND 2005**

 

F-1

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**RETRACTABLETECHNOLOGIES, INC.**

**INDEX TOFINANCIAL STATEMENTS**

 

| ** **                                                                                                     | **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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**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directorsand Stockholdersof Retractable Technologies, Inc.

 

We have audited theaccompanying balance sheets of Retractable Technologies, Inc. as of December 31,2006 and 2005, and the related statements of operations, changes instockholders’ equity, and cash flows for each of the three years in the periodended December 31, 2006. Our audits also included the financial statementschedule of Retractable Technologies, Inc., listed in Item 15(a).  These financial statements and financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Retractable Technologies, Inc. as of December 31,2006 and 2005, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2006 in conformity withU.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule whenconsidered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 
|                                           | /s/ CF & Co., L.L.P. |   |
|-------------------------------------------|-------------------------------|--------|
|                                      | CF & Co., L.L.P.     |
| Dallas, Texas                             |                          |
| April 2, 2007, except for Note 8     |                          |
| as to which the date is February 27, 2008 |                          |

 

F-3

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** **

**RETRACTABLETECHNOLOGIES, 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.**

**STATEMENTSOF 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 |   |

 

See accompanying notes tofinancial statements

 

F-5

----

** **

**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 loss                                                          |       |                                |       |                                 |       |                                  |       |                                 |       |                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                              |       |                                |       |                                 |       |                                  |       |                                 |       |                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   | $ | — |   |

 

See accompanying notes tofinancial 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 TOFINANCIAL STATEMENTS**

** **
| **1.** | **BUSINESS  OF THE COMPANY** |
|--------|------------------------------|

 

Retractable Technologies, Inc. (the “Company”)was incorporated in Texas on May 9, 1994, to design, develop, manufactureand market 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, blood collection tube holders, allergy trays, andIV catheters. The Company has conducted preliminary clinical evaluations andworked with national distributors to encourage healthcare facilities totransition from the use of standard 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,the Company capitalized interest of approximately $136,000; $105,000; and$53,000, respectively. Gains or losses from property disposals are included inincome.

 

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 assetswill be adjusted for impairment to a level commensurate with a discounted cashflow analysis 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 creditrisks to be limited. The Company had a high concentration of sales with twosignificant customers. For the year ended December 31, 2006, theaforementioned customers 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 supplier forits 5 cc and 10 cc syringes and increase domestic production for 1 cc and 3 ccsyringes 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) rebatesgranted to distributors who provide tracking reports which show, among otherthings, the facility that purchased the products, and (ii) a provision forestimated contractual pricing allowances for products that the Company has notreceived tracking reports. Rebates are recorded when issued and are appliedagainst the customer’s receivable balance. The provision for contractualpricing allowances is reviewed at the end of each quarter and adjusted forchanges in levels of products for which there is no tracking report.Additionally, if it becomes clear that tracking reports will not be provided byindividual distributors, the provision is further adjusted. The estimatedcontractual allowance is netted against individual distributors’ accountsreceivable balances for financial reporting purposes. The resulting net balanceis reflected in accounts receivable or accounts payable, as appropriate. Theterms and

 

F-10

----

 

conditions of contractual pricing allowances aregoverned by contracts between the Company and its distributors. Revenue for shipmentsdirectly to end-users is recognized when title and risk of ownership passesfrom the Company. Any product shipped or distributed for evaluation purposes isexpensed.

 

**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 Marketingand Distribution Agreement with Abbott was terminated.

 

**Litigation Proceeds**

 

Proceeds from litigation settlements in the Company’sfederal antitrust lawsuit, Retractable Technologies, Inc. v. BectonDickinson & Co., et al. were recognized when realizable. Generally,realization was not reasonably assured and expected until proceeds werecollected. Such amounts were net of attorneys’ fees, court costs, legalexpenses, and amounts payable under the Covenant Not to Sue. Liability forattorneys’ 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. Becton Dickinson & Co et al.  Payments under the discount reimbursementprogram were recognized upon invoicing of amounts due under the agreementprovided collection was reasonably assured. Such amounts are presented in the Statements of Operations as a separatecomponent of revenues.  All fundsavailable under the discount reimbursement program were recognized by the thirdquarter of 2006.

 

**Income taxes**

 

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.

 

**Earnings per share**

 

The Company has adopted Statement of FinancialAccounting Standards No. 128, *EarningsPer Share*, 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 |   |

 

**Research and development costs**

 

Research and development costs are expensed asincurred.

 

**Share-based compensation**

 

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 didnot have a material impact on the financial statements of the Company.  In accordance with the disclosurerequirements of SFAS No. 123R, the Company incurred the followingshare-based compensation 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

----

 

**Recent Pronouncements**

 

In July 2006 the Financial Accounting StandardsBoard issued FASB Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*. FIN 48 is intended to clarify the accounting for uncertainty in incometaxes recognized in financial statements in accordance with SFAS 109*.* This Interpretation prescribes two stepsin evaluating uncertainty in income taxes. The steps include a recognitionthreshold and measurement attribute.  Inthe recognition threshold step the Company determines whether it ismore-likely-than-not that a tax position will be sustained based on thetechnical merits of the position. The Company should presume that the positionwill be examined by the appropriate taxing authority with their having fullknowledge of all relevant information. In the measurement attribute step, theCompany will evaluate its tax position that meets the more-likely-than-notrecognition threshold.   The benefit ismeasured to determine the amount to recognize in the financial statements. Thetax position is measured at the largest amount of benefit that is greater than50 percent likely of being realized upon ultimate settlement.  Tax positions that previously failed to meetthe more-likely-than-not recognition threshold should be recognized in thefirst subsequent financial reporting period in which that threshold ismet.  Previously recognized tax positionsthat no longer meet the more-likely-than-not recognition threshold should bederecognized in the first subsequent financial reporting period in which thethreshold is no longer met.  FIN 48 iseffective for fiscal years ending after December 15, 2006.  The Company is evaluating the effect, if any,that the adoption of FIN 48 will have on our financial statements.

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement No. 157, *Fair ValueMeasurements* (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements.  SFAS 157is effective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those years. The provisions of the new standard are to be applied prospectively formost financial instruments and retrospectively for others as of the beginningof the fiscal 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** |
|--------------|-----------------|

 

Inventoriesconsist 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** |
|--------|------------------------|

 

Intangibleassets 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 and2005, 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 liability company (“LLC”) in which we will be a minorityinterest holder.  The funds are held inescrow until the LLC has raised the majority of its capital.  If such fundraising is not completed by November 2007the Company has the option to have its investment returned.  The purpose of this project is to provideinformation and insight to the public 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 aggregatematurities of 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****(as of February 27, 2008)** |
|--------|-----------------------------------------------------------------|

 

On August 12,2005, the Company filed a lawsuit against Abbott Laboratories Inc. in theUnited States District Court in the Eastern District of Texas, TexarkanaDivision. The Company is alleging fraud and breach of contract in connectionwith the National Marketing and Distribution Agreement dated as of May 4, 2000which was terminated on October 15, 2003. The Company is seeking damages which areestimated to be in millions of dollars of lost profits, out of pocket expensesand other damages. In addition, the Company is seeking punitive damages,pre-judgment and post-judgment interest and attorney’s fees. Abbott hasappealed a trial court determination that the dispute does not need to bedecided by arbitration. Oral argument is scheduled for March 3, 2008. 

 

In August 2006, theCompany was sued by Occupational and Medical Innovations Limited (“OMI”) inFederal Court of Australia, alleging that two letters written to OMI by outsidecounsel contained unjustified threats. OMI is not seeking monetary damages inthe action, but was awarded its costs. The Court subsequently held that one ofthe letters written by outside counsel contained an unjustified threat. OMIamended its complaint to seek a declaratory judgment that OMI’s syringe doesnot infringe RTI’s Australian patents. Trial of that claim is set for April2008.

 

On June 15, 2007, theCompany filed a lawsuit against BD in the United States District Court for theEastern District of Texas, Marshall Division. The Company is alleging antitrust violations, violations of the LanhamAct and patent infringement.  BD hascounterclaimed for a declaration that the Company’s patents are invalid andunenforceable.  All other claims havebeen stayed until resolution of the patent claims.  The patent case is set for trial in March2009.

 

On September 6,2007, BD and MDC Investment Holdings, Inc. filed a complaint against theCompany in the United States District Court for the Eastern District of Texas,Texarkana Division.  Plaintiffs allegethat the Company’s VanishPoint® product line infringes U.S. patent nos.6,179,812 and 7,090,656.  Plaintiffs seeka declaration of infringement, an injunction against further infringement,compensatory damages (with interest), the costs of the litigation, and suchother relief as the Court deems just and proper.  The Company has counterclaimed for adeclaration that the asserted patents are invalid and unenforceable.  The Company believes that it has meritoriousdefenses to such allegations and intends to defend this lawsuit vigorously. Notrial date has been set.

 

The Company isinvolved in 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 forincome taxes 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 taxbenefit of net operating loss carry forwards utilized in 2004 aggregated $12.1million for current federal income taxes and $7.5 million for current stateincome taxes.  As of December 31, 2004,the Company 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 reconciliationof income 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 hasone class of Preferred Stock outstanding: Class B Convertible PreferredStock (“Class B Stock”). 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 of164,000; 224,700; 135,245; 553,500; and 1,363,721 shares, respectively. Theremaining 2,558,834 authorized shares have not been assigned a series.

 

Series I Class B

 

There were1,000,000 shares of $1 par value Series I Class B ConvertiblePreferred Stock (“Series I Class B Stock”) issued and 164,000 and171,000 shares outstanding at December 31, 2006 and 2005, respectively.Holders of Series I Class B Stock are entitled to receive acumulative annual dividend of $.50 per share, payable quarterly if declared bythe Board of Directors. In 2004, the Company paid $2,550,000 in dividends.  At December 31, 2006 and 2005approximately $226,000 and $141,000, respectively, of dividends which had notbeen declared were in arrears.

 

Series I Class BStock is redeemable after three years from the date of issuance at the optionof the Company at a price of $7.50 per share, plus all accrued and unpaiddividends. Each share of Series I Class B Stock may, at the option ofthe stockholder, be converted to one share of Common Stock after three yearsfrom the date of issuance or in the event the Company files an initialregistration statement under the Securities Act of 1933. Pursuant to theseterms, a total of 7,000 shares of Series I Class B Stock wereconverted into Common Stock in 2006. In the event of voluntary or involuntarydissolution, liquidation or winding up of the Company, holders of Series IClass B Stock then outstanding are entitled to $6.25 per share, plus allaccrued and unpaid dividends prior to any distributions to holders of Series IIClass B Convertible Preferred Stock (“Series II Class B Stock”),Series III Class B Convertible Preferred Stock (“Series III Class BStock”), Series IV Class B

 

F-17

----

 

ConvertiblePreferred Stock (“Series IV Class B Stock”), Series V Class BConvertible Preferred Stock (“Series V Class B Stock”) or CommonStock.

 

Series II Class B

 

There were1,000,000 shares of $1 par value Series II Class B Stock issued andthere were 224,700 and 255,200 shares outstanding at December 31, 2006 and2005. Holders of Series II Class B Stock are entitled to receive acumulative annual dividend of $1.00 per share, payable quarterly if declared bythe Board of Directors. Holders of Series II Class B Stock generallyhave no voting rights until dividends are in arrears and unpaid for twelveconsecutive quarters. In such case, the holders of Series II Class BStock have the right to elect one-third of the Board of Directors of theCompany. In 2004, the Company paid $4.6 million in dividends. At December 31,2006 and 2005, approximately $678,000 and $443,000, respectively, of dividendswhich had not been declared were in arrears.

 

Series II Class BStock is redeemable after three years from the date of issuance at the optionof the Company at a price of $15.00 per share plus all accrued and unpaiddividends. Each share of Series II Class B Stock may, at the optionof the stockholder, be converted to one share of Common Stock after three yearsfrom the date of issuance or in the event the Company files an initialregistration statement under the Securities Act of 1933. Pursuant to theseterms, 30,500 shares of Series II Class B Stock were converted intoCommon Stock in 2006. In the event of voluntary or involuntary dissolution,liquidation or winding up of the Company, holders of Series II Class BStock then outstanding are entitled to $12.50 per share, plus all accrued andunpaid dividends, after distribution obligations to holders of Series I Class BStock have been satisfied and prior to any distributions to holders of Series IIIClass B Stock, Series IV Class B Stock, Series V Class BStock or Common Stock.

 

Series III Class B

 

There were1,160,445 shares of $1 par value Series III Class B Stock issued and135,245 and 135,245 shares outstanding at December 31, 2006 and 2005,respectively. Holders of Series III Class B Stock are entitled toreceive a cumulative annual dividend of $1.00 per share, payable quarterly ifdeclared by the Board of Directors. At December 31, 2006 and 2005,approximately $2,853,000 and $2,718,000, respectively, of dividends which havenot been declared were in arrears.

 

Series III Class BStock is redeemable after three years from the date of issuance at the optionof the Company at a price of $15.00 per share, plus all accrued and unpaiddividends. Each share of Series III Class B Stock may, at the optionof the stockholder, be converted to one share of Common Stock after three yearsfrom the date of issuance or in the event the Company files an initialregistration statement under the Securities Act of 1933. Pursuant to theseterms, no shares of Series III Class B Stock were converted intoCommon Stock in 2006. In the event of voluntary or involuntary dissolution,liquidation or winding up of the Company, holders of Series III Class BStock then outstanding are entitled to $12.50 per share, plus all accrued andunpaid dividends, after distribution obligations to Series I Class BStock and Series II Class B Stock have been satisfied and prior toany distributions to holders of Series IV Class B Stock, Series VClass B Stock or Common Stock.

 

Series IV Class B

 

There were1,133,800 shares issued and 553,500 and 556,000 shares outstanding at December 31,2006 and 2005, respectively. Holders of Series IV Class B Stock areentitled to receive a cumulative annual dividend of $1.00 per share, payablequarterly, if declared by the Board of Directors. Holders of Series IV Class BStock generally have no voting rights. At December 31, 2006 and 2005,approximately $5,924,000 and $5,368,000, respectively, of dividends which havenot been declared were in arrears.

 

Series IV Class BStock is redeemable after three years from the date of issuance at the optionof the Company at a price of $11.00 per share plus all accrued and unpaiddividends. Each share of

 

F-18

----

 

Series IV Class BStock may, at the option of the stockholder any time subsequent to three yearsfrom date of issuance, be converted into one share of Common Stock, or in theevent the Company files an initial registration statement under the SecuritiesAct of 1933. Pursuant to these terms, 2,500 shares of Series IV Class BStock were converted into Common Stock in 2006. In the event of voluntary orinvoluntary liquidation, 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 BStock, and Series III Class B Stock have been satisfied and prior toany distribution to holders of Series V Class B Stock or CommonStock.

 

Series V Class B

 

There were2,416,221 shares issued and 1,363,721 and 1,381,221 outstanding at December 31,2006 and 2005, respectively. Holders of Series V Class B Stock areentitled to receive a cumulative annual dividend of $0.32 per share, payablequarterly, if declared by the Board of Directors. Holders of Series V Class BStock generally have no voting rights. At December 31, 2006 and 2005,approximately $2,482,000 and $2,041,000, respectively, of dividends which havenot been declared were in arrears.

 

Series V Class BStock is redeemable after two years from the date of issuance at the option ofthe Company at a price of $4.40 per share plus all accrued and unpaiddividends. Each share of Series V Class B Stock may, at the option ofthe stockholder any time subsequent to the date of issuance, be converted intoCommon Stock. Pursuant to the terms of the certificate of designation, 17,500shares of Series V Class B Stock were converted into Common Stock in2006. In the event of voluntary or involuntary liquidation, dissolution, orwinding up of the Company, holders of Series V Class B Stock thenoutstanding are entitled to receive liquidating distributions of $4.40 pershare, plus accrued and unpaid dividends after distribution obligations to Series IClass B Stock, Series II Class B Stock, Series III Class BStock and Series IV Class B Stock have been satisfied and prior toany distribution to the holders of the Common Stock.

 

**Commonstock**

 

The Company isauthorized to issue 100,000,000 shares of no par value Common Stock, of which23,644,164 and 23,511,884 shares are issued and outstanding at December 31,2006 and 2005, respectively.

 
| **11.** | **RELATED  PARTY TRANSACTIONS** |
|---------|---------------------------------|

 

The Company has alease with Mill Street Enterprises (“Mill Street”), a sole proprietorship ownedby a 10% shareholder for offices and storage in Lewisville, Texas. During theyears ended December 31, 2006, 2005 and 2004, the Company paid $34,800;$34,800; and $37,700, respectively, under this lease. This lease term expiresin June 2007.  Beginning in October 2005and pursuant 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, theCompany paid MediTrade $91,883 on a month-to-month consulting agreement wherebyMediTrade is paid $6,500 per month plus expenses.

 

 The Companyhas a license agreement with the Chief Executive Officer of the Company. SeeNote 5. The officer has a Covenant Not to Sue Agreement with the Company. SeeNote 13.

 

F-19

----

 

During the yearsended December 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**

 

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

 

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

 

A committee appointed by the Board of Directors administers all plansand determines 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 ofdirector, officer and employee options granted and outstanding under the Plansis presented 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 ofeach option grant is estimated on the date of grant using the Black-Scholesoption pricing 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

----

 

Thefollowing table summarizes information about director, officer and employeeoptions outstanding under the aforementioned plans 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-employee options**

 

Asummary of options outstanding during the years ended December 31 and held bynon-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 |       |                                        |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |

 

 

 

 

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model.  Nooptions were issued in 2006, 2005, or 2004.

 

Thefollowing 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 reached settlementagreements with Premier Inc.; Premier Purchasing Partners, L.P.; VHA, Inc.;Novation, L.L.C.; Tyco International (US) Inc.; and Tyco Healthcare Group L.P.in its federal antitrust lawsuit, Retractable Technologies, Inc. v. BectonDickinson & Co. et al. As part of the settlements, the litigation againstPremier, 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 the settlementagreements.

 

TheCompany’s litigation attorneys received $5,650,000 of 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 were distributed.The amount realized is net of $22,832 realized by Mr. Shaw pursuant to aCovenant 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 wire transferor an irrevocable confirmed letter of credit. The Company does extend credit to international customers on someoccasions depending upon certain criteria, including, but not limited to, thecredit worthiness of the customer, the stability of the country, bankingrestrictions, and the size of the order. All transactions are in United States currency.

 
| **16.** | **SUBSEQUENT EVENTS** |
|---------|-----------------------|

 

 

 

OnMarch 27, 2007, the Board of Directors declared a dividend on the Series I andSeries II Class B Convertible Preferred Stock to be paid on July 24, 2007 toShareholders of Record on July 2, 2007. Arrearages will be paid through June 30, 2007 in the amount of $1.1million.

 

F-23

----

 
|    | **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

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**Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure.**

 

The Company hashad no change in accountants in the last two fiscal years.

 

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

 

In preparing itsfinancial statements and disclosures relating to the 2006 year, it came toManagement’s attention that the Company had a material weakness in its internalcontrols and procedures at December 31, 2006, whereby a significant entry(for $1,708,608) was initially made in the wrong period.  The material weakness concerned anunder-accrual of rebates due to an error in posting the year-end accrual.  This was related to a one-time adjustmentspecifically associated with the discount program which ended December 31,2006.  The calculation itself wasreasonable, but was recorded in January 2007 rather than December 2006.

 

Extenuatingcircumstances, including a September 2006 conversion to a new accounting systemand the third quarter’s termination of the discount reimbursement program(which necessitated a change in the manner in which the estimate for rebateswas calculated) contributed to the error.  

 

Since the auditadjustment to correctly record the discounts had been made prior to the filingof our Form 10-K, and no further significant transactions related to thediscounts are expected in the future, Management believes that the materialweakness no longer existed as of the date of the Form 10-K and thereforeno further remediation of the material weakness was necessary.  

 

Even though theCompany does not believe that there was a material weakness as of the date ofits Form 10-K, it has taken the following steps to enhance its internalcontrols in case it ever has a similar discount program:

 

·   TheCompany now reviews the rebate calculation earlier in its timeline in order tohave the most up-to-date trial balance for future audits, as well as quarterlyreviews;

 

·   TheCompany has added an additional accountant’s position to its staff; and

 

·   TheCompany has increased its cross training for review of the rebate calculationand timely entry.

 

Pursuant toparagraph (b) of Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of1934 (the “Exchange Act”) and on March 29, 2007, our President, Chairman, andChief Executive Officer, Thomas J. Shaw (the “CEO”), and our Vice President andChief Financial Officer, Douglas W. Cowan (the “CFO”), acting in theircapacities as our principal executive and financial officers, evaluated theeffectiveness of our disclosure controls and procedures, as defined in Rule13a-15(e) or Rule 15d-15(e), and determined that, as of December 31, 2006, andbased on the evaluation of these controls and procedures as required by paragraph(b) of Rule 13a-15, or Rule 15d-15 there were no significant deficiencies inthese procedures. The CEO and CFO determined that our disclosure controls andprocedures are effective.

 

The basis fortheir conclusion that the Company’s disclosure controls and procedures wereeffective at the end of the period covered by the report (April 2, 2007) (despitethe error in internal controls as of December 31, 2006, discussed above)was the fact that the error  was botheventually discovered and corrected in time so that the Company’s disclosureswere both accurate and timely made. Furthermore, the Company has in place additional multiple controls aspart of its regular review processes that had not yet been performed when themisposting was discovered.  Those reviews,more likely than not, would also have detected a problem of thismagnitude.  Such reviews include, but arenot limited to, analyses of average sales prices, cost of goods sold, profitmargins, and the relationships of each to the other.   

 

Finally, the CEOand CFO did not identify fraud that involved our Management or any otheremployee who had a significant role in our internal controls.

 

They did not findany other deficiencies or weaknesses which would require changes to be made orcorrective actions to be taken related to our internal controls. There havebeen no changes during the fourth quarter of 2006 or subsequent to December 31,2006, in our internal controls over financial reporting (other than as setforth above) or in any other factor that has materially affected or isreasonably likely to materially affect our internal controls over financialreporting.

** **

**Item 9B. Other Information.**

 

None

 

**PARTIII**

 

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

 

The followingtable sets forth information concerning our Directors, executive officers, andcertain of our significant employees as of the date of this filing. Our Boardof Directors consists of a total of seven (7) members, two (2) members of whichare Class 1 Directors and five (5) of which are Class 2 Directors which servefor two-year terms.

 
| Name                 | ** ** | ** ** | ** ** | **Age**                                                                      | ** ** | **Position** | ** ** | **Term as  Director Expires** |
|----------------------|------------|------------|------------|------------------------------------------------------------------------------|------------|--------------|------------|-------------------------------|
| **EXECUTIVES**       | ** ** | ** ** | ** ** | ** **                                                                   | ** ** | ** **   |
| Thomas J. Shaw       |       | 57         |       | Chairman, President,  Chief Executive Officer, and Class 2 Director          |       | 2008         |
| Douglas W. Cowan     |       | 64         |       | Vice President, Chief  Financial Officer, Treasurer, and Class 2 Director    |       | 2008         |
| Kathryn M.  Duesman  |       | 44         |       | Executive Director,  Global Health                                           |       | N/A          |
| Russell B.  Kuhlman  |       | 54         |       | Vice President, Sales                                                        |       | N/A          |
| Michele M.  Larios   |       | 41         |       | Vice President, General  Counsel, and Secretary                              |       | N/A          |
| Lawrence G.  Salerno |       | 47         |       | Director of Operations                                                       |       | N/A          |
| Steven R. Wisner     |       | 50         |       | Executive Vice President, Engineering &  Production and Class 2 Director |       | 2008         |

 

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| **INDEPENDENT DIRECTORS**  | ** ** | ** ** | ** ** | ** **                                | ** ** | ** ** |
|----------------------------|------------|------------|------------|-------------------------------------------|------------|------------|
| Marco Laterza              |       | 59         |       | Class 1 Director                          |       | 2009       |
| Amy Mack                   |       | 40         |       | Class 1 Director                          |       | 2009       |
| Marwan Saker               |       | 52         |       | Class 2 Director                          |       | 2008       |
| Clarence Zierhut           |       | 79         |       | Class 2 Director                          |       | 2008       |
|                       |       |       |       |                                      |       |       |
| **SIGNIFICANT  EMPLOYEES** | ** ** | ** ** | ** ** | ** **                                | ** ** | ** ** |
| Shayne Blythe              |       | 38         |       | Director of Sales and Marketing Logistics |       | N/A        |
| John W. Fort III           |       | 39         |       | Director of Accounting                    |       | N/A        |
| James A. Hoover            |       | 59         |       | Director of Quality Assurance             |       | N/A        |
| R. John Maday              |       | 47         |       | Production Manager                        |       | N/A        |
| Jules Millogo              |       | 47         |       | Medical Director                          |       | N/A        |
| Judy Ni Zhu                |       | 49         |       | Research and Development Manager          |       | N/A        |

 

** **

**EXECUTIVES**

 

Thomas J. Shaw,the Founder of the Company, has served as Chairman of the Board, President, ChiefExecutive Officer, and Director since the Company’s inception. In addition tohis duties overseeing the management of the Company, he continues to lead ourdesign team in product development of other medical safety devices that utilizehis unique patented friction ring technology. Mr. Shaw has over 25 years ofexperience in industrial product design and has developed several solutions tocomplicated mechanical engineering challenges. He has been granted multiplepatents and has additional patents pending. Mr. Shaw received a Bachelor ofScience in Civil Engineering from the University of Arizona and a Master ofScience in Accounting from the University of North Texas.

 

Douglas W. Cowanis a Vice President and our Chief Financial Officer, Treasurer, and a Director.Mr. Cowan joined the Company as Chief Financial Officer and was elected to theBoard of Directors in 1999. He is responsible for the financial, accounting,risk management and forecasting functions of the Company. Mr. Cowan has aBachelor of Business Administration from Texas Technological College. He is aCPA licensed in Texas.

 

Kathryn M.Duesman, RN, joined us in 1996 and currently serves as the Executive Director,Global Health. She provides clinical expertise on existing VanishPoint®products as well as those in development. She has been instrumental indeveloping training and marketing materials and has spoken and been publishedon needle safety issues. Ms. Duesman works with international agencies topromote the use of safe technologies in developing countries.  Ms. Duesman is a 1985 graduate of TexasWoman’s University with a Bachelor of Science in Nursing. Ms. Duesman’sclinical background as a registered nurse includes diagnostic, acute, and homehealthcare nursing.

 

Russell B. Kuhlmanjoined us in February 1997 and is our Vice President, Sales. Mr. Kuhlman isresponsible for management of the sales force and liaison with GPOs and producttraining for our sales organization, as well as distribution. Mr. Kuhlman’sefforts with us have resulted in bringing onboard Specialty Distributors,influencing legislation, and educating influential healthcare representativesabout the benefits of the VanishPoint® product line. Mr. Kuhlman is respected throughout theindustry and is a main contributor to the safety effort in this country. He hasa sales background in the medical service industry that includes his mostrecent work for ICU Medical (formerly Bio-Plexus), a medical devicemanufacturing 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, amedical products company, in several territories from 1980 to 1989, where hewas recognized as the National Sales Representative for the year 1987. Mr.Kuhlman holds a Bachelor of Science in Finance from the University ofTennessee.

 

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Michele M. Lariosjoined us in February 1998 and currently serves as a Vice President, GeneralCounsel and Secretary of the Company. Ms. Larios is responsible for the legaland legislative, quality assurance, human resource and regulatory functions ofthe Company. In addition to working on legal matters and with outside counsel,Ms. Larios works with legislators on pertinent issues and relevant legislation.Ms. Larios received a Bachelor of Arts in Political Science from Saint Mary’sCollege in Moraga, California, and a Juris Doctorate from Pepperdine UniversitySchool of Law in Malibu, California.

 

Lawrence G.Salerno has been employed with us since 1995 and has served as Director ofOperations for us since 1998. He is responsible for the manufacture of allVanishPoint® products, as well as all product development andprocess 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. Wisnerjoined us in October 1999 as Executive Vice President, Engineering andProduction and Director. Mr. Wisner’s responsibilities include the managementof engineering, production,  Chineseoperations, and international sales. Mr. Wisner has over 30 years of experiencein product design, development, and manufacturing. Mr. Wisner holds a Bachelorof Science in Computer Engineering from Iowa State University.

 

**INDEPENDENTDIRECTORS**

 

Marco Laterzajoined us as a Class 1 Director effective as of March 22, 2005. Since 1988, Mr.Laterza has owned and operated a public accounting practice. His practiceincludes corporate, partnership and individual taxation, compilation/review offinancial statements, financial planning, business consulting, and trusts andestates. From 2004 to the present Mr. Laterza has also served as the ChiefFinancial Officer for EZ Blue Software Corporation, a development stagesoftware company. Formerly, Mr. Laterza was employed in a number of positionsfrom 1977 to 1985 with El Paso Natural Gas Company eventually serving as itsDirector of Accounting. Mr. Laterza received his Bachelors of BusinessAdministration in Accounting from Pace University in 1972. He is a CertifiedPublic Accountant and has received a Certificate of Educational Achievement inPersonal Financial Planning from the American Institute of CPAs.

 

Ms. Amy Mackjoined us as a Director on November 19, 2007. Since April of 2000, she has owned and operated (and served as ChiefNursing Officer for) EmergiStaff & Associates, a nursing staffing company,in Dallas, Texas.  She served as aregistered nurse from August 1997 to the date she began EmergiStaff &Associates.  She obtained her Bachelor ofScience degree from Texas A&M University in College Station, Texas in 1991and an Associate degree in Nursing from El Centro College in Dallas, Texas in1994.  She is a registered nurse inTexas.

 

Marwan Saker firstjoined our Board of Directors in June 2000. Since 1983, Mr. Saker has served asChief Executive Officer of Sovana, Inc., an export management company thatsupplies agricultural equipment and 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.

 

Clarence Zierhuthas served on our Board of Directors since April 1996. Since 1955, Mr. Zierhuthas operated an industrial design firm, Zierhut Design, now Origin Design, thatdevelops new products from concept through final prototypes.****During his professional career, Mr. Zierhut has createdover 3,000 

 

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productdesigns for more than 350 companies worldwide, in virtually every field ofmanufacturing, and has won many international awards for design excellence. Hisclients have included Johnson & Johnson, Abbott Laboratories, Gould, andMcDonnell Douglas. He received a Bachelor of Arts from Art Center College ofDesign in Los Angeles, California.

 

**SIGNIFICANTEMPLOYEES**

 

Shayne Blythe hasbeen with the Company for over ten years and is our Director of Sales andMarketing Logistics.  She is responsiblefor developing and implementing strategic directions, objectives, comprehensivesales and marketing plans, and programs. In addition, she directs and oversees all aspects of the distributionprocess and customer 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 IIIis our Director of Accounting. Mr. Fort joined us in March of 2000 as aFinancial Analyst and has served as our Director of Accounting since October of2002. His primary responsibilities include managing the day-to-day operationsof the Accounting and Finance Department, coordination of the annual audits,and interim reviews by our independent accountants, as well as the costaccounting and forecasting functions of the Company. Prior to joining us, heserved as the Manager of Financial Planning for the product-marketingdepartment of Excel Communications. Mr. Fort also served as the Manager ofBudgeting and Projections for Snelling and Snelling, Inc., an internationalpersonnel services firm. Mr. Fort holds a Bachelor of Business Administrationin Accounting from Tarleton State University.

 

James A. Hooverjoined us in February 1996 and is our Director of Quality Assurance. Prior tohis becoming Director of Quality Assurance he was Production Manager. He isresponsible for quality assurance functions of the Company. Mr. Hoover has alsodeveloped and implemented FDA required procedures and has been involved in theFDA inspection process. Mr. Hoover joined us after working for Sherwood for 26years. During his tenure with Sherwood, a medical device manufacturing company,he gained hands-on experience in all aspects of the medical devicemanufacturing process. Mr. Hoover began his career with Sherwood as a materialshandler and worked his way up through a series of positions with added responsibilitiesto his final position there as Production Manager of Off-Line Molding,Operating Room/Critical Care. In this capacity, he managed several departments,ran several product lines, and hired and supervised over 200 employees. Whileat Sherwood, he also gained experience with one of the country’s first safetysyringes, the Monoject®.

 

R. John Madayjoined us in July 1999 and is our Production Manager. He is responsible forsupervision of the production of our products. Prior to becoming Production Manageron January 1, 2005, he served as our Production General Supervisor. Mr. Madayhas 23 years of manufacturing experience in both class II and III medicaldevices. He spent three years with Mentor Corp. supervising two productiondepartments and 13 years with Sherwood Medical in which he gained hands-onexperience in all aspects of medical device manufacturing including managingthe Kit and Packaging department with over 225 employees. Mr. Maday’s formaltraining includes FDA, and Total Quality Management Systems and is certified asa Black Belt of Six Sigma Methodology.

 

Dr. Jules Millogohas served as our Medical Director since May 2007. His duties includerepresenting the Company at scientific forums and working with Ministries ofHealth and international organizations on developing injection safety andhealth workers safety standards and policies. From 2004 to April 2007 Dr.Millogo was employed by John Snow, Inc. as the Project Director for theWashington-based Making Medical Injections Safer Project (“MMIS”), a $150million project funded by the US Government to decrease unsafe injections andthe medical transmission of HIV/AIDS, hepatitis B and C as part of the USPresident Emergency Plan for AIDS Relief (PEPFAR). Under his leadership, theMMIS Project trained more than 100,000 health workers in safer injectionpractices and donated more than 100 million safety syringes to high HIVprevalence countries in Africa and the Caribbean. From 2001 to 2004 Dr. Millogowas a technical advisor for John Snow, Inc. Dr. Millogo’s experience includesworking in several African and Asian countries under the World HealthOrganization. Dr. Millogo holds a Master’s of Science in Epidemiology ofCommunicable Diseases from the University College of London, UK, and a MD fromthe University of Ouagadougou, Burkina Faso. Dr Millogo is fluent in French,English, and several African languages.

 

Judy Ni Zhu joinedus in 1995 and is our Research and Development Manager. Her primary focus is onnew product development and improvement of current products. Prior to joiningus, Ms. Zhu worked with Checkmate Engineering, an engineering firm, as a designengineer on the original 3cc syringe and other SBIR grant projects. Ms. Zhureceived her Bachelor of Science from Northwest Polytechnic University in Xian,China, and her Master of Engineering from University of Texas at Arlington. Ms.Zhu has assisted in design modifications for the 3cc syringe, which havemaximized both product reliability and production efficiency. She also designedand developed a manual needle assembly machine and an automatic lubricating andcapping system 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 patentapplications.

 

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FAMILY RELATIONSHIPS

 

There are nofamily relationships among the above persons except as set forth above.

 

INVOLVEMENT IN CERTAINLEGAL PROCEEDINGS

 

None of the abovepersons or any business in which such person was an executive officer have beeninvolved in a bankruptcy petition, been subject to a criminal proceeding(excluding traffic violations and other minor offenses), been subject to anyorder enjoining or suspending their involvement in any type of business, orbeen found by a court or administrative body to have violated a securities law.

 

DIRECTORSHIPS IN OTHERCOMPANIES

 

No Directors holdDirectorships in reporting companies other than as set forth above.

 

SECTION 16(a) BENEFICIALOWNERSHIP REPORTING COMPLIANCE

 

Section 16 of theExchange Act requires our Directors, executive officers, and persons who ownmore than 10 percent of a registered class of our equity securities to filewith the Commission initial reports of beneficial ownership (Form 3) andreports of changes in beneficial ownership (Forms 4 and 5) of our Common Stockand our other equity securities. Officers, Directors, and greater than 10percent shareholders are required by the Commission’s regulations to furnish uswith copies of all Section 16(a) reports they file.

 

Ms. SuzanneAugust, a 10% shareholder, filed a Form 3 late. The Form 3 addressed one transaction (her receipt of 2,800,000 shares ofCommon Stock).  The Form 3 was filed onDecember 5, 2006.

 

CODE OF ETHICS

 

Effective as ofMarch 9, 2004, we adopted a code of ethics that applies to all employees,including, but not limited to, the Company’s principal executive and financialofficers.  Our Code of Business Conductand Ethics is designed 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 acopy of the code on our website at www.vanishpoint.com/investor.asp.  Please follow link to Governance then followlink to Charters, then click RVP Corporate Code of Conduct. Any amendment tothis code or waiver of its application to the principal executive officer,principal financial officer, principal accounting officer, or controller orsimilar person shall be disclosed to investors by means of a Form 8-K filingwith the Commission. We will provide to any person without charge, uponrequest, a copy of such code of ethics. Such requests should be submitted inwriting to Mr. Douglas W. Cowan at 511 Lobo Lane, P.O. Box 9, Little Elm, Texas75068-0009.

 

AUDIT COMMITTEE

 

We have aseparately-designated standing Audit Committee established in accordance withSection 3(a)(58)(A) of the Exchange Act consisting of Messrs. Clarence Zierhut,Marco Laterza, and Marwan Saker. Each of the members of the Audit Committee isindependent as determined by The AMEX rules and Item 7(d)(3)(iv) of Schedule14A under the Exchange Act.

 

Audit Committee FinancialExpert 

 

The Board ofDirectors has determined that we have at least one financial expert serving onthe Audit Committee.  Mr. Marco Laterzaserves as the Company’s designated Audit Committee Financial Expert.  Mr. Laterza is independent as defined forAudit Committee members by the listing standards of the AMEX.

 

**Item 11. Executive Compensation.**

 

COMPENSATION DISCUSSIONAND ANALYSIS

 

The Objectives of OurCompensation Program

 

Our executive officercompensation program (the “Compensation Program”) is based on the belief thatcompetitive compensation is essential to attract, retain, motivate, and rewardhighly qualified and industrious executive officers.  Our Compensation Program is intended toaccomplish the following purposes:

 

attract and retain highlytalented and productive executive officers;

 

provide incentives andrewards for superior performance by the executive officers; and

 

align the interests ofexecutive officers with the interests of our stockholders.

 

What the CompensationProgram is Designed to Award

 

Our Compensation Programis designed to award both superior long-term performance by our executiveofficers and their loyalty.

 

Summary of Each Elementof Compensation

 

To achieve theseobjectives, the Compensation and Benefits Committee has approved an executiveofficer compensation program that consists of four basic components:

 

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 to Pay EachElement of Our Compensation Program

 

*Base Salary*

 

We choose to pay asignificant component of our compensation in base salary due to the fact thatour financial performance is constrained by the monopolistic activities ofBD.  We have been blocked from access tothe market by exclusive marketing practices engaged in by BD who dominates themarket. We believe that their monopolistic business practices continue despitetheir paying $100 million to settle a lawsuit with the Company foranticompetitive practices, business disparagement, and tortious interference.Until such time as we believe that the Company has access to the market, webelieve that it is appropriate to weigh our Compensation Program heavily infavor of base salaries rather than in incentive compensation.

 

*Cash Bonuses*

 

From time to time andwhen our cash reserves allow (taking into account the continued need to competein this monopolistic environment and the continued need for significant cashreserves) we grant cash bonuses in order to reward significant efforts or theaccomplishment of short term goals. The last bonuses were granted in 2003.  The CEO has never been granted any bonuses ofany kind.

 

*Long-Term Incentives: StockOptions*

 

Long-term incentives areprovided through grants of stock options primarily under the Company’s 1999Stock Option Plan.  The grants aredesigned to align the interests of executive officers with those of stockholdersand to provide each executive officer with a significant incentive to managethe Company from the perspective of an owner with an equity stake in theCompany.

 

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

 

Executive compensationremains the same until there is a review of such compensation by theCompensation 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.

 

*Base Salary*

 

The base salary for eachof the Company’s executive officers is subjectively determined primarily on thebasis of the following factors: experience, individual performance, contribution to the Company’sperformance, level of responsibility, duties and functions, salary levels ineffect for comparable positions within and without the Company’s industry, andinternal base salary comparability considerations. These base salaries arereviewed periodically and may be adjusted in the discretion of the Compensationand Benefits Committee, based upon the factors discussed in the previoussentence, as well as upon individual performance during the previous fiscalyear, changes in the duties, responsibilities and functions of the executiveofficer, and general changes in the compensation peer group in which theCompany competes for executive talent. The relative weight given to each of these factors differs fromindividual to individual, as the Compensation and Benefits Committee deemsappropriate.

 

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*Periodic Cash Bonuses*

 

For 2006, the Company did not grant bonuses to itsexecutive officers.  These bonuses, whenpaid, are paid on a discretionary basis, as determined by the Compensation andBenefits Committee.  Factors consideredby the Compensation and Benefits Committee in determining discretionary cashbonuses are personal performance, level of responsibility, as well as many ofthe same factors considered by the Compensation and Benefits Committee anddiscussed above when it reviews and sets base salaries, except with a greaterfocus on the prior fiscal year.

 

*Long-Term Incentive: Stock Options*

 

The number of shares subject to each stock optiongrant is subjectively determined by the Compensation and Benefits Committee orthe Board of Directors primarily related to the executive officer’s anticipatedcontributions to the Company’s future success, the size of comparable awardsmade to individuals in similar positions within the industry, the individual’spotential for increased responsibility over the option term and theindividual’s personal performance in recent periods.  The Compensation and Benefits Committee alsoconsiders the number of unvested stock options held by the executive officer inorder to maintain an appropriate level of equity incentive for thatindividual.  However, the Compensationand Benefits Committee does not adhere to any specific guidelines as to therelative stock option holdings of the Company’s executive officers.  The Company granted no options to executiveofficers during 2006.

 

Each stock option grant allows the executive officerto acquire shares of Common Stock at a fixed price per share (typically, andnever less than, the closing stock price of the Common Stock on the date ofgrant) for a fixed period (usually ten years). Each option generally becomes exercisable after three years, contingentupon the executive officer’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 Between Long-Term/Current and Between Cash/Non-Cash Compensation

 

All of our long-term compensation consists of non-cashcompensation in the form of stock options. We believe that the granting of stock options incentivizes executives tomaximize the long-term strengths of the Company as well as its stock price.  However, because we are operating in a monopolisticenvironment and the Company’s stock price has little relationship with theCompany’s performance, the most significant component of compensation is basesalary and not stock options.  Managementis incented to maximize shareholder value and will be rewarded if they doso.  However, a significant base salaryenables us to retain this competent management despite the current inability toprovide valuable equity incentives.

 

We expense all of our option costs as we do the costsof salaries and bonuses.  Accordingly,the impact of tax treatment of various compensation forms does not impact ourcompensation decisions.

 

How Determinations Are Made as to When Awards AreGranted

 

Generally, option awards are granted at the discretionof the Board.  The exercise price isequal to the closing price of the Company’s stock on the date of the grant.

 

Unfortunately, our stock price does not always reactas expected to Company achievements. Accordingly, at times options have been granted to aid in retainingcompetent and experienced executives without regard to the then current stockprice.

 

In addition, there is no relationship between the dateof grant of options and the Company’s possession of material non-publicinformation.  Because we are competing ina contentious antitrust environment, we are often in possession of materialnon-public information.  However, alloptions granted to executives require a minimum three year vesting period.  Furthermore, it is the Company’s policy with 

 

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regardto options that (although the options could be exercised) the underlying sharescould not be sold into the market while the executive was in possession ofmaterial non-public information under our insider trading policy.  Accordingly, we believe that there is minimalrisk of the executive profiting from such material nonpublic information.

 

What Specific Items of Corporate Performance Are takenInto Account in Making Compensation Decisions and How It Affects the Structureof Compensation

 

Cash reserves as well as trends in sales and costs aretaken into account when considering the advisability of increasing basesalaries or granting cash bonuses.  Atsuch times that any of these factors make it inadvisable to increase salariesor grant bonuses, then consideration is given to increasing option awardstaking into account the value of prior option awards.

 

Awards are granted on the basis of historicalperformance.  Accordingly, there is nodiscretion to change the awards.

 

Factors We Consider in Determining to ChangeCompensation Materially

 

We consider the cash position of the Company, currentliquidity trends, and the short term and long term needs for cash reserves(especially in light of the hostile environment in which we operate) whenevaluating whether we can change compensation materially at a given time.

 

On an individual by individual basis, we also considerthe value of past option compensation, the competitiveness of that individual’sbase salary, and their individual contribution to the Company’s goals.

 

How Amounts Realized From Past Compensation AffectFuture Compensation

 

We are very aware that the vast majority of optionsgranted to our executives are significantly out of the money and that they mayremain so until we are able to obtain real access to the market.  Accordingly, future compensation will likelycontinue to be dominated by base salary as well as periodic bonuses whenpossible.

 

The Impact of the Accounting and Tax Treatments of OurTypes of Compensation

 

Stock options granted to executives and otheremployees are expensed for accounting purposes under FAS 123(R). Stock optionexpense is not recognized for tax purposes, except in the case of non-qualifiedstock options.  For non-qualified stockoptions, the intrinsic value of the option is recognized when the option isexercised.   Incentive stock options donot qualify for any tax deduction.

 

Bases for Selecting Events as Payment Triggers Underthe Employment Agreement with Thomas Shaw

 

Please see PotentialPayments Upon Termination Or Change In Control for a discussion of ourEmployment Agreement with Mr. Shaw including a discussion of certain triggersthat would cause the Company to immediately pay Mr. Shaw certain lump sumpayments in the event of a change in control.

 

Benchmarking of Our Compensation Program

 

In 2003, the Company hired Trinity ExecutiveRecruiters, Inc. to assist us in providing benchmarks for compensation bysimilarly sized companies in similar industries for persons that hold positionswhich are currently fulfilled by various members of our executive team.  Trinity Executive Recruiters performed asurvey of other publicly held companies with $20-$50 million in revenues in theMedical Equipment and Supplies Industry. 49 companies were included in the search with a total of 346executives.  However, for each executive,the list of executives to use as comparisons was tailored to correspond to eachexecutive’s particular job functions.

 

30

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

 

Although we have obtained benchmarking informationwith regard to the CEO’s position, such benchmarks were not utilized as a basisfor increasing Mr. Shaw’s salary in 2005. His salary was increased at the recommendation of the Compensation andBenefits Committee as well as a unanimous vote of the Board of Directors due tothe fact that he had never been granted options or any bonuses and had not hada material increase in salary in many years. However, such benchmarks support an increase of at least the amount made.

 

The Role of Our Executives in Determining Compensation

 

Management establishes the initial proposedrecommendations regarding compensation for all employees, includingthemselves.  Such proposal is thensubmitted 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.

 

Compensation Pursuant to Employment Agreement

 

We have an Employment Agreement with Mr. Thomas J.Shaw.  However, this agreement may be modifieddue to changes in the tax laws.  No otherexecutives (or Directors) are compensated pursuant to employment agreements.

 

The Employment Agreement with Mr. Shaw (the“Employment Agreement’) provides for an initial period of three years whichended September 2002 that automatically and continuously renews for consecutivetwo-year periods. The Employment Agreement is terminable either by us or Mr.Shaw upon 30 days’ written notice. The Employment Agreement provides for anannual salary of at least $150,000 with an annual salary increase equal to noless than the percentage increase in the Consumer Price Index during theprevious calendar year. (However, the Board has authorized a salary increase to$400,000.)  The Employment Agreementrequires that Mr. Shaw’s salary be reviewed by the Board of Directors eachJanuary, which shall make such increases as it considers appropriate. Mr. Shawis also entitled to participate in all executive bonuses as the Board ofDirectors, in its sole discretion, shall determine.  The Employment Agreement is being modified toavoid adverse tax consequences to Mr. Shaw created by the passage of theAmerican  Jobs Creation Act of 2004.

 

Under the Employment Agreement, we will also providecertain fringe benefits, including, but not limited to, participation inpension plans, profit-sharing plans, employee stock ownership plans, stockappreciation rights, hospitalization and health insurance, disability and lifeinsurance, paid vacation, and sick leave. We also reimburse him for anyreasonable and necessary business expenses, including travel and entertainmentexpenses, necessary to carry on his duties. Pursuant to the EmploymentAgreement, we have agreed to indemnify Mr. Shaw for all legal expenses andliabilities incurred with any proceeding involving him by reason of his beingan officer or agent. We have further agreed to pay reasonable attorney fees andexpenses in the event that, in Mr. Shaw’s sole judgment, he needs to retaincounsel or otherwise expend his personal funds for his defense.

 

Mr. Shaw has agreed to a one-year non-compete, not tohire or attempt to hire employees for one year, and to not make known ourcustomers or accounts or to call on or solicit our accounts or customers in theevent of termination of his employment for one year unless the termination iswithout cause or pursuant to a change of control of the Company. Furthermore,Mr. Shaw has the right to resign in the event that there is a change in controlwhich is defined as a change in the majority of directors within any 12 monthperiod without two-thirds approval of the shares outstanding and entitled tovote, or a merger where less than 50 percent of the outstanding stock survivesand a majority of the Board of Directors remains, or the sale of substantiallyall of our assets, or any other person acquires more than 50 percent of thevoting capital. Mr. Shaw retained the right to participate in other businessesas long as they do not compete with us and so long as he devotes the necessaryworking time to the Company.

 

31

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SUMMARY OF TOTALCOMPENSATION

 

The followingSummary Compensation Table sets forth the total compensation paid or accrued byus  over the prior three years to or forthe account of the principal executive officer, the principal financialofficer, and the three highest paid additional 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)             The fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions used for grants in 2004: nodividend yield; expected volatility of 37%; risk free interest rate of 4.89%; andan expected life of 9.0 years.  Nooptions 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 officer)                                                           |       |   | 25,000 | (3) |   |   |   |   |   |   |   |   | 6.90 |   |   | 09/30/12 |   |   |   |   |   |   |   |   |   |
|                                                                                         |       |   | 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

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(17)       These incentive stockoptions will vest on May 11, 2007 assuming the recipient is still employed bythe Company.  At such time, these optionswill be reflected in future filings under column “b” in the above chart.

 

(18)       These shares vested on May5, 2000.

 

(19)       These shares vested on July9, 2001.

 

(20)       One half of these sharesvested on July 1, 2001 and the remainder vested on July 1,2002.

 

(21)       These shares vested onNovember 1, 2003.

 

(22)       These shares vested onSeptember 30, 2005.

 

(23)       These shares vested on June23, 2006.

 

(24)       These incentive stockoptions will vest on May 11, 2007 assuming the recipient is still employed bythe Company.  At such time, these optionswill be reflected in future filings under column “b” in the above chart.

 

Optionexercises and stock vested 

 

The followingOption Exercises and Stock Vested Table sets forth information regarding theexercise of stock options during the last fiscal year by the principalexecutive officer, the principal financial officer, and the three highest paidadditional executive officers.

 

**2006OPTION 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)               This value iscalculated by subtracting the cost to purchase the shares via exercise of the option($2,500) from the market price of the underlying securities (based on theclosing price of $3.70 on the date of exercise).

 

35

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Pensionbenefits

 

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

 

401(k)Plan

 

Weimplemented an employee savings and retirement plan (the “401(k) Plan”) in 2005that is intended to be a tax-qualified plan covering substantially allemployees.  Under the terms of the 401(k)Plan, employees may elect to contribute up to 90% of their compensation, or thestatutory prescribed limit, if less.  Wemay, at our discretion, match employee contributions.  As of December 31, 2006, we made no matchingcontributions.

 

NON-QUALIFIED DEFERRED COMPENSATION

 

The Company does not have aNon-Qualified Deferred Compensation plan.

 

Potential PaymentsUpon Termination or Change in Control

 

Thefollowing table identifies the types and amounts of payments that shall be madeto Mr. Thomas Shaw, our Chief Executive Officer, in the event of a terminationof his employment or a change in control of the Company.  Such payments shall be made by the Companyand 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 participatesin the Company’s benefit plans which do not discriminate in scope, terms, oroperation in favor of executive officers. Such plans are generally available to all salaried employees.  Accordingly, the value of such payments isnot included in the “Value of Payments” column.

 

(2)             This value does not include payments under theCompany’s benefit plans for reasons set forth in footnote 1 above.  In addition, it does not include a value fora bonus as bonuses are authorized only periodically and there is currently noauthorized bonus program.  Furthermore,Mr. Shaw has never been given a bonus. In addition, this value assumes that the triggering event occurred onDecember 29, 2006.  Authorized paymentsunder the Agreement are also capped to one dollar less than the amount thatwould cause Mr. Shaw to be the recipient of a parachute payment under Section280G(b) of the Internal Revenue Code of 1986.

 

36

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Mr. Shaw is obligated underthe Agreement for one year not to compete with the Company, to recruit orattempt to recruit our employees or to solicit our customers or accounts orotherwise to make known our customers and accounts to others unless his terminationwas without cause or occurs after a change in control.  

 

COMPENSATION OF DIRECTORS

 

The following tableidentifies the types and amounts of compensation earned by our Directors (withthe exception of those that are named Executive Officers as described infootnote 1 to the table) in the last Fiscal Year:

 

**2006DIRECTOR 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 |   |
| Patti S. King,  Former Director |       | $          |  1,000 |                                                               |       |                        |       |                                        | —     |                                                    |       |                                                                                                              |       |                                               |       | $                         |  139,882 | (3) |   | $ |  140,882 |   |
| Jimmie Shiu                     |       | $          |  2,500 |                                                               |       |                        |       |                                        | —     |                                                    |       |                                                                                                              |       |                                               |       |                      |          |   |   | $ |  2,500 |   |
| Clarence Zierhut                |       | $          |  2,500 |                                                               |       |                        |       |                                        | —     |                                                    |       |                                                                                                              |       |                                               |       |                      |          |   |   | $ |  2,500 |   |
|                                 |            |            |             |                                                                    |            |                             |            |                                             |            |                                                         |            |                                                                                                                   |            |                                                    |            |                           |               |  |  |  |  |  |  |  |  |

 

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(1)             Messrs. Thomas J.Shaw, Douglas W. Cowan and Steven Wisner are Named Executive Officers who arealso Directors.  Their compensation isreflected in the Summary Compensation and other tables presented earlier.  Mr. Kuhlman, a former Director, is alsoincluded in the prior disclosures as a Named Executive.

 

(2)             The followingidentifies the aggregate number of option awards outstanding for each of theabove persons as of year end:

 

OPTIONS HELD BYDIRECTORS 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, aformer Director, has also received $139,882 in payments in 2006 for herservices as a consultant.  Only afraction of these payments were incurred during her tenure as director in 2006.

 

37

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Narrative Explanation of2006 Director Compensation Table and Supplementary Options Table

 

In 2006 we paid eachnon-employee Director a fee of $500 per meeting and reimbursed travelexpenses.  In the past, we have grantedto each Director (except Mr. Shaw) stock options for Common Stock. We do notpay any additional amounts for committee participation or special assignment. 

 

Generally, employeeDirectors are compensated as discussed in the Compensation DiscussionAnalysis.  However, one employee, Mr.Thomas J. Shaw, our President and CEO, is compensated pursuant to an employmentagreement.  Please see the CompensationDiscussion Analysis for an in depth summary of the terms of such agreement. 

 

Compensation CommitteeInterlocks and Insider Participation

 

The Compensation andBenefits Committee is currently composed of Messrs. Clarence Zierhut and MarcoLaterza.  From January 2006 through May9, 2006, Ms. Patti King, a former independent Director, served on the committee.  Dr. Shiu, also a former independent Director,was appointed to the committee on August 8, 2006. Dr.Shiu resigned as a Directoron November 19, 2007.  Each of thesecurrent and former members of this committee is/was an independent Board memberat the time of their service on the committee and none have ever beenemployees.  Ms. King currently serves theCompany as a consultant.  However, shewas not compensated in excess of $60,000 until after resignation from the Boardof Directors.  

 

There are no interlockingDirectors or executive officers between our Company and any other publicCompany.  Accordingly, none of ourexecutive officers or Directors served as a Director for another entity one ofwhose executives or Directors served on our Board of Directors.

 

CompensationCommittee Report

 

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 at the time this report was approved were Mr. Clarence Zierhut, Mr. MarcoLaterza, and Jimmie Shiu, M.D. The current committee consists of Messrs. Zierhutand Laterza.

 

**Item 12. Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters.**

 

EQUITY COMPENSATION PLANINFORMATION 

 

The following table setsforth information relating to our 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                                                                                                              |       |

 

----

*                      In conjunction with a $3 million LoanAgreement and the purchase of 525,000 Series V shares by Katie Petroleum, weissued options for the purchase of 136,439 shares of Common Stock of the Companyat an exercise price of $1 per share to Katie Petroleum and two affiliates.Options for 136,436 shares were exercised in 2005. 

 

38

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In conjunction with a $2.5 million working capitalloan, purchase of a real estate note and a $1,000,000 construction loan (whichwas never drawn on) we issued an option to Katie Petroleum for the purchase of100,000 shares of Common Stock of the Company at an exercise price of $1 pershare. The options were exercised in 2005.

 

We authorized the issuance of an option for thepurchase of 200,000 shares of Common Stock to Jimmie Shiu, M.D., for his pastservices in introducing the Company to purchasers of various series ofPreferred Stock as well as for introducing the Company to Mr. JackJackson, who controlled Katie Petroleum. The option is exercisable at $6.90 pershare and will terminate in 2012.

 

We  authorizedthe issuance of an option for the purchase of 25,000 shares of Common Stock to Mr. HarryWatson for his past services in assisting the Company in protecting itsintellectual property. The option is exercisable at $6.90 per share and willterminate in 2012.

 

In connection with a Consulting Agreement withInternational Export and Consulting, we issued an option for the purchase of61,000 shares of Common Stock to Marwan Saker, a Director. The option isexercisable at $10.00 and will expire in 2010.

 

SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS

 

The followingtable sets forth certain information regarding the beneficial ownership of ourcapital stock as of January 28, 2008, for each person known by us to ownbeneficially 5 percent or more of the voting capital stock. Each shareholderidentified in the table possesses sole voting and investment power with respectto 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                                                         |       | 47.3                           | %(2)       |
|                         |       | Suzanne M. August(3)  5310 Buena Vista Drive  Frisco, TX 75034                              |       | 2,800,000                                                          |       | 11.7                           | %(3)       |
|                         |       | Lillian E. Salerno(4)  432 Edwards  Lewisville, TX 75067                                    |       | 2,434,500                                                          |       | 10.2                           | %          |
|                         |       | Signia Capital Management, LLC(5)  108 N.Washington St., Ste 305  Spokane, Washington 99201 |       | 1,549,462                                                          |       | 6.5                            | %          |
| Class B  Stock          |       |                                                                                        |       |                                                               |       |                           |       |
|                         |       | Thomas J. Shaw                                                                              |       | 80,000                                                             |       | 3.4                            | %          |
|                         |       | Lillian E.  Salerno                                                                         |       | 12,500                                                             |       | 1                              | %          |

 

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(1)             Thepercentages of Common Stock are based on 23,848,914 shares of Common Stockequivalents consisting of 23,756,414 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 2,328,916shares 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. SuzanneAugust (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 in calculating Mr. Shaw’sCommon Stock equivalents and percentages in the above table.

 

(3)             Ms. August’s2,800,000 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.

 

(5)    The number of shares heldby this entity was obtained from a Schedule 13G/A filed on February 4, 2008.Pursuant to the Schedule 13G/A, Signia Capital Management, LLC has sole votingpower for 635,938 of the shares and sole dispositive power for a total of1,549,462 shares (inclusive of the sole voting power shares).

 

There are no arrangementsthe operation of which would result in a change in control of the Company otherthan the fact that Ms. August’s shares shall cease to be controlled by Mr. Shawunder their Voting Agreement upon their sale to a third party.

 

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                  |       | 12,436,500                                                 |       | 49.6                           | %          |
| As Individuals               |       | Thomas J. Shaw(2)                       |       | 11,280,000                                                 |       | 45.0                           | %          |
|                         |       | Marwan Saker(3)                         |       | 461,000                                                    |       | 1.8                            | %          |
|                         |       | Clarence Zierhut(4)                     |       | 61,000                                                     |       | Less than 1                    | %          |
|                         |       | Douglas W. Cowan(5)                     |       | 204,000                                                    |       | 1                              | %          |
|                         |       | Steve R. Wisner(6)                      |       | 206,400                                                    |       | 1                              | %          |
|                         |       | Michele M.  Larios(7)                   |       | 214,100                                                    |       | 1                              | %          |
|                         |       | Marco Laterza                           |       | 10,000                                                     |       | Less than 1                    | %          |
|                         |       |                                    |       |                                                       |       |                           |       |
| Class B  Stock          |       |                                    |       |                                                       |       |                           |       |
| As a Group                   |       | Officers and Directors                  |       | 435,000                                                    |       | 18.7                           | %          |
| As Individuals               |       | Thomas J. Shaw                          |       | 80,000                                                     |       | 3.4                            | %          |
|                         |       | Marwan Saker                            |       | 355,000                                                    |       | 15.2                           | %          |
|                         |       |                                    |       |                                                       |       |                           |       |

 

----

(1)             Thepercentages of Common Stock are based on 25,092,314 shares of Common Stockequivalents consisting of 23,756,414 shares of Common Stock outstanding at  January 28, 2008, 435,000 shares of PreferredStock convertible by the above persons and options for the purchase of 900,900shares of Common Stock obtainable by the above persons within 60 days of thisReport. The percentages of Class B stock are based on 2,328,916 shares of Class BStock 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 by Mr. Shawuntil such time as they are sold by Ms. August.  These shares are included in calculating Mr. Shaw’sCommon 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 and25,000 shares of Series V Stock, Sovana Cayman Islands, Inc. holds300,000 shares of Series IV Stock, and My Investments holds 14,500 sharesof Series IV Stock. Mr. Saker is an Officer or Director andshareholder for each of these companies. The remaining 106,000 shares identifiedas Common Stock are shares obtainable through the exercise of options held by Mr. Sakerwithin 60 days of the Report

 

(4)             51,000of 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)             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

 

Webelieve that all of the transactions set forth below were made on terms no lessfavorable to us than could have been obtained from unaffiliated third parties.In accordance with our Audit Committee Charter, the Audit Committee hasreviewed and approved all related party transactions.** **In particular, the Audit Committeereviews all transactions where the amount involved exceeded $120,000.

 

ThomasJ. Shaw, our President and Chief Executive Officer who beneficially owned 35.4%percent of the outstanding Common Stock (and controlled another 11.8% pursuantto a voting agreement with Ms. Suzanne August) as of January 28, 2008, waspaid a licensing fee of $500,000 (amortized over 17 years) by us for theexclusive worldwide licensing rights to manufacture, market, sell, anddistribute retractable medical safety products. In addition, Mr. Shaw andMs. August together receive an aggregate 5 percent royalty on gross sales ofall

 

41

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licensed products sold to customers over the life ofthe technology licensing agreement.  Aroyalty of $2,631,955 was paid in 2006.

 

Director Independence

 

The Board ofDirectors has the responsibility for establishing corporate policies and forthe overall performance of the Company, although it is not involved inday-to-day operations. Currently, a majority (four of seven) of the Directorsserving on our Board of Directors are independent Directors as defined in Section 121(A) ofthe listing standards of The American Stock Exchange (the “AMEX”). Our currentindependent Directors are Messrs. Clarence Zierhut, Marwan Saker, MarcoLaterza, and Amy Mack.

 

The Board, inreviewing the independence of its members, further considered the fact that Ms. PattiKing, a former Director, was compensated as a consultant while a Director.  The Board determined that Ms. King waspaid less than $60,000 as a consultant while a Director and, accordingly,determined that her independence was not compromised.

 

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

 

AUDIT FEES

 

Theaggregate fees billed by CF & Co., L.L.P. for professional servicesrendered for the audit of the Company’s annual financial statements for 2006and 2005 and the reviews of the financial statements included in the Company’sForms 10-Q or services normally provided by the accountant in connection withstatutory and regulatory filings for those fiscal years were $160,671 and$146,125, respectively.

 

AUDIT RELATED FEES

 

Theaudit related fees for the Form S-8 Registration Statement filed in 2005were $4,060.   There were no such fees in2006.

 

 TAX FEES

 

The aggregate feesbilled by CF & Co., L.L.P. for preparation of federal and state incometax returns and tax consulting costs related to notices from taxing authoritiesfor 2006 and 2005 were $56,118 and $36,360, respectively.

 

ALL OTHER FEES

 

There were no feesincurred with any accounting firm other than those mentioned above.

 

PRE-APPROVAL POLICIES ANDPROCEDURES

 

Theengagement of CF & Co., L.L.P. was entered into pursuant to theapproval policies and procedures of the Audit Committee. The engagement is foraudit and tax services which were detailed separately. The Audit Committeeimplemented its approval procedures i.e. they were not delegated to any otherparty. All of the services provided were pre-approved by the Audit Committee.

 

42

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**PART IV**

 

**Item 15. Exhibits, FinancialStatement Schedules.**

 

(a)          1.     Financial Statements:  See Retractable Technologies, Inc. Indexto Financial Statements on Page F-2.

2.     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 Receivable |       |                                           |       |          |       |           |       |                                         |        |
| 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 |   |

 

All other schedules havebeen omitted as they are not required, not applicable, or the requiredinformation is otherwise included.

 

                        3.                Exhibits:

 

The followingexhibits are filed herewith or are incorporated herein by reference to exhibitspreviously filed with the Commission.

 

(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***                                       |

 

43

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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 onJune 23, 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

 

44

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SIGNATURES 

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf 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:                          | February 26, 2008        |
|        |                                |                          |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
|        |   |                                             |
|--------|--------|--------------------------------------------------|
|   |   | /s/ Steven R. Wisner                             |
|   |   | Steven R. Wisner                                 |
|   |   | Executive Vice President, Engineering & |
|   |   | Production and Director                          |
|   |   |                                             |
|   |   | February 22, 2008                                |

 
|        |   |                                                               |
|--------|--------|--------------------------------------------------------------------|
|   |   | /s/ Douglas W. Cowan                                               |
|   |   | Douglas W. Cowan                                                   |
|   |   | Vice President, Chief Financial Officer, Treasurer,  and  Director |
|   |   |                                                               |
|   |   | February 26, 2008                                                  |

 
|        |   |                 |
|--------|--------|----------------------|
|   |   | /s/ Clarence Zierhut |
|   |   | Clarence Zierhut     |
|   |   | Director             |
|   |   |                 |
|   |   | February 20, 2008    |

 
|        |   |              |
|--------|--------|-------------------|
|   |   | /s/ Amy Mack      |
|   |   | Amy Mack          |
|   |   | Director          |
|   |   |              |
|   |   | February 23, 2008 |

 
|        |   |              |
|--------|--------|-------------------|
|   |   | /s/ Marco Laterza |
|   |   | Marco Laterza     |
|   |   | Director          |
|   |   |              |
|   |   | February 19, 2008 |

 
|        |   |              |
|--------|--------|-------------------|
|   |   | /s/ Marwan Saker  |
|   |   | Marwan Saker      |
|   |   | Director          |
|   |   |              |
|   |   | February 27, 2008 |

 

45

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