** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-K**

 

**(Mark One)**
| **x** | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 31, 2007**

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

 

**For thetransition period from              to**

** **

**Commissionfile number: 000-30885**

** **

**Retractable Technologies, Inc.**

(Exact name of registrant as specified in its charter)

** **

| **Texas**                                                        | ** ** | **75-2599762**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or other jurisdiction of 

incorporation or organization) |       | (I.R.S. Employer 

Identification No.) |

 

**511 Lobo Lane**

**Little Elm, Texas 75068-0009**

(Address of principal executive offices)

 

**(972)294-1010**

Registrant’stelephone number, including area code 

 

----

 

Securitiesregistered pursuant to Section 12(b) of the Act:

** **

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

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**PreferredStock**

(Title of class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.    Yes  o    No  x

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.     x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act:

 

| Large accelerated  filer  o                                              |   | Accelerated  filer  o         |
|------------------------------------------------------------------------------------|--------|-----------------------------------------|
| Non-accelerated  filer  o (Do not check if a smaller reporting  company) |   | Smaller reporting  company  x |

 

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

 

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas last sold, or the average bid and asked price of such common equity, as ofthe last business day of the registrant’s most recently completed second fiscalquarter.  The aggregate market value ofthe common equity held by non-affiliates is $25,357,660, assuming a price of$2.50, which was computed with reference to the closing price as of June 29,2007.

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY

 

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Section 12, 13, or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securitiesunder a plan confirmed by a court.    Yes  o    No  o

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant’sclasses of common equity, as of the latest practicable date. As of March 1,2008, there were 23,800,064 shares of our Common Stock issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference andthe Part of the Form 10-K (e.g., Part I, Part II, etc.)into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy orinformation statement; and (3) Any prospectus filed pursuant to Rule 424(b) or(c) under the Securities Act of 1933. The listed documents should be clearly described for identificationpurposes (e.g., annual report to security holders for fiscal year ended December 24,1980).

 

None except exhibits.

 

 

 

----

 

**RETRACTABLETECHNOLOGIES, INC.**

**FORM 10-K**

**For theFiscal Year Ended December 31, 2007**

 

**TABLE OF CONTENTS**

 
| **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.**                                                                                                   | **12**     |
| **Item 4. Submission  of Matters to a Vote of Security Holders.**                                                                 | **12**     |
|                                                                                                                              | ** ** |
| **PART II**                                                                                                                  | ** ** |
|                                                                                                                              | ** ** |
| **Item 5. Market  for Registrant’s Common Equity, Related Stockholder Matters, and Issuer  Purchases of Equity Securities.** | **13**     |
| **Item  6. Selected Financial Data.**                                                                                             | **14**     |
| **Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of  Operation.**                          | **15**     |
| **Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.**                                                         | **22**     |
| **Item 8.  Financial Statements and Supplementary Data.**                                                                         | **F-1**    |
| **Item 9. Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure.**                                | **23**     |
| **Item  9A(T). Controls and Procedures.**                                                                                         | **23**     |
| **Item  9B. Other Information.**                                                                                                  | **23**     |
|                                                                                                                              | ** ** |
| **PART III**                                                                                                                 | ** ** |
|                                                                                                                              | ** ** |
| **Item 10.  Directors, Executive Officers and Corporate Governance.**                                                             | **24**     |
| **Item  11. Executive Compensation.**                                                                                             | **28**     |
| **Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters.**                    | **39**     |
| **Item 13.  Certain Relationships and Related Transactions, and Director Independence.**                                          | **42**     |
| **Item 14.  Principal Accounting Fees and Services.**                                                                             | **42**     |
|                                                                                                                              | ** ** |
| **PART IV**                                                                                                                  | ** ** |
|                                                                                                                              | ** ** |
| **Item 15.  Exhibits, Financial Statement Schedules.**                                                                            | **43**     |
| **SIGNATURES**                                                                                                                    | **45**     |

 

i

----

 

**PART I**

 

**Item 1. Business.**

 

DESCRIPTION OF BUSINESS

 

General Description

 

                We design, develop, manufacture,and market innovative patented safety medical products for the healthcareindustry.

 

                Our VanishPoint® safety needle products (consisting of 1cc tuberculin,insulin, and allergy antigen VanishPoint® syringes;3cc, 5cc, and 10cc VanishPoint® syringes;the VanishPoint® blood collection tube holder; autodisablesyringe and the VanishPoint® IV safetycatheter)utilize a unique friction ring mechanismpatented by Thomas J. Shaw, our Founder, President, and Chief ExecutiveOfficer. VanishPoint® safety needle products are designed specificallyto prevent needlestick injuries and to prevent reuse. The friction ringmechanism permits the automated retraction of the syringe needle into thebarrel of the syringe, directly from the patient, after delivery of themedication is completed. The VanishPoint® bloodcollection tube holder utilizes the same mechanism to retract the needle afterblood has been drawn from the patient. Closure of an attached end cap of theblood collection tube holder causes the needle to retract directly from thepatient into the closed blood collection tube holder. The IV catheter alsooperates with a friction ring mechanism whereby the needle is retracted afterinsertion of the catheter into the patient.  We also have a Patient SafeTM syringe which reduces the risk of infectionresulting from IV contamination that will likely be introduced into the marketthis year.

 

                Advantages of our VanishPoint® safety needle products include protection fromneedlestick injuries, prevention of cross contamination through reuse, andreduction of disposal and other associated costs. Federal regulation nowrequires 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 which is in the process of being amendedto cover additional patents and products.

 

                We and Thomas J. Shaw enteredinto a Technology License Agreement dated effective as of the 23rd day of June 1995,whereby Mr. Shaw granted us a worldwide exclusive license to manufacture,market, sell, and distribute ‘Licensed Products’ and ‘Improvements’ until theexpiration of the last ‘Licensed Patents’ unless sooner terminated undercertain conditions without right to sublicense. ‘Licensed Products’, ‘Improvements’,and ‘Licensed Patents’ are all terms that are extensively defined in theTechnology License Agreement. In exchange, we paid a $500,000 initial licensingfee and a five percent royalty on gross sales after returns of ‘LicensedProducts’.  Mr. Shaw entered into an agreement whereby Ms. SuzanneAugust, his former spouse, is entitled to $100,000 per quarter payable out ofany royalties. See “Patents, Trademarks, Licenses, and Proprietary Rights”for a more detailed discussion.  TheTechnology License Agreement is in the process of being amended to cover additionalpatents and products.

 

                Our goal is to become a leadingprovider of safety medical products.

 

Our Development Over theLast Year

 

                Our products have been andcontinue to be distributed nationally through numerous distributors. However,we have been blocked from access to the market by exclusive marketing practicesengaged in by Becton Dickinson and Company (“BD”) which dominates our market.We initiated a lawsuit in 2007 against BD. The suit is for patent infringement,antitrust practices, and false advertising.

 

                We continue to attempt to gainaccess to the market through our sales efforts, our innovative technology,introduction of new products and, when necessary, litigation.  We are focusing on methods of upgrading ourmanufacturing capability and efficiency in order to enable us to offer ourtechnology at a reduced price. We believe our current capitalization providesthe resources necessary to implement these changes and improve ourmanufacturing capacity and efficiency, thereby reducing our unit cost.

 

                We are developing new safetymedical products, some of which do not utilize our patented retractiontechnology. The Patient SafeTM syringe is one such product. This productreduces the risk of infection resulting from IV contamination.

 

1

----

 

FinancialInformation

 

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

 

PrincipalProducts

 

                Our products with Notice ofSubstantial Equivalence to the U.S. Food and Drug Administration (“FDA”) andwhich are currently sold include the 1cc tuberculin, insulin, and anautodisable syringe allergy antigen VanishPoint®  syringes; 3cc, 5cc, and 10cc VanishPoint®  syringes; the VanishPoint®  bloodcollection tube holder; the VanishPoint®  IV safety catheter; and a small diameter tubeadapter.  We also received a Notice of Substantial Equivalencefor our Patient SafeTM syringe, whichreduces the risk of infection resulting from IV contamination. We expect tohave the Patient SafeTM syringe in themarket in 2008.  From 1999 to 2001 and in2003 ECRI (formerly known as the Emergency Care Research Institute), arecognized authority in evaluating medical devices, awarded the VanishPoint® syringeand blood collection tube holder its highest possible rating.****Syringe sales comprised 98.6%, 98.8%, and98.0% of revenues in 2005, 2006, and 2007.

 

                Our products (without Notice ofSubstantial Equivalence to the FDA), which are currently in development,include a dental syringe, a butterfly IV, and an autodisable syringe.

 

PrincipalMarkets

 

                Our products are sold to andused by healthcare providers primarily in the United States (with 18.4% ofrevenues in 2007 generated from sales outside the United States) which include,but are not limited to, acute care hospitals, alternate care facilities,doctors’ offices, clinics, emergency centers, surgical centers, convalescenthospitals, Veterans Administration facilities, military organizations, publichealth facilities, and prisons.

 

                The syringe and needle devicemarket continues to be a market in transition. The nature of the productscomprising 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 William 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 this requirement, many hospitals areneglecting to follow the law intended to protect healthcare workers.

 

Methodsof Marketing and Distribution

 

                Under the current supply chainsystem in the U.S. acute care market, the vast majority of decisions relatingto the contracting for and purchasing of medical supplies are made by therepresentatives of group purchasing organizations (“GPOs”) rather than theend-users of the product (nurses, doctors, and testing personnel). The GPOs andmanufacturers often enter into long-term exclusive contracts which can prohibitentry in the marketplace by competitors.

 

                We distribute our productsthroughout the U.S. and its territories through general line and specialtydistributors. We also utilize international distributors. We have developed anational direct marketing network in order to market our products to healthcare customers and their purchaser representatives. Our marketers make calls ontarget markets that are users of these products.  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 

 

2

----

 

clinicians,including registered nurses and/or medical technologists that educatehealthcare providers and healthcare workers on the use of safety devicesthrough exhibits at related tradeshows and publications of relevant articles intrade journals and magazines. These nurses provide clinical support tocustomers. In addition to marketing our products, the network demonstrates thesafety and cost effectiveness of the VanishPoint® automated retraction products tocustomers.

 

                In the needle and syringemarket, the market share leader, BD, has utilized, among other things,long-term exclusive contracts which have restricted our entry into the market.

 

                We have numerous agreements withorganizations for the distribution of our products in foreign markets. Sales tothese markets increased from 12.2% to 18.4% of revenues in 2006 and 2007,respectively. The total population of Western Europe exceeds 310 million, andthe recognition for the urgency of safe needle devices in parts of Europe hasfollowed the United States model. In France, England, Germany, and Italy,organized healthcare worker unions have taken action to force hospitals andgovernment agencies to place safety as a priority. Regions within Asia andAfrica are also recognizing the need for our products.  In the past, we were given an award (fromPATH) to supply syringes to various African countries.  Awards increased significantly from 2004 to2007.  However, currently there is nofunding for this program.  We are hopefulthat funding will be re-established.  Ifso, we will again also distribute our products under this program.

 

                Key components of our strategyto increase our market share are to: (a) focus on methods of upgrading ourmanufacturing capability and efficiency in order to enable us to offer productsat a reduced price and improved profit margins; (b) continue marketingemphasis in the U.S.; (c) continue to add Veterans Administrationfacilities, 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 products; (e) supply product throughGPOs 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

 

                We have patented and are in theprocess of developing additional safety medical products. Such products includea 1⁄2cc insulin syringe, and a dental syringe for which we have developed earlystage prototypes.  We have shipped limited quantities of the autodisablesyringe and IV catheters. We have also developed a Patient SafeTM syringe which reduces the risk of infectionresulting from IV contamination.  Ourlimited access to the market has slowed the introduction of these products intothe market.

 

Sourcesand Availability of Raw Materials

 

                We purchase most of our productcomponents from single suppliers, including needle adhesives and packagingmaterials. There are multiple sources of these materials. We own the molds thatare used to manufacture the plastic components of our products. Our suppliersinclude Magor Mold, Inc., Helix Medical (formerly APEC),Multivac, Inc., Exacto SpringCorporation, Sterigenics, and ISPG.  Somesuppliers have increased their prices generally due to the increase in costs ofpetroleum products.

 

Patents,Trademarks, Licenses, and Proprietary Rights

 

                We and Thomas J. Shaw enteredinto a Technology License Agreement dated effective as of the 23rd day ofJune, 1995, whereby Mr. Shaw granted us “... a worldwide exclusive licenseand right under the ‘Licensed Patents’ and ‘Information’, to manufacture,market, sell and distribute ‘Licensed Products’ and ‘Improvements’ withoutright to sublicense and subject to such nonexclusive rights as may be possessedby the Federal Government...”. ‘Licensed Patents’, ‘Information’, ‘LicensedProducts’, and ‘Improvements’ are all defined extensively in the TechnologyLicense Agreement. We may enter into 

 

3

----

 

sublicensingarrangements with Mr. Shaw’s written approval of the terms and conditionsof the licensing agreement. The ‘Licensed Products’ include all retractablesyringes and retractable fluid sampling devices and components thereof,assembled or unassembled, which comprise an invention described in ‘LicensedPatents’, and improvements thereof including any and all ‘Products’ which employ the inventive conceptdisclosed or claimed in the ‘Licensed Patents’. The Technology License Agreement is in the process of being amended tocover additional patents and products.

 

                In exchange, we negotiated alicensing fee and agreed to pay a five percent royalty on gross sales afterreturns. The license terminates upon expiration of the last licensed patentsunless sooner terminated under certain circumstances. The licensing fees havebeen paid in accordance with this agreement with the exception of $1,500,000 infees which were waived by Mr. Shaw and his former wife.

 

                We have the right and obligationto obtain protection of the invention, including prosecution of patentproperties. The license unilaterally changes to a nonexclusive license in theevent of a hostile takeover. Also, if Mr. Shaw involuntarily loses controlof the Company, the license becomes a nonexclusive license and a right toinformation.

 

                We seek foreign patentprotection through the Patent Cooperation Treaty and have filed applicationsfor regional and national patent protection in selective countries where webelieve the VanishPoint® syringe can be utilized most.

 

                We hold numerous U.S. patentsrelated to our automated retraction technology, including patents for IV safetycatheters, winged IV sets, syringes, dental syringes, and blood collection tubeholders. In addition, we have multiple applications for patents currentlypending. The principal syringe patent in the U.S., as well as its foreigncounterpart, will expire in May 2015. We have also registered the following trade names and trademarks: VanishPoint®, VanishPoint® logos,RT with a circle mark, the Spiral Logo used in packaging our products, and thecolor coded spots on the ends of our syringes. We also have trademarkprotection for the phrase “The New Standard for Safety.” We have applied for atrademark for the Patient SafeTM syringe.

 

                We have a patent infringement claimpending against BD.  There are also twopatent infringement claims pending against us as well as a declaratory judgmentaction seeking a determination of non-infringement.  These claims are detailed in **Item 3.  Legal Proceedings**.We have decided, on the advice of patent counsel, not to purchase patentinsurance because it would require inappropriate disclosure of information thatis currently proprietary and confidential.

 

                We currently obtain roughly73.1% of our finished products through Double Dove, a Chinesemanufacturer.  We believe we could make up any long-term disruption inthese supplies by utilizing more of the capacity at the Little Elm facility,except for 5cc and 10cc syringes which comprised about 7.6% of our 2007revenues.

 

     We have a Licensing Agreementwith Baiyin Tonsun Medical Device Co., Ltd. (“BTMD”) which expires on May 13,2008. Royalties that were expected in 2007 were not received due to the timeneeded to build the factory, assembly equipment, and the related infrastructureas well as the need of BTMD to meet the requisite Chinese governmentrequirements. The facility has been completed and BTMD is in the process ofmeeting Chinese government requirements. Although successful renegotiation and/or extension of this agreementcannot be assumed, we still continue to expect royalty payments although we areunable to predict the date we will begin to receive such royalties. Royaltiesshould begin once Chinese government requirements are met and BTMD is able toproduce and sell products.

 

SeasonalEffect on Business

 

                We have generally experiencedhigher syringe sales during the last half of the year which we believe is dueto flu season.

 

4

----

 

WorkingCapital Practices

 

                Cash and cash equivalentsinclude unrestricted cash and investments with original maturities of threemonths or less.

 

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

 

                Inventories are valued at thelower of cost or market, with cost being determined using a standard costmethod, which approximates average cost. A reserve is established for anyexcess or obsolete inventories.

 

                Receivables are established forfederal and state taxes where we have determined we are entitled to a refundfor overpayments of estimated taxes or loss carry backs.

 

                Accounts payable and othershort-term liabilities include amounts that we believe we have an obligationfor at the end of year.  These included charges for goods or servicesreceived in 2007 but not billed to us at the end of the year.  It alsoincluded estimates of potential liabilities such as rebates and other fees.

 

                Our domestic return policy isset forth in our standard Distribution Agreement, a copy of which was attachedas exhibit no. 6.3 to our Form 10-SB filed on June 23, 2000. This policy provides that a customer may return incorrect shipments within 10days following arrival at the distributor’s facility.  In all such casesthe distributor must obtain an authorization code from us and affix the code tothe returned product.  We will not accept returned goods without areturned goods authorization number.  We may refund the customer’s moneyor replace the product.

 

                Our international contracts donot provide for any returns.

 

                Our return policy also providesthat a customer may return product that is overstocked.  Overstockingreturns are limited to two times in each 12 month period up to one percent ofdistributor’s total purchase of products for the prior 12 month period upon thefollowing terms: i) an “overstocked” product is that portion of distributor’sinventory of the product which exceeds distributor’s sales volume for theproduct during the preceding four months; ii) distributor must not have takendelivery of the product which is overstocked during the preceding four months;iii) overstocked product held by distributor in excess of 12 months from thedate of original invoice will not be eligible for return; iv) the overstockedproduct must be returned to us in our saleable case cartons which are unopenedand untampered, with no broken or re-taped seals;  v) distributor will begranted a credit which may be used only to purchase other products from us, thecredit to be in the amount of the invoice price of the returned products less a10% restocking fee which will be assessed against distributor’s subsequentpurchase of product; vi) distributor must obtain an authorization code from ourdistribution department and affix the code to the returned product; and vii)distributor shall bear the cost of shipping the returned products to us. All product overstocks and returns are subject to inspection and acceptance bymanufacturer.

 

Dependenceon Major Customers

 

                Three distributors accounted foran aggregate of 36.5% of our revenue in 2007. We have numerous otherdistributors that sell our products in the U.S. and internationally.

 

BacklogOrders

 

                Order backlog is not material toour business inasmuch as orders for our products generally are received andfilled on a current basis, except for items temporarily out of stock.

 

5

----

 

CompetitiveConditions

 

                We believe our products continueto be the most effective safety devices in today’s market. Our syringe productsinclude passive safety activation, require less disposal space, and areactivated while in the patient.   We have three major competitors:BD, Tyco International Ltd.(“Tyco”), and Terumo Medical Corp.(“Terumo”).

 

                Founded in 1897, BD isheadquartered in New Jersey. BD’s safety-engineered device sales accounted forapproximately 22% of BD’s total 2007 sales. BD currently manufactures theSafetyLokTM, a syringe that utilizes a tubular plastic sheaththat must be manually slid over the needle after an injection, and theSafetyGlideTM, a needle which utilizes a hinged lever to cover theneedle 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 IntegraTM, a retractable syringe offered by BD,does not offer a full product line and cannot be used with highly viscousmedication due to leakage (as described on their labels). The introduction ofthis syringe has had little impact on our sales due to BD’s historic marketdominance.  BD’s “Vacutainer®” blood collection products are commonlyused as industry jargon to refer to blood collection products in general.

 

                Sherwood Medical Co. (“Sherwood”),was acquired by Tyco, a company headquartered in Bermuda. Sherwood manufacturesthe Monoject®, a safety syringe that utilizes a sheath similar tothe BD SafetyLokTM syringe. Sherwood also manufactures the Magellansafety syringe, a product similar to the BD SafetyGlideTM.

 

                Founded in 1974, Terumo was thefirst company to sell disposable syringes in Japan. Today Terumo manufacturesstandard syringes and blood collection tube holders, operates internationally,and has sales in some 120 countries.

 

                Both BD’s SafetyLokTM andSherwood’s Monoject® safety syringes require the use of two hands andseveral extra steps to activate the tubular plastic shield which must be slidand locked into place to protect the needle. These products must be removedfrom the patient in order for the safety mechanism to be activated.  Incontrast, use of the VanishPoint® syringe is identical to that of astandard syringe until the end of an injection, when the automated retractionmechanism retracts the needle directly from the patient safely into the barrelof the syringe. This allows both hands to remain safely out of harm’s way. BD’sIntegraTM operates in asimilar way but may have to be removed from the patient in order to haveretraction of the needle occur.

 

                BD and Sherwood have controllingU.S. market share; greater financial resources; larger and more establishedsales, marketing and distribution organizations; and greater market influence,including the long-term and/or exclusive contracts with GPOs described earlier.The current conditions have restricted competition in the needle and syringe market.BD may be able to use its resources to improve its products through research oracquisitions or develop new products, which may compete more effectively withour products.

 

We continue to attempt to gain access to the market through our salesefforts, our innovative technology, introduction of new products and, whennecessary, litigation. We are focusing on methods of upgrading ourmanufacturing capability and efficiency in order to enable us to compete byoffering our technology at a reduced price. We believe our currentcapitalization provides the resources necessary to implement these changes andimprove our manufacturing capacity and efficiency, thereby reducing our unitcost.

 

                Our competitive strengthsinclude that the VanishPoint® syringe is one of four syringes previouslygiven the highest possible rating by ECRI.****Ourblood collection tube holder is one of only two safety products previously giventhe highest possible rating. Our safety needle products also have an advantageover non-retracting safety needles because minimal training and changes topractitioners’ normal routines are required. Use of our products also prohibitsunfortunate and improper reuse. Several factors could materially andbeneficially affect the marketability of our products. Demand could beincreased by existing legislation and other legislative and investigative****efforts. Outsourcing arrangements such asour purchases from Double Dove have increased our manufacturing capacity withlittle or no capital outlay and provide a competitive cost.  Licensing 

 

6

----

 

agreementssuch as the one with BTMD (which we expect to be renegotiated and/or extended priorto its termination in May 2008) could provide entry into new markets andgenerate additional revenue.****Adiscussion of the BTMD agreement can be found in **Item 1.**Patents,Trademarks, Licenses, and Proprietary Rights and repeated in **Item 7.** OVERVIEW and Internal Sources of Liquidity.

 

                Our competitive weaknessesinclude our current lack of market share because two well-established companiescontrol most of the U.S. market. Our competitive position is also weakened bythe method that providers use for making purchasing decisions and the fact thatour initial price per unit for our safety needle products may be higher.However, our price per unit is competitive or even lower than the competitiononce all the costs incurred during the life cycle of a syringe are considered.Such life cycle costs include disposal costs, testing and treatment costs forneedlestick injuries, and treatment for contracted illnesses throughneedlestick injuries. Demand for our products could decrease due to the sale ofthe IntegraTM, a retractable syringe manufactured by BD, whichdominates the market.  Although, to date, the introduction of the IntegraTM has not noticeably impacted our sales, BD hasa wider range of product offerings and more capital resources.

 

Researchand Development

 

                We spent $934,209; $958,798; and$1,071,143 in fiscal 2005, 2006, and 2007 respectively, on research anddevelopment. Costs in 2007 were primarily for validation testing anddevelopment work for the safety catheter as well as higher compensation costs.** **Ourongoing research and development activities are performed by an internalresearch and development staff. This team of engineers is developing processimprovements for current and future automated machines. Products currently indevelopment include a 1⁄2cc insulin syringe, a Patient SafeTM syringe, an IV catheter and a dental syringe.****Our limited access to the market hasslowed the introduction of these products into the market. Possible futureproducts include needle medical devices to which the automated retractionmechanism can be applied as well as other safety medical devices.

 

EnvironmentalCompliance

 

                We believe that we do not incurmaterial costs in connection with compliance with environmental laws. We areconsidered a Conditionally Exempt Small Quantity Generator because we generateless than 100 kilograms (220 lbs.) of hazardous waste per month. Therefore, weare exempt from the reporting requirements set forth by the Texas Commission onEnvironmental Quality. The waste that is generated at our facility is primarilymade up of flammable liquids and paint-related waste and is sent for fuelblending by Safety Kleen. This fuel blending process completely destroys ourwaste and satisfies our “cradle-to-grave” responsibility.

 

                Other nonhazardous productionwaste includes clean polypropylene regrind that is sold for recycling. We alsogrind dirty plastics, syringes, and needles for disposal by Waste Management.All other nonhazardous waste produced is considered municipal solid waste andsent to a sanitary landfill by Waste Management.

 

                We also produce small amounts ofregulated biohazardous waste from contaminated sharps and laboratory wastes.This waste is sent for incineration by Stericycle.

 

Employees

 

                As of March 1, 2008, we had138 full-time employees, five part-time employees, and six independentlycontracted consultants. Of the 138 full-time employees, seven persons wereengaged in research and development activities, 56 persons were engaged inmanufacturing and engineering, 17 persons were engaged in quality assurance andregulatory affairs, 36 persons were engaged in sales and marketing, 20 personswere engaged in general and administrative functions, and two persons infacilities.  No employees are covered by collective bargaining agreements.We are dependent upon a number of management and technical personnel, and theloss of services of one or more of such employees could have a material adverseeffect on us. Our President and Chief Executive Officer, Thomas J. Shaw, has an

 

7

----

 

employmentcontract with an initial term that ended on September 2002 that containsan automatic and continuous renewal provision for consecutive two-year periods.

 

FinancialInformation About Geographic Areas

 

                We have no long-lived assets inforeign countries. Shipments to international customers generally require aprepayment either by wire transfer or an irrevocable confirmed letter ofcredit.  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.  All transactions are in U.S. currency. We attributesales to countries based on the destination of shipment.

** **

| ** **          | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**   | ** ** |
|---------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic sales      |       | $         | 21,461,717 |      | $          | 22,240,347 |       | $ | 22,310,150 |   |
| International sales |       | 4,828,003 |       | 3,084,172 |       | 1,924,866  |       |
| Total sales         |       | $         | 26,289,720 |      | $          | 25,324,519 |       | $ | 24,235,016 |   |
|                |       |      |       |      |       |       |       |
| Long-lived assets   |       |      |       |      |       |       |       |
| Domestic            |       | $         | 11,483,423 |      | $          | 12,212,140 |       | $ | 11,925,976 |   |
| Foreign             |       | $         | —     |      | $          | —     |       | $ | — |   |

 

GovernmentFunding of Research and Right to License

 

                Thomas J. Shaw developed hisinitial version of a safety syringe with the aid of grants by the NationalInstitute of Drug Abuse, a subsidiary of the National Institutes of Health. Asa result, the federal government has the right, where the public interestjustifies it, to disperse the technology to multiple manufacturers so that thesafety syringe can be made widely available to the public. However, the fundingwas only used to develop and patent the earlier syringe design as of 1991. Thatsyringe was a bulkier, less effective, and more expensive version of thecurrent VanishPoint® product. Accordingly and on the advice ofcounsel, Management believes that the risk of the government demandingmanufacture of this alternative product is minimal.

 

AvailableInformation

 

                Ourinternet address is www.vanishpoint.com. We make our filings with the U.S. Securities and Exchange Commission (the“SEC”) available via our website.  Uponrequest, we will be pleased to deliver written copies of our filings free ofcharge.

 

**Item 1A. Risk Factors.**

 

                You should carefully considerthe following material risks facing us.  If any of these risks occur, ourbusiness, results of operations or financial condition could be materiallyaffected.

 

WeCompete in a Monopolistic Marketplace

 

                We operate in an environmentthat is dominated by the major syringe manufacturer in the U.S., BD.  Webelieve that its monopolistic business practices continue despite its paying us$100 million to settle a lawsuit for anticompetitive practices, businessdisparagement, and tortious interference.  Although we made limitedprogress in some areas, such as the alternate care and international markets,our volumes are not as high as they should be given the nature and quality ofour product, and the federal and state legislation requiring use of safe needledevices.

 

OurCash Position Is Decreasing and Legal Expenses Are Increasing

 

                Due to our operating losses and currentlyincreasing legal fees, our cash position declined $6.3 million in 2007. The litigation will continue to require a significant amount of cash until theissues are resolved.  Our lawsuit againstBD is currently scheduled for trial in March 2009.  After conclusion of the trial, legal expensesare expected to decrease significantly.

 

8

----

 

In the event we continue to have only limited market access and thecash provided by the litigation settlements and generated from operationsbecomes insufficient and royalties from BTMD are not forthcoming, we would takecost cutting measures to reduce cash requirements. Such measures could resultin reduction of units being produced, reduction of workforce, reduction ofsalaries of officers and other nonhourly employees, and deferral of royaltypayments.

 

WeHave Generally Been Unable to Gain Sufficient Market Access to AchieveProfitable Operations

 

Historically, we have incurred net operating losses including allfiscal quarters of 2007.  We mayexperience operating losses in the future. If we are unable to gain sufficientmarket access and market share, we may be unable to continue to financeresearch and development as well as support operations and expansion ofproduction.

 

WeAre Dependent On Our Aging Patent Protection

 

Our main competitive strength is our technology.  We are dependenton our patent rights, and if our patent rights are invalidated or circumvented,our business would be adversely affected. Patent protection is considered, in the aggregate, to be of materialimportance in our marketing of products in the United States and in most majorforeign markets.  Patents coveringproducts that we have introduced normally provide market exclusivity, which isimportant for the successful marketing and sale of our products.

 

As our technology ages (and the associated patent life expires), ourcompetitive position in the marketplace will weaken.  The initial patents protecting ourrevolutionary spring action syringe will expire beginning in May 2015.  Patent life may be extended, not through theoriginal patents, but through related improvements.  Eventually, however, our patent protectionmay decrease and we will be vulnerable to other competitors utilizing ourtechnology.

 

OurPatents Are Subject to Litigation

 

We are currently involved in patent disputes with BD, Occupational andMedical Innovations Limited (“OMI”) and MedSafe Technologies LLC (“MedSafe”).  See **Item 3 Legal Proceedings**below.  Patent litigation and challenges involvingour patents are costly and unpredictable and may deprive us of marketexclusivity for a patented product or, in some cases, third party patents mayprevent us from marketing and selling a product in a particular geographicarea.

 

WeAre Vulnerable to New Technologies

 

Because we have a narrow focus on particular product lines andtechnology (currently predominantly retractable needle products), we arevulnerable to the development of superior competing products and to changes intechnology which could eliminate or reduce the need for our products.  Ifa superior technology is created, the demand for our products could greatlydiminish.

 

OurCompetitors Have Greater Resources

 

The three leading manufacturers of hypodermic syringes and bloodcollection products are BD with a worldwide market share in the safety syringemarket of approximately 50%, Sherwood with approximately 26%, and Terumo with amarket share of approximately 10%.  All three companies offer bothstandard syringes and at least one safety syringe alternative.  BD alsooffers 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 productsthrough research and acquisitions or develop new products, which may competemore effectively with our products.

 

If our competitors choose to use their resources to create productssuperior to ours, we may be unable to sell our products and our ability tocontinue operations would be weakened.

 

9

----

 

TheMajority of Our International Sales Are Filled Using One Supplier

 

Most international sales are filled by production from Double Dove. Inthe event that we were unable to purchase such product from Double Dove, wewould need to find an alternate supplier for the 5cc and 10cc syringes andincrease domestic production for 1cc and 3cc syringes to avoid a disruption insupply. Currently, approximately 73.1% of our production is provided by DoubleDove.

 

Fluctuationsin Supplies of Inventory Could Temporarily Increase Costs

 

Fluctuations in the cost and availability of raw materials andinventory and the ability to maintain favorable supplier arrangements andrelationships could result in the need to manufacture all (as opposed to 26.9%)of the products in the U.S.  This couldtemporarily increase unit costs as we ramp up domestic production.

 

WeAre Controlled by Two Shareholders

 

Thomas J. Shaw, our President and a Director, Lillian E. Salerno, one ofour consultants, and Ms. Suzanne August own 35.3%, 10.2%, and 11.8%,respectively, of the outstanding Common Stock as of March 1, 2008. 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.  Mr. Shaw and Ms. Salernowill, therefore, have the ability to direct our operations and financialaffairs and to substantially influence the election of members of our Board ofDirectors.  The interests of these persons may not always coincide withour interests or the interests of other stockholders. This concentration ofownership, for example, may have the effect of delaying, deferring orpreventing a change in control, impeding a merger, consolidation, takeover orother business combination involving us or discouraging a potential acquirerfrom making a tender offer or otherwise attempting to obtain control of us,which in turn could materially adversely affect the market price of the CommonStock.  Of the 23,800,064 shares of Common Stock outstanding as of March 1,2008, Officers and Directors own 10,143,064****ofthe shares.

 

WeHave Limited Access to the Capital Markets

 

The volume of trading in our Common Stock on the American StockExchange (the “AMEX”) is low.  Accordingly, it is unclear if there is anysignificant market for our shares.  This may reduce our ability to raisecash through public or private offerings in the future.

 

OurStock Price Sometimes Decreases Below AMEX Listing Standards

 

Our share price fluctuates and sometimes falls below $2.00 which isrequired for listing on the AMEX under its alternative listing standards.  The AMEX may initiate delisting procedures,in its discretion.  Delisting of ourshares would greatly affect the liquidity of our shares and would reduce ourability to raise funds from the sale of equity in the future.  However, we believe such delistingapplication to be unlikely.  Furthermore,in the event that we receive a deficiency letter from the AMEX, we will havethe right to appeal such determination. In addition, entities that are given such notices are usually given upto 18 months to execute a plan to bring themselves into compliance with thelisting standards.

 

OurInterest Income May Decrease

 

Future interest income may be negatively affected by lowering interestrates and our current movement of cash to U.S. Treasury bills and other U.S.government backed securities.

 

10

----

 

OilPrices and Transportation Costs May Increase Our Costs

 

As our products are made from petroleum products, the high cost of oiland transportation may have a negative impact on our costs to the extent theymay not be recoverable through price increases of our products.

 

CurrentEconomic Conditions May Decrease Collectability of Accounts

 

Although we believe that we have granted credit to credit-worthy firms,current economic conditions may affect the timing and/or collectability of someaccounts.

 

WeFace Inherent Product Liability Risks

 

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

 

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

 

Not applicable and none.

 

**Item 2. Properties.**

 

Our 22,500 square foot headquarters is located at 511 Lobo Lane, on 35acres, which we own, overlooking Lake Lewisville in Little Elm, Texas.  The headquarters are in good condition andhouse our administrative offices and manufacturing facility. The manufacturingfacility produced approximately 26.9% of the units that were sold in2007.  We placed a 45,000 square foot warehouse in service in March 2005.  In the event of a disruption in service of our outside supplier, Double Dove,we believe we could produce quantities sufficient to meet demand under currentcircumstances except for demand for 5cc and 10cc syringes which are soldprincipally in the international market.  In that event, we would attemptto engage another manufacturer. We are currently utilizing less than 50% of ourcurrent productive capacity.

 

We obtained a loan from 1st International Bank (“1st International”) for $2,500,000, secured by theland and existing buildings, which provided funding for the construction of the45,000 square foot warehouse placed in service in 2005. The proceeds from theloan were used to pay off the remaining $475,000 of the revolving creditagreement with 1st International in addition tofunding the warehouse and related infrastructure. The payments for thepermanent 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 one percent, with floors that may rangefrom 4.25% to 6.50%. Compensating balances at 1st Internationalaffecting the interest rate will range from $0 to $500,000.

 

The Board of Directors has approved our obtaining financing for up to$4.5 million for a capital project to expand the warehouse.  The expansion will include additionalwarehouse space, additional office space, and a new Clean Room.  We are in the process of finalizing thefinancing which will be secured by a second lien on the land and buildings.

 

11

----

 

In the opinion of Management, the property and equipment are suitablefor their intended use and are adequately covered by an insurance policy.

 

**Item 3. Legal Proceedings.**

 

On August 12, 2005, we filed a lawsuit against Abbott LaboratoriesInc. (“Abbott”) in the United States District Court in the Eastern District ofTexas, Texarkana Division. We are alleging fraud and breach of contract inconnection with the National Marketing and Distribution Agreement dated as of May 4,2000, which was terminated on October 15, 2003. We are seeking damageswhich we estimate to be in millions of dollars of lost profits, out of pocketexpenses, and other damages. In addition, we are seeking punitive damages,pre-judgment and post-judgment interest, and attorney’s fees. On October 31,2005, Abbott moved to dismiss our suit and to compel arbitration of thedispute.  The Court ruled in our favorand denied the motion to compel arbitration. Abbott appealed the decision to the Fifth Circuit on February 27,2007.  Briefing has been completed andoral argument was conducted on March 3, 2008.  It is not possible to predict when exactlythe Fifth Circuit will decide the appeal or how.  Whether the matter proceeds in litigation orarbitration, Abbott may counterclaim for amounts that Abbott believes are owedby us under the agreement.

 

In August 2006, we were sued by OMI in Federal Court of Australia,alleging that two letters written to OMI by our outside counsel containedunjustified threats, but seeking no damages. OMI later amended its complaint toseek a declaratory judgment that OMI does not infringe our Australian patents,again seeking no damages.  Following aone-day trial in June 2007, the Court held that one of the two letterswritten by outside counsel contained an unjustified threat and awarded costs toOMI.  A one-day trial of the declaratoryjudgment (that OMI does not infringe on our Australian patents) action is setfor April 2008.

 

On June 15, 2007, we filed a lawsuit against BD in the UnitedStates District Court for the Eastern District of Texas, Marshall Division. We subsequently amended the complaint to add Thomas Shaw as aplaintiff.  We are alleging violations ofthe federal and state antitrust laws, violation of the Lanham Act, and patentinfringement.  Please see Exhibit No. 99to our Form 8-K filed on June 19, 2007, for details regarding thefactual basis underlying the action as well as the relief sought.  We areseeking both damages and injunctive relief in the suit.  In January 2008, the Court severed thepatent claims from the other claims and stayed proceedings in the other claimspending resolution of the patent dispute. BD has denied the allegations and has counterclaimed for a declarationthat our asserted patents are invalid and unenforceable.  The patent case is set for trial in March 2009.

 

On September 6, 2007, BD and MDC Investment Holdings, Inc.filed a complaint against us  in the United States District Court for theEastern District of Texas, Texarkana Division.  Plaintiffs allege that ourVanishPoint® product line infringes U.S. patent nos.6,179,812 and 7,090,656.  Plaintiffs seek a declaration of infringement,an injunction against further infringement, compensatory damages (withinterest), the costs of the litigation, and such other relief as the Courtdeems just and proper.  We have counterclaimed for a declaration that theasserted patents are invalid and unenforceable.  No trial date has beenset.

 

On March 14, 2008, MedSafe filed a complaint against us andBD in the United States District Court for the District of South Carolina,Greenville Division.  Plaintiffs allege that our VanishPoint® syringe productline and BD’s IntegraTM product line infringe U.S. patent no. 6,074,370. **** Plaintiffs seekunspecified damages, including compensatory damages (with prejudgment interest)and any further relief as the Court deems appropriate. No trial date has beenset.

 

**Item 4. Submission of Matters to aVote of Security Holders.**

 

No matters were submitted to a vote during the fourth quarter of 2007.

 

12

----

 

**PART II**

 

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

 

RECENTSALES OF UNREGISTERED SECURITIES

 

                There were no sales ofunregistered securities in the first or second quarter.  One sale of unregistered securities in thethird quarter of 2007 was reported in our Form 10-Q quarterly report filedwith the SEC which is available via EDGAR.   One non-accreditedshareholder converted 5,000 shares of Series II Class B ConvertiblePreferred stock on a one-for-one basis for no additional consideration intoCommon Stock in the fourth quarter.

 

MARKET INFORMATION

 

                Our Common Stock has been listedon the AMEX under the symbol “RVP” since May 4, 2001. Shown below are thehigh and low sales prices of our Common Stock as reported by the AMEX for eachquarter of the last two fiscal years:

 

| ** **     | ** ** | **Common Stock** | ** ** |
|----------------|------------|-----------------------|------------|
| ** **     | ** ** | **High**              | ** ** | **Low** | ** ** |
| 2007           |       |                  |       |   |   |
| Fourth Quarter |       | $2.12                 |       | $1.40 |   |
| Third Quarter  |       | $2.60                 |       | $1.72 |   |
| Second Quarter |       | $3.06                 |       | $2.25 |   |
| First Quarter  |       | $3.48                 |       | $2.70 |   |
|           |       |                  |       |   |   |
| 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 |   |

 

SHAREHOLDERS

 

As of March 1, 2008, there were 23,800,064 shares of Common Stockheld by 280 shareholders of record not including shareholders who beneficiallyown Common Stock held in nominee or “street name.”

 

DIVIDENDS

 

We have not ever declared or paid any dividends on the Common Stock. Wehave no current plans to pay any cash dividends on the Common Stock. We intendto retain all earnings, except those required to be paid to the holders of thePreferred Stock as resources allow, to support operations and future growth.Dividends on Common Stock cannot be paid so long as preferred dividends areunpaid. As of December 31, 2007, an aggregate of $12,500,000 in preferreddividends were in arrears.

 

On March 27, 2007, the Board of Directors declared a dividend onthe Series I and Series II Class B Convertible Preferred Stockto be paid on July 24, 2007 to Shareholders of Record on July 2,2007.  Arrearages were paid through June 30, 2007 in the approximate amountof $1.1 million.

 

EQUITYCOMPENSATION PLAN INFORMATION

 

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

 

13

----

 

**Item 6. Selected Financial Data.**

 

The following selected financial data are qualified by reference to,and should be read in conjunction with, our audited financial statements andthe notes to those statements and **Management’s Discussionand Analysis of Financial Condition and Results of Operations**appearing elsewhere herein.  The selected Statements of Operations datapresented below for the years ended December 31, 2004 and 2003, and theBalance Sheet data as of December 31, 2005, 2004, and 2003, have beenderived from our audited financial statements, which are not included herein.

 

(In thousands except for earnings per share, shares and percentages)*

 
| ** **                                        | ** ** | **As of  and for the Years Ended December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales, net                                        |       | $                                                    | 26,290     |   | $ | 20,897 |   | $ | 21,157 |   | $ | 21,136 |   | $ | 19,078 |   |
| Reimbursed discounts                              |       | —                                               |       | 4,427 |   | 3,078 |   | 386 |   | — |   |
| Total sales                                       |       | 26,290                                               |       | 25,324 |   | 24,235 |   | 21,522 |   | 19,078 |   |
| Cost of sales                                     |       | 18,300                                               |       | 17,778 |   | 15,429 |   | 16,411 |   | 14,654 |   |
| Gross profit                                      |       | 7,990                                                |       | 7,546 |   | 8,806 |   | 5,111 |   | 4,424 |   |
| Total operating expenses                          |       | 17,936                                               |       | 14,261 |   | 11,683 |   | 13,110 |   | 10,327 |   |
| Loss from operations                              |       | (9,946                                               | )          | (6,715 | ) | (2,877 | ) | (7,999 | ) | (5,903 | ) |
| Interest income                                   |       | 1,870                                                |       | 1,976 |   | 1  ,373 |   | 475 |   | 45 |   |
| Interest expense, net                             |       | (326                                                 | )          | (411 | ) | (340 | ) | (243 | ) | (308 | ) |
| Litigation settlements, net                       |       | —                                               |       | — |   | — |   | 74,635 |   | 13,880 |   |
| Net income (loss) before income taxes             |       | (8,402                                               | )          | (5,150 | ) | (1,844 | ) | 66,868 |   | 7,714 |   |
| Provision (benefit) for income taxes              |       | (1,454                                               | )          | (1,280 | ) | (606 | ) | 12,177 |   | 266 |   |
| Net income (loss)                                 |       | (6,948                                               | )          | (3,870 | ) | (1,238 | ) | 54,691 |   | 7,448 |   |
| Preferred Stock dividend requirements             |       | (1,399                                               | )          | (1,451 | ) | (1,503 | ) | (1,993 | ) | (2,560 | ) |
| Earnings (loss) applicable to common shareholders |       | $                                                    | (8,347     | ) | $ | (5,321 | ) | $ | (2,741 | ) | $ | 52,698 |   | $ | 4,888 |   |
|                                              |       |                                                 |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per share — basic            |       | $                                                    | (0.35      | ) | $ | (0.23 | ) | $ | (0.12 | ) | $ | 2.33 |   | $ | 0.23 |   |
| Earnings (loss) per share — diluted          |       | $                                                    | (0.35      | ) | $ | (0.23 | ) | $ | (0.12 | ) | $ | 2.08 |   | $ | 0.20 |   |
|                                              |       |                                                 |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding               |       | 23,727,029                                           |       | 23,591,999 |   | 23,332,277 |   | 22,600,166 |   | 21,001,004 |   |
| Current assets                                    |       | $                                                    | 51,916     |   | $ | 57,781 |   | $ | 61,485 |   | $ | 64,674 |   | $ | 13,497 |   |
| Current liabilities                               |       | $                                                    | 8,786      |   | $ | 6,891 |   | $ | 5,458 |   | $ | 7,852 |   | $ | 5,773 |   |
| Property, plant, and equipment, net               |       | $                                                    | 11,483     |   | $ | 12,212 |   | $ | 11,926 |   | $ | 11,057 |   | $ | 9,679 |   |
| Total assets                                      |       | $                                                    | 64,330     |   | $ | 70,795 |   | $ | 73,756 |   | $ | 76,123 |   | $ | 23,631 |   |
| Long-term debt, net of current maturities         |       | $                                                    | 3,747      |   | $ | 4,137 |   | $ | 4,351 |   | $ | 3,535 |   | $ | 2,723 |   |
| Stockholders’ equity                         |       | $                                                    | 51,761     |   | $ | 59,710 |   | $ | 63,235 |   | $ | 63,665 |   | $ | 15,135 |   |
| Redeemable Preferred Stock (in shares)            |       | 2,329,916                                            |       | 2,441,166 |   | 2,498,666 |   | 2,572,116 |   | 3,591,216 |   |
| Cash dividends per common share                   |       | $                                                    | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Gross profit margin                               |       | 30.4                                                 | %          | 29.8 | % | 36.3 | % | 23.7 | % | 23.2 | % |

 

14

----

 

*              Events that could positivelyaffect the trends indicated above include receipt of royalties from BTMD,continued reductions in manufactured costs, continued increasing average salesprices, and the gaining of market access. Future interest income trends may negatively affect the trends indicatedabove due to possibly lower future interest rates as will our movement of ourcash to U.S. Treasury bills and other U.S. government backed securities.  Furthermore, as our products are made frompetroleum products, the increasing cost of oil and transportation may have anegative impact on our costs to the extent they may not be recoverable throughprice increases of our products.

 

**Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operation.**

 

FORWARD-LOOKINGSTATEMENT WARNING

 

Certain statements included by reference in this filing containing thewords “could,” “may,” “believes,” “anticipates,” “intends,” “expects,” andsimilar such words constitute forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act. Any forward-looking statementsinvolve known and unknown risks, uncertainties, and other factors that maycause our actual results, performance, or achievements to be materiallydifferent from any future results, performance, or achievements expressed orimplied by such forward-looking statements. Such factors include, among others,our ability to maintain liquidity, our maintenance of patent protection, theimpact of current litigation (as it affects our costs as well as market accessand the viability of our patents), the ability to successfully re-negotiate orextend the BTMD license agreement and the receipt of payments thereunder, theimpact of dramatic increases in demand, our ability to quickly increasecapacity in the event of a dramatic increase in demand, our ability to accessthe market, our ability to maintain or lower production costs, our ability tocontinue to finance research and development as well as operations andexpansion of production, the increased interest of larger market players,specifically BD, in providing safety needle products, and other factors listedin **Item 1A. Risk Factors**. Giventhese uncertainties, undue reliance should not be placed on forward-lookingstatements.

 

OVERVIEW

 

We have been manufacturing and marketing safety products into themarketplace since 1997. We are currently transitioning into providing othersafety medical products in addition to safety syringe products which comprised98.0% of our sales in 2007. One such product, the Patient SafeTM syringeshouldenter the market in 2008. Our products have been and continue to be distributednationally through numerous distributors. However, we have been blocked fromaccess to the market by exclusive marketing practices engaged in by BD whichdominates the market. We believe that BD’s monopolistic business practicescontinue despite their paying $100 million in 2004 to settle a lawsuit with usfor anticompetitive practices, business disparagement, and tortiousinterference.  Although we made limited progress in some areas, such asthe alternate care and international markets, our volumes are not as high asthey should be given the nature and quality of our product, the federal andstate legislation requiring use of safe needle devices, and the SenateSubcommittee hearings on GPOs.  We continue to pursue various strategiesto have better access to the hospital market, as well as other markets,including attempting to gain access to the market through our sales efforts, ourinnovative technology, introduction of new products and, when necessary,litigation. 

 

We are focusing on methods of upgrading our manufacturing capabilityand efficiency in order to enable us to offer our technology at a reducedprice.  We believe our current capitalization provides the resourcesnecessary to implement these changes, improve profit margins, and improve ourmanufacturing capacity and efficiency, thereby reducing our unit cost. We arealso marketing more products internationally.  Beginning in 2004, we were givenan award (from PATH) to supply syringes to various African countries.  Awards increased significantly from 2004 to2007.  However, currently there is nofunding for this program.  We are hopefulthat funding will be re-established.  Ifso, we will again also distribute our products under this program.  We continue to produce syringes and bloodcollection tube holders in Little Elm, Texas.

 

Additionally, an Australian distributor was awarded a one-year contractin March 2007 to supply our VanishPoint®  automatedretraction syringes to all of Queensland Health’s 202 acute carefacilities.  Queensland Health is a department within the government ofQueensland, Australia.  The contract was 

 

15

----

 

effectiveimmediately and renewable for two years.  VanishPoint® products are distributed in Australia byBrisbane-based Scientific Educational Supplies Pty Ltd.

 

Product purchases from Double Dove have enabled us to increasemanufacturing capacity with little capital outlay and provided a competitivemanufactured cost.  These purchases have enabled improved profit marginsin spite of limited revenues.  The cost of production per unit hasgenerally declined as volumes increased. We currently obtain roughly 73.1% ofour finished products through Double Dove. We believe we could make up anylong-term disruption in these supplies by utilizing more of the capacity at theLittle Elm facility, except for 5cc and 10cc syringes which comprised about7.6% of our 2007 revenues.

 

We have a Licensing Agreement with BTMD which expires on May 13,2008. Royalties that were expected in 2007 were not received due to the timeneeded to build the factory, assembly equipment, and the related infrastructureas well as the need of BTMD to meet the requisite Chinese governmentrequirements. The facility has been completed and BTMD is in the process ofmeeting Chinese government requirements. Although successful renegotiation and/or extension of this agreementcannot be assured, we still continue to expect royalty payments although we areunable to predict the date we will begin to receive such royalties. Royaltiesshould begin once Chinese government requirements are met and BTMD is able toproduce and sell products.

 

Historically, unit sales have increased in the latter part of the yeardue, in part, to the demands for syringes during the flu season.

 

We are committed to the expansion of an existing warehouse. Thisexpansion will increase our warehouse area, provide for additional officespace, and add a second Clean Room.

 

LIQUIDITYAND FUTURE CAPITAL RESOURCES

 

At the present time Management does not intend to raise equity capitalin 2008. Due to the litigation settlements, we have sufficient cash reservesand intend to rely on operations, cash reserves, and debt financing as theprimary ongoing sources of cash.

 

HistoricalSources of Liquidity

 

We have historically funded operations primarily from proceeds fromprivate placements, 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.

 

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

 

InternalSources of Liquidity

 

To achieve break even quarters we need minimal access to hospitalmarkets which has been difficult to obtain due to the monopolistic marketplacewhich was the subject of our initial lawsuit and now also included in oursecond lawsuit against BD. We will also continue to attempt to gain access tothe market through our sales efforts, innovative technology and theintroduction of new products. We are focusing on methods of upgrading ourmanufacturing capability and efficiency in order to enable us to offer ourtechnology at a reduced price. We believe our current capitalization providesthe resources necessary to implement these changes and improve ourmanufacturing capacity and efficiency, thereby reducing our unit cost.

 

Beginning in early 2004, we began to receive shipment of product fromDouble Dove which enabled us to sell product at lower costs.  Fluctuationsin the cost and availability of raw materials and 

 

16

----

 

inventoryand the ability to maintain favorable supplier arrangements and relationshipscould result in the need to manufacture all (as opposed to 26.9%) of theproducts in the U.S.  This could temporarily increase unit costs as weramp up domestic production.

 

We have a Licensing Agreement with BTMD which expires on May 13,2008. Royalties that were expected in 2007 were not received due to the timeneeded to build the factory, assembly equipment, and the related infrastructureas well as the need of BTMD to meet the requisite Chinese governmentrequirements. The facility has been completed and BTMD is in the process ofmeeting Chinese government requirements. Although successful renegotiationand/or extension of this agreement cannot be assured, we still continue toexpect royalty payments although we are unable to predict the date we willbegin to receive such royalties. Royalties should begin once Chinese governmentrequirements are met and BTMD is able to produce and sell products.  We anticipate that receipt of such royaltieswould have a positive effect on our liquidity.

 

Historically, unit sales have increased in the latter part of the yeardue, in part, to the demand for syringes during the flu season.

 

Due to increased volumes, our manufacturingunit costs have tended to decline. However, increasing oil and transportationcosts could mitigatethis trend.

 

As our products are made from petroleum products, the increasing costsof oil and transportation may have a negative impact on our costs to the extentthey may not be recoverable through price increases of our products.

 

In the event we continue to have only limited market access and cashgenerated from operations and cash reserves become insufficient to supportoperations, we would take cost cutting measures to reduce cash requirements.Such measures could result in reduction of units being produced, reduction ofworkforce, reduction of salaries of officers and other nonhourly employees, anddeferral of royalty payments.

 

ExternalSources of Liquidity

 

We have obtained several loans over the past seven****years (see Historical Sources ofLiquidity), which have, together with proceeds from the sales of equitiesand litigation settlements, enabled us to pursue development and production ofour products. Currently we believe we could obtain additional funds through loansif needed. Furthermore, the shareholders have previously authorized anadditional 5,000,000 shares of a Class C stock that could, if necessary,be authorized and used to raise funds through the sale of equity.  We are in the process of finalizing a loanfor approximately $4.2 million to fund the expansion of the warehouse (whichwill include additional warehouse space, additional office space, and a newClean Room).

 

CAPITALRESOURCES

 

In 2006, we invested $500,000 in a limited liability company (“LLC”). We are in the process of exercising our option to have that investmentreturned.

 

MaterialCommitments for Expenditures

 

Capital expenditures in 2008 are dependent upon several factors,including, but not limited to, the success of projects to decrease productioncosts, the successful introduction of new products, and access to debtfinancing.

 

Beginning in 2008, we plan to expand our warehouse (to includeadditional warehouse space, additional office space, and a new Clean Room).  This expansion will be funded by a loan fromLewisville State Bank, a division of 1st International,for approximately $4.2 million, secured by a 2nd Lien Deed to the land andexisting buildings.

 

Trendsin Capital Resources

 

Interest expense will increase due to the pending loan of approximately$4.2 million, but will be somewhat mitigated by lower borrowing rates ifcurrent conditions in the credit markets continue.  Interest income may be negatively 

 

17

----

 

affectedby lower interest rates and our movement of cash to U.S. Treasury bills andother U.S. government backed securities. Although we believe that we have granted credit to credit-worthy firms,current economic conditions may affect the timing and/or collectability of someaccounts.

 

RESULTSOF OPERATIONS

 

The following discussion contains trend information and otherforward-looking statements that involve a number of risks and uncertainties.Our actual future results could differ materially from our historical resultsof operations and those discussed in the forward-looking statements. All periodreferences are to our fiscal years ended December 2007, 2006 or 2005.Dollar amounts have been rounded for ease of reading.

 

*Comparison of Year Ended**December 31, 2007, and Year Ended December 31,2006*

 

Revenues increased due principally to increased sales in theinternational market.  Domestic sales were 81.6% of revenues withinternational sales comprising the remainder.  Unit sales of the 1ccsyringe increased 7.3% and 5cc unit sales increased 30.6%.  Unit sales ofall products increased 7.5%.  The discount reimbursements ended in2006.  The discount reimbursement program expired after the settlementagreement under which it was established provided for a total of $8.0 millionin reimbursements.  We had recognized $8.0 million in cumulative discountreimbursements by the third quarter of 2006.  Sales to three distributorsaccounted for 36.5% and 31.3% of our revenues in 2007 and 2006, respectively.

 

Cost of sales as a percentage of revenues decreased slightly****due to higher volumes offset by the lower average sellingprice principally in the international sales.  The increased volume ofproduction resulted in a lower unit cost.  Royalty expenses were flat.

 

As a result, gross profits increased and gross profit margins increasedslightly from 29.8% in 2006 to 30.4% in 2007.

 

Operating expenses increased from the prior year primarily due toincreases in General and administrative costs.

 

Sales and marketing expenses declined due primarily to decreasedmarketing and trade show expense. Increased compensation and consulting costs were mitigated by reductionsin stock option expenses and travel and entertainment.  

 

Research and development costs were somewhat higher. We had increasesin engineering costs due principally to validation testing and the developmentwork on the IV safety catheter and higher compensation costs.

 

General and administrative costs increased due principally to higherlegal expenses.  Compensation costs,outside accounting costs, and distribution fees also increased.  Stockoption expenses, shareholder expenses, consulting and training decreased.  Legal costs concerning the litigation against BD comprise the largest amount oflegal fees and have a significant effect on our expenses. Our lawsuit against BDis currently scheduled for trial in March 2009. After conclusion of the trial,legal expenses are expected to decrease significantly. The legal costs incurredin 2007 with regard to the Abbott litigation are lower than those in2006.  We expect such costs to continue until the litigation is resolved.We also have higher litigation expenses concerning OMI.  We had decreasesin taxes other than income taxes in 2007. We awarded merit increases to our employees in 2006.  We donatedproduct in an international humanitarian effort in 2006.  There have beenno stock options awarded since 2004; therefore, this expense continues todecline as the costs become fully amortized with virtually none recorded in2007.  We also increased our allowancefor bad debt.

 

18

----

 

 

Preferred Stock dividend requirements declined due to conversion ofPreferred Stock into Common Stock.  The dividend arrearage at December 31,2007, on all classes of Preferred Stock was approximately $12,500,000.

 

Interest income decreased due to lower interest rates and cashbalances.  Interest expense decreased due to lower interest rates and debtbalances.  We expect interest income tocontinue to decline because of declining cash balances, the market environmentfor declining interest rates, and the transfer of our cash to U.S. Treasurybills and other government backed securities. Interest expense will increase with the addition of a building loan inthe approximate amount of $4.2 million which is in the process of beingfinalized.

 

Provision for income tax benefits consists primarily of the settlementin our favor of a state tax audit.  We also have a valuation reserve forall deferred taxes, with the exception of deferred taxes on the beneficialconversion feature associated with our note payable to Katie Petroleum.

 

Cash flow from operations was negative for 2007 due principally to theloss for the year.  The effect of non-cash expenses and the change inworking capital were a positive $2.7 million.

 

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

* *

Revenues increased 4.5%, due principally to increased sales in thealternate care and international markets.  Domestic sales were 87.8% ofrevenues with international sales comprising the remainder.  Unit sales ofthe 1cc syringe increased 39.1% and 3cc unit sales increased 19.7%.  Unitsales of all products increased 32.6%.  The hospital market continues tolag despite very favorable promotional pricing under the discountprogram.  The increase in discount reimbursements in 2006 is dueprincipally to the reduction of the promotional prices initiated in April 2005,resulting in larger reimbursements, mitigated by the ending of thereimbursement of the discounts in the third quarter of 2006.  The discountreimbursement program expired since the settlement agreement under which it wasestablished provided for a total of $8.0 million in reimbursements.  Wehad recognized $8.0 million in cumulative discount reimbursements by the thirdquarter of 2006.  Sales to two distributors accounted for 31.3% and 34.8%of our revenues in 2006 and 2005, respectively.

 

Cost of sales as a percentage of revenues increased due to the loweraverage selling price resulting from the ending of the discount reimbursementprogram mitigated by higher volumes of product produced and sold.  Theincreased volume of production resulted in a lower unit cost.  The effectof the reduction in staff in August 2005 also contributed to the lowerunit cost in 2006.  Royalty expenses were higher due to an increase ingross revenues.

 

As a result, gross profits decreased, and gross profit margins declinedfrom 36.3% in 2005 to 29.8% in 2006.

 

Operating expenses increased from the prior year due to increases inSales and marketing costs and General and administrative costs.

 

Sales and marketing expenses increased as we continued to grow oursales force, resulting in higher compensation costs, marketing and promotionalcosts, and travel and entertainment.  We also had increased consultingexpense mitigated by a reduction in stock option expense.

 

Research and development costs were flat. We had increases inconsulting costs and decreases in engineering costs due principally tovalidation testing and the development work on the IV safety catheter 

 

19

----

 

in2005.  We began marketing the IV safety catheter in the first quarter of2006.  We anticipate that until we reach economies of scale inmanufacturing this product, we will incur losses on its sale.

 

General and administrative costs increased due principally to higherlegal costs, compensation costs, consulting, and taxes other than incometaxes.  Decreases in expenses include stock option expense, shareholderexpenses, outside accounting costs, severance pay, and training.  The legal costs incurred in 2006 in regard to the Abbott litigation are higherthan those in 2005.  We expect such costs to continue until the litigationis resolved. We also have litigation expenses concerning OMI. Compensation costs increased as officers and other salaries were brought into amore appropriate range in 2005, the full effect being reflected in 2006. We also awarded merit increases to our employees in 2006.  Consultingcosts increased due to our continuing efforts to penetrate U.S. and internationalmarkets.  We had increases in taxes other than income taxes in 2006. We donated product in an international humanitarian effort in 2006.  Therehave been no stock options awarded since 2004; therefore, this expensecontinues to decline as the costs become fully amortized.

 

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

 

Interest income increased due to higher interest rates.  Interestexpense increased due to higher interest rates mitigated by lower debtbalances.

 

Provision for income tax benefits consists primarily of federal taxsubject to carry back provisions.  State income taxes are also subject tothe various states’ carry back rules.  We also have a valuation reservefor all deferred taxes, with the exception of deferred taxes on the beneficialconversion feature associated with our note payable to Katie Petroleum.

 

Cash flow from operations was negative for 2006 due principally to theloss for the year.  The effect of non-cash expenses and the change inworking capital was a positive $500,000.  Investing activities utilized$2.0 million in cash.

 

OFF-BALANCESHEET ARRANGEMENTS

 

None.

** **

CONTRACTUALOBLIGATIONS

 

ContractualObligations and Commercial Commitments

 

The following chart summarizes our material obligations and commitmentsto make future payments under contracts for long-term debt as of December 31,2007:

** **
| ** **                                   | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**             | ** ** | **Total**                                 | ** ** | **Less  Than  1 Year** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **More  Than 5  Years** | ** ** |
| Long-term debt, including current maturities |       | $                                    | 4,285,007  |   | $  | 442,293 |   | $  | 3,061,288 |   | $  | 781,426 |   | $  | — |   |
|                                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

20

----

 

SIGNIFICANTACCOUNTING POLICIES

 

We consider the following to be our most significant accountingpolicies. Careful consideration and review is given to these and all accountingpolicies on a routine basis to ensure that they are accurately and consistentlyapplied.

 

**Accounts Receivable**

** **

We record trade receivables when revenue is recognized. No product hasbeen consigned to customers.  Our allowance for doubtful accounts isprimarily determined by review of specific trade receivables.  Thoseaccounts that are doubtful of collection are included in the allowance. An additional allowance has been established based on a percentage ofreceivables outstanding.  These provisions are reviewed to determine theadequacy of the allowance for doubtful accounts.  Trade receivables arecharged off when there is certainty as to their being uncollectible. Trade receivables are considered delinquent when payment has not been madewithin contract terms.

 

**Revenue Recognition**

** **

Revenue is recognized for sales to distributors when title and risk ofownership passes to the distributor, generally upon shipment. Revenue isrecorded on the basis of sales price to distributors, less contractual pricingallowances. Contractual pricing allowances consist of (i) rebates grantedto distributors who provide tracking reports which show, among other things,the facility that purchased the products, and (ii) a provision forestimated contractual pricing allowances for products that we have not receivedtracking reports. Rebates are recorded when issued and are applied against thecustomer’s receivable balance. The provision for contractual pricing allowancesis reviewed 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 betweenus and our distributors. Revenue for shipments directly to end-users isrecognized when title and risk of ownership passes from us. Any product shippedor distributed for evaluation purposes is expensed.

 

Our domestic return policy is set forth in our standard DistributionAgreement.  This policy provides that a customer may return incorrectshipments within 10 days following arrival at the distributor’s facility. In all such cases the distributor must obtain an authorization code from us andaffix the code to the returned product.  We will not accept returned goodswithout a returned goods authorization number.  We may refund the customer’smoney or replace the product.

 

Our return policy also provides that a customer may return product thatis overstocked.  Overstocking returns are limited to two times in each 12month period up to one percent of distributor’s total purchase of products forthe prior 12 month period.  All product overstocks and returns are subjectto inspection and acceptance by manufacturer.

 

Our international Distribution Agreements do not provide for anyreturns.

 

We record an allowance for estimated returns as a reduction to accountsreceivable and gross sales. Historically, returns have been less than 0.48% of Total sales.

 

**Inventories**

** **

Inventories are valued at the lower of cost or market, with cost beingdetermined using a standard cost method, which approximates average cost. Areserve is established for any excess or obsolete inventories.

 

21

----

 

**MarketingFees**

** **

Undera sales and marketing agreement with Abbott, we paid marketing fees until weterminated the contract for breach.  The contracted services were toinclude participation in promotional activities, development of educational andpromotional materials, representation at trade shows, clinical demonstrations,inservicing and training, and tracking reports detailing the placement of ourproducts to end-users. Marketing fees were accrued at the time of the sale ofproduct to Abbott. These fees were paid after Abbott provided us a trackingreport of product sales to end-users. These costs were included in Sales andmarketing expense in the Statements of Operations. No marketing fees have beenaccrued since October 15, 2003, the date the National Marketing andDistribution Agreement with Abbott was terminated. We filed suit against Abbottin August 2005 for breach of contract. We do not expect the eventual liability for marketing fees, if any, toexceed the amount accrued.

 

**Reimbursed Discounts**

** **

We received reimbursed discounts from one of the settlement agreementsreached in our previous federal antitrust lawsuit, *RetractableTechnologies, Inc. v. BD, et al*. Payments under the discountreimbursement program were recognized upon invoicing of amounts due under theagreement, provided collection was reasonably assured.  Such amounts are presented in the Statementsof Operations as a separate component of revenues.  All funds availableunder the discount reimbursement program were recognized by the third quarterof 2006.

 

**Item 7A. Quantitative and QualitativeDisclosures About  Market Risk.**

 

We believe that our market risk exposuresregarding our cash and cash equivalents are immaterial as we do not haveinstruments for trading purposes. Additionally, reasonable, possible near-termchanges in market rates or prices will not result in material near-term lossesin earnings.

22

----

 

** **

** **

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

 

**RETRACTABLETECHNOLOGIES, INC.**

 

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

 

**DECEMBER31, 2007 AND 2006**

 

 

F-1

----

 

 
| **RETRACTABLE TECHNOLOGIES, INC.**                          |       |     |       |
|-------------------------------------------------------------|------------|----------|------------|
| **INDEX TO FINANCIAL STATEMENTS**                           |       |     |       |
|                                                        | ** ** | **Page** | ** ** |
| Report of Independent  Registered Public Accounting Firm    |       | F-3      |       |
|                                                        |       |     |       |
| Financial Statements:                                       |       |     |       |
|                                                        |       |     |       |
| Balance Sheets as  of December 31, 2007 and 2006       |       | F-4      |       |
|                                                        |       |     |       |
| Statements of  Operations for the years ended               |       |     |       |
| December 31,  2007, 2006 and 2005                      |       | F-5      |       |
|                                                        |       |     |       |
| Statements  of Changes in Stockholders’ Equity         |       |     |       |
| for  the years ended December 31, 2007, 2006 and 2005  |       | F-6      |       |
|                                                        |       |     |       |
| Statements  of Cash Flows for the years ended               |       |     |       |
| December 31,  2007, 2006 and 2005                      |       | F-8      |       |
|                                                        |       |     |       |
| Notes to  Financial Statements                              |       | F-9      |       |
|                                                        |       |     |       |
| Selected  Quarterly Financial Data - Unaudited              |       | F-23     |       |
|                                                        |       |     |       |
| Financial Statement  Schedule:                              |       |     |       |
|                                                        |       |     |       |
| Schedule  II: Schedule of Valuation and Qualifying Accounts |       |     |       |
| for  the years ended December 31, 2007, 2006, and 2005 |       | 43       |       |
|                                                        |       |     |       |

 

 

F-2

----

 

 

**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directorsand Stockholdersof Retractable Technologies, Inc.

 

Wehave audited the accompanying balance sheets of Retractable Technologies, Inc.as of December 31, 2007 and 2006, and the related statements ofoperations, changes in stockholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2007.  Our audits also included the financialstatement schedule of Retractable Technologies, Inc., listed in Item15(a).  These financial statements and financial statement schedule arethe responsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Retractable Technologies, Inc.as of December 31, 2007 and 2006, and the results of its operations andits cash flows for each of the three years in the period ended December 31,2007 in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in our opinion, the related financial statementschedule when considered in relation to the basic financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

 

Wewere not engaged to examine management’s assertion about the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2007 included in Item 9A(T) of the Company’s December 31, 2007 Form 10-Kand, accordingly, we do not express an opinion thereon.

 
|                |   | /s/                   | CF & Co., L.L.P. |   |
|---------------------|--------|----------------------------|---------------------------|--------|
|                |   | CF & Co.,  L.L.P. |
| Dallas, Texas       |   |                       |
| March 31, 2008 |   |                       |

 

 

F-3

----

 

 

**RETRACTABLE TECHNOLOGIES, INC.BALANCE SHEETS**

 
| ** **                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                                                             |       |                  |       |   |   |
| Current assets:                                                                                                                                                                        |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                             |       | $                     | 40,507,431 |   | $ | 46,814,689 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $254,008 and $87,030,  respectively                                                                                    |       | 1,667,636             |       | 1,956,756 |   |
| Inventories, net                                                                                                                                                                       |       | 7,037,129             |       | 6,385,780 |   |
| Income taxes  receivable                                                                                                                                                               |       | 2,345,041             |       | 2,355,732 |   |
| Other current  assets                                                                                                                                                                  |       | 358,807               |       | 267,707 |   |
| Total current  assets                                                                                                                                                                  |       | 51,916,044            |       | 57,780,664 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| Property, plant, and equipment, net                                                                                                                                                    |       | 11,483,423            |       | 12,212,140 |   |
| Intangible assets, net                                                                                                                                                                 |       | 424,560               |       | 279,846 |   |
| Other assets                                                                                                                                                                           |       | 505,899               |       | 522,294 |   |
| Total assets                                                                                                                                                                           |       | $                     | 64,329,926 |   | $ | 70,794,944 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                          |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                   |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                       |       | $                     | 5,535,365  |   | $ | 4,247,630 |   |
| Current portion  of long-term debt                                                                                                                                                     |       | 387,906               |       | 261,905 |   |
| Accrued  compensation                                                                                                                                                                  |       | 539,330               |       | 472,573 |   |
| Marketing fees  payable                                                                                                                                                                |       | 1,419,760             |       | 1,419,760 |   |
| Accrued royalties  to shareholders                                                                                                                                                     |       | 619,304               |       | 2,755 |   |
| Other accrued  liabilities                                                                                                                                                             |       | 263,339               |       | 440,253 |   |
| Current deferred  tax liability                                                                                                                                                        |       | 20,626                |       | 45,697 |   |
| Total current  liabilities                                                                                                                                                             |       | 8,785,630             |       | 6,890,573 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| Long-term debt, net of current maturities                                                                                                                                              |       | 3,747,259             |       | 4,137,231 |   |
| Long-term deferred tax liability                                                                                                                                                       |       | 36,200                |       | 56,828 |   |
| Total liabilities                                                                                                                                                                      |       | 12,569,089            |       | 11,084,632 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                             |       |                  |       |   |   |
| Preferred Stock  $1 par value:                                                                                                                                                         |       |                  |       |   |   |
| Class B;  authorized: 5,000,000 shares                                                                                                                                            |       |                  |       |   |   |
| Series I, Class B;  issued: 1,000,000 shares; outstanding: 144,000 and 164,000 shares,  respectively (liquidation preference of $900,000 and $1,025,000 respectively)        |       | 144,000               |       | 164,000 |   |
| Series II,  Class B; issued: 1,000,000 shares; outstanding 219,700 and 224,700,  respectively (liquidation preference of $2,746,250 and $2,808,750,  respectively)           |       | 219,700               |       | 224,700 |   |
| Series III,  Class B; issued: 1,160,445 shares; outstanding: 130,245 and 135,245  shares, respectively (liquidation preference of $1,628,063 and $1,690,563,  respectively)  |       | 130,245               |       | 135,245 |   |
| Series IV,  Class B; issued: 1,133,800 shares; outstanding 553,500 shares  (liquidation preference of $6,088,500)                                                            |       | 553,500               |       | 553,500 |   |
| Series V,  Class B; issued 2,416,221 shares; outstanding: 1,282,471 and 1,363,721  shares, respectively (liquidation preference of $5,642,872 and $6,000,372,  respectively) |       | 1,282,471             |       | 1,363,721 |   |
| Common Stock, no  par value; authorized: 100,000,000 shares; issued and outstanding: 23,755,414  and 23,644,164 shares, respectively                                                   |       | —                |       | — |   |
| Additional  paid-in capital                                                                                                                                                            |       | 53,818,987            |       | 54,709,108 |   |
| Retained earnings  (deficit)                                                                                                                                                           |       | (4,388,066            | )          | 2,560,038 |   |
| Total  stockholders’ equity                                                                                                                                                       |       | 51,760,837            |       | 59,710,312 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                       |       | $                     | 64,329,926 |   | $ | 70,794,944 |   |

 

See accompanying notes to financial statements

 

 

F-4

----

 

 

**RETRACTABLETECHNOLOGIES, INC.STATEMENTS OF OPERATIONS**

 
| ** **                                  | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales, net                                  |       | $                                           | 26,289,720 |   | $ | 20,897,207 |   | $ | 21,156,666 |   |
| Reimbursed discounts                        |       | —                                      |       | 4,427,312 |   | 3,078,350 |   |
| Total sales                                 |       | 26,289,720                                  |       | 25,324,519 |   | 24,235,016 |   |
| Cost of Sales                               |       |                                        |       |   |   |   |   |
| Costs of manufactured product               |       | 16,212,609                                  |       | 15,684,450 |   | 13,713,675 |   |
| Royalty expense to shareholders             |       | 2,087,596                                   |       | 2,093,822 |   | 1,715,024 |   |
| Total cost of sales                         |       | 18,300,205                                  |       | 17,778,272 |   | 15,428,699 |   |
| Gross profit                                |       | 7,989,515                                   |       | 7,546,247 |   | 8,806,317 |   |
|                                        |       |                                        |       |   |   |   |   |
| Operating expenses:                         |       |                                        |       |   |   |   |   |
| Sales and marketing                         |       | 5,299,157                                   |       | 5,545,500 |   | 4,148,688 |   |
| Research and development                    |       | 1,071,143                                   |       | 958,798 |   | 934,209 |   |
| General and administrative                  |       | 11,565,144                                  |       | 7,756,647 |   | 6,600,133 |   |
| Total operating expenses                    |       | 17,935,444                                  |       | 14,260,945 |   | 11,683,030 |   |
| Loss from operations                        |       | (9,945,929                                  | )          | (6,714,698 | ) | (2,876,713 | ) |
|                                        |       |                                        |       |   |   |   |   |
| Interest income                             |       | 1,870,512                                   |       | 1,976,406 |   | 1,372,715 |   |
| Interest expense, net                       |       | (326,304                                    | )          | (411,154 | ) | (339,688 | ) |
| Net loss before income  taxes               |       | (8,401,721                                  | )          | (5,149,446 | ) | (1,843,686 | ) |
| Benefit for income taxes                    |       | (1,453,617                                  | )          | (1,279,962 | ) | (605,363 | ) |
| Net loss                                    |       | (6,948,104                                  | )          | (3,869,484 | ) | (1,238,323 | ) |
| Preferred Stock dividend requirements       |       | (1,399,062                                  | )          | (1,451,321 | ) | (1,502,887 | ) |
| Net loss applicable to  common shareholders |       | $                                           | (8,347,166 | ) | $ | (5,320,805 | ) | $ | (2,741,210 | ) |
|                                        |       |                                        |       |   |   |   |   |
| Net loss per share - basic  and diluted     |       | $                                           | (0.35      | ) | $ | (0.23 | ) | $ | (0.12 | ) |
|                                        |       |                                        |       |   |   |   |   |
| Weighted average common  shares outstanding |       | 23,727,029                                  |       | 23,591,999 |   | 23,332,277 |   |

 

 

See accompanying notes to financial statements

 

 

F-5

----

 

 

**RETRACTABLE TECHNOLOGIES, 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, 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  Preferred Stock 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 |   | — |   |
|                                                                              |   |                                |       |                                 |       |                                  |       |                                 |       |                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of  Preferred Stock into Common Stock                                  |   | (20,000                             | )          | (20,000                              | )          | (5,000                                | )          | (5,000                               | )          | (5,000                              | )          | (5,000     | )          | — |   | — |   | (81,250 | ) | (81,250 | ) | 111,250 |   | — |   |
|                                                                              |   |                                |       |                                 |       |                                  |       |                                 |       |                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of  stock option compensation                                         |   | —                              |       | —                               |       | —                                |       | —                               |       | —                              |       | —     |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |   |                                |       |                                 |       |                                  |       |                                 |       |                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|  Dividends  declared and paid on Series I Class B Preferred Stock  |   | —                              |       | —                               |       | —                                |       | —                               |       | —                              |       | —     |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |   |                                |       |                                 |       |                                  |       |                                 |       |                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
|  Dividends  declared and paid on Series II Class B Preferred Stock |   | —                              |       | —                               |       | —                                |       | —                               |       | —                              |       | —     |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |   |                                |       |                                 |       |                                  |       |                                 |       |                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                          |   | —                              |       | —                               |       | —                                |       | —                               |       | —                              |       | —     |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |   |                                |       |                                 |       |                                  |       |                                 |       |                                |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of  December 31, 2007                                             |   | 144,000                             |       | $                                    | 144,000    |                                  | 219,700    |                                 | $          | 219,700                             |       | 130,245    |       | $ | 130,245 |   | 553,500 |   | $ | 553,500 |   | 1,282,471 |   | $ | 1,282,471 |   | 23,755,414 |   | $ | — |   |

 

See accompanying notes to financial statements

 

 

F-6

----

 

 

**RETRACTABLETECHNOLOGIES, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

 
| ** **                                                                  | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------|------------|
|                                                                        |       |                             |       |                              |       |       |       |
| 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 |       |
|                                                                        |       |                             |       |                              |       |       |       |
| Conversion of Preferred Stock into Common Stock                             |       | 111,250                          |       | —                            |       | —     |       |
|                                                                        |       |                             |       |                              |       |       |       |
| Recognition of stock option compensation                                    |       | 52,173                           |       | —                            |       | 52,173     |       |
|                                                                        |       |                             |       |                              |       |       |       |
| Dividends declared and paid on Series I  Class B Preferred Stock  |       | (262,819                         | )          | —                            |       | (262,819   | )          |
|                                                                        |       |                             |       |                              |       |       |       |
| Dividends declared and paid on Series II  Class B Preferred Stock |       | (790,725                         | )          | —                            |       | (790,725   | )          |
|                                                                        |       |                             |       |                              |       |       |       |
| Net loss                                                                    |       | —                           |       | (6,948,104                        | )          | (6,948,104 | )          |
|                                                                        |       |                             |       |                              |       |       |       |
|  Balance as of December 31, 2007                                  |       | $                                | 53,818,987 |                              | $          | (4,388,066 | )          | $ | 51,760,837 |   |

 

 

 

See accompanying notes to financial statements

 

 

F-7

----

 

 

 

**RETRACTABLETECHNOLOGIES, INC.****STATEMENTS OF CASH FLOWS**

 
| ** **                                                                              | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                                              |       |                                        |       |   |   |   |   |
| Net loss                                                                                |       | $                                           | (6,948,104 | ) | $ | (3,869,484 | ) | $ | (1,238,323 | ) |
| Adjustments to  reconcile net loss to net cash provided (used) by operating activities: |       |                                        |       |   |   |   |   |
| Depreciation and  amortization                                                          |       | 1,430,072                                   |       | 1,426,748 |   | 1,366,907 |   |
| Capitalized  interest                                                                   |       | (177,086                                    | )          | (135,857 | ) | (104,961 | ) |
| Stock option  compensation                                                              |       | 6,478                                       |       | 372,298 |   | 572,423 |   |
| Provision for  inventory valuation                                                      |       | 155,600                                     |       | (61,296 | ) | 13,977 |   |
| Provision for  doubtful accounts                                                        |       | 169,223                                     |       | 65,362 |   | 64,299 |   |
| Accreted interest                                                                       |       | 120,486                                     |       | 138,155 |   | 101,120 |   |
| Deferred income  taxes                                                                  |       | —                                      |       | 534,065 |   | (88,863 | ) |
| Loss on disposal  of assets                                                             |       | —                                      |       | — |   | 4,474 |   |
| (Increase)  decrease in assets:                                                         |       |                                        |       |   |   |   |   |
| Inventories                                                                             |       | (806,949                                    | )          | (3,026,759 | ) | 467,246 |   |
| Accounts  receivable                                                                    |       | 119,897                                     |       | 1,382,790 |   | (1,604,693 | ) |
| Income taxes  receivable                                                                |       | 10,691                                      |       | (1,794,670 | ) | 788,082 |   |
| Other current  assets                                                                   |       | (91,100                                     | )          | 194,443 |   | (163,701 | ) |
| Increase  (decrease) in liabilities:                                                    |       |                                        |       |   |   |   |   |
| Accounts payable                                                                        |       | 1,287,735                                   |       | 1,902,016 |   | (1,056,423 | ) |
| Other accrued  liabilities                                                              |       | 506,386                                     |       | (481,842 | ) | 456,621 |   |
| Income taxes  payable                                                                   |       | —                                      |       | — |   | (1,813,084 | ) |
|                                                                                    |       |                                        |       |   |   |   |   |
| Net cash used by  operating activities                                                  |       | (4,216,671                                  | )          | (3,354,031 | ) | (2,234,899 | ) |
|                                                                                    |       |                                        |       |   |   |   |   |
| **Cash  flows from investing activities:**                                              |       |                                        |       |   |   |   |   |
| Purchase of  property, plant and equipment                                              |       | (464,415                                    | )          | (1,530,357 | ) | (2,015,345 | ) |
| Investment in LLC                                                                       |       | —                                      |       | (500,000 | ) | — |   |
| Acquisitions of  patents, trademarks, licenses, and intangibles                         |       | (188,168                                    | )          | (4,576 | ) | — |   |
|                                                                                    |       |                                        |       |   |   |   |   |
| Net cash used by  investing activities                                                  |       | (652,583                                    | )          | (2,034,933 | ) | (2,015,345 | ) |
|                                                                                    |       |                                        |       |   |   |   |   |
| **Cash  flows from financing activities:**                                              |       |                                        |       |   |   |   |   |
| Repayments of  long-term debt and notes payable                                         |       | (384,460                                    | )          | (385,062 | ) | (391,629 | ) |
| Proceeds from  long-term debt                                                           |       | —                                      |       | — |   | 1,050,846 |   |
| Proceeds from the  exercise of stock options                                            |       | —                                      |       | 74,780 |   | 236,436 |   |
| Payment of  Preferred Stock dividends                                                   |       | (1,053,544                                  | )          | — |   | — |   |
|                                                                                    |       |                                        |       |   |   |   |   |
| Net cash provided  (used) by financing activities                                       |       | (1,438,004                                  | )          | (310,282 | ) | 895,653 |   |
|                                                                                    |       |                                        |       |   |   |   |   |
| Net decrease in  cash and cash equivalents                                              |       | (6,307,258                                  | )          | (5,699,246 | ) | (3,354,591 | ) |
| Cash and cash  equivalents at:                                                          |       |                                        |       |   |   |   |   |
| Beginning of  period                                                                    |       | 46,814,689                                  |       | 52,513,935 |   | 55,868,526 |   |
| End of period                                                                           |       | $                                           | 40,507,431 |   | $ | 46,814,689 |   | $ | 52,513,935 |   |
|                                                                                    |       |                                        |       |   |   |   |   |
| Supplemental  schedule of cash flow information:                                        |       |                                        |       |   |   |   |   |
| Interest paid                                                                           |       | $                                           | 382,901    |   | $ | 425,429 |   | $ | 334,127 |   |
| Income taxes paid                                                                       |       | $                                           | —     |   | $ | 45,893 |   | $ | 2,062,493 |   |
| Supplemental schedule of noncash investing and  financing activities:                   |       |                                        |       |   |   |   |   |
| Debt assumed to  acquire assets                                                         |       | $                                           | —     |   | $ | — |   | $ | 78,453 |   |

 

See accompanying notes to financialstatements

 

 

F-8

----

** **

** **

**NOTES TO FINANCIAL STATEMENTS**

 

**1.**    **BUSINESS OF THE COMPANY**

 

Retractable Technologies, Inc.(the “Company”) was incorporated in Texas on May 9, 1994, and designs,develops, manufactures and markets safety syringes and other safety medicalproducts for the healthcare profession. The Company began to develop itsmanufacturing operations in 1995. The Company’s manufacturing andadministrative facilities are located in Little Elm, Texas. The Company’sprimary products with Notice of Substantial Equivalence to the FDA are theVanishPoint® 1cc tuberculin, insulin, and allergy antigensyringes; the 3cc, 5cc, and 10cc syringes; autodisable syringe; small diametertube adapters; blood collection tube holders; allergy trays; and IV safetycatheters. We also have the Patient SafeTM syringe, which reduces the risk of infectionresulting from IV contamination, which the Company anticipates will enter themarket in 2008.  The Company hasconducted preliminary clinical evaluations and worked with nationaldistributors to encourage healthcare facilities to transition from the use ofstandard syringes to the VanishPoint® syringe.

 

**2.**    **SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**Accountingestimates**

 

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires Management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ significantly from those estimates.

 

**Cash andcash equivalents**

 

For purposes of reportingcash flows, cash and cash equivalents include unrestricted cash and investmentswith original maturities of three months or less.

 

**Accountsreceivable**

 

The Company records tradereceivables when revenue is recognized. No product has been consigned tocustomers. The Company’s allowance for doubtful accounts is primarilydetermined by review of specific trade receivables. Those accounts that aredoubtful of collection are included in the allowance. An additional allowancehas been established based on a percentage of receivables outstanding. Theseprovisions are reviewed to determine the adequacy of the allowance for doubtfulaccounts. Trade receivables are charged off when there is certainty as to theirbeing uncollectible. Trade receivables are considered delinquent when paymenthas not been made within contract terms.

 

**Inventories**

 

Inventories are valued atthe lower of cost or market, with cost being determined using a standard costmethod, which approximates average cost. A reserve is established for anyexcess or obsolete inventories.

 

**Property,plant, and equipment**

 

Property, plant, andequipment are stated at cost. Expenditures for maintenance and repairs arecharged to operations as incurred. Cost includes major expenditures forimprovements and replacements which extend useful lives or increase capacityand interest cost associated with significant capital additions. For the yearsended December 31, 2007, 2006, and 2005, the Company capitalized interestof approximately $177,000; $136,000; and $105,000, respectively. Gains orlosses from property disposals are included in income.

 

 

F-9

----

 

 

Depreciation andamortization are calculated using the straight-line method over the followinguseful lives:

 
| 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-livedassets**

 

The Company assesses therecoverability of long-lived assets using an assessment of the estimatedundiscounted future cash flows related to such assets. In the event that assetsare found to be carried at amounts which are in excess of estimated grossfuture cash flows, the assets will be adjusted for impairment to a levelcommensurate with a discounted cash flow analysis of the underlying assets.

 

**Reclassifications**

 

Certain prior year amountshave been reclassified to conform with the current year’s presentation.

 

**Intangibleassets**

 

Intangible assets arestated at cost and consist primarily of patents, a license agreement grantingexclusive rights to use patented technology, and trademarks which are amortizedusing the straight-line method over 17 years.

 

**Financialinstruments**

 

The fair value offinancial instruments is determined by reference to various market data andother valuation techniques as appropriate. The Company believes that the fairvalues of financial instruments approximates their recorded values.

 

**Concentrationrisks**

 

The Company’s financialinstruments exposed to concentrations of credit risk consist primarily of cash,cash equivalents, and accounts receivable. Cash balances, some of which exceedthe federally insured limits, are maintained in financial institutions;however, Management believes the institutions are of high credit quality. Themajority of accounts receivable are due from companies which are well-establishedentities. As a consequence, Management considers any exposure fromconcentrations of credit risks to be limited. The Company had a highconcentration of sales with  threesignificant customers. For the year ended December 31, 2007, theaforementioned customers accounted for $9.6 million, or 36.5%, of net sales.

 

The Company purchasesmost of its product components from single suppliers, including needleadhesives and packaging materials. There are multiple sources of thesematerials. The Company currently obtains roughly 73.1% of its finished productsthrough Double Dove, a Chinese manufacturer. In the event that the Company wasunable to purchase such product from Double Dove, the Company would need tofind an alternate supplier for its 5cc and 10cc syringes and increase domesticproduction for 1cc and 3cc syringes to avoid a disruption in supply.

 

**Revenuerecognition**

 

Revenue is recognized forsales to distributors when title and risk of ownership passes to thedistributor, generally upon shipment. Revenue is recorded on the basis of salesprice to distributors, less contractual pricing allowances. Contractual pricingallowances consist of (i) rebates granted to distributors who providetracking reports which show, among other things, the facility that purchased 

 

 

F-10

----

 

 

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

 

The Company’s domesticreturn policy is set forth in its standard Distribution Agreement.  Thispolicy provides that a customer may return incorrect shipments within 10 daysfollowing arrival at the distributor’s facility.  In all such cases thedistributor must obtain an authorization code from the Company and affix thecode to the returned product.  The Company will not accept returned goodswithout a returned goods authorization number.  The Company may refund thecustomer’s money or replace the product.

 

The Company’s returnpolicy also provides that a customer may return product that isoverstocked.  Overstocking returns are limited to two times in each 12month period up to one percent of distributor’s total purchase of products forthe prior 12 month period.  All product overstocks and returns are subjectto inspection and acceptance by manufacturer.

 

The Company’sinternational Distribution Agreements do not provide for any returns.

 

The Company records anallowance for estimated returns as a reduction to accounts receivable and grosssales.  Historically, returns have beenless than 0.48% of Total sales.

 

**Marketingfees**

 

Undera sales and marketing agreement with Abbott Laboratories, Inc. (“Abbott”), theCompany paid marketing fees until the Company terminated the contract forbreach.  The contracted services were to include participation inpromotional activities, 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. The Company filed suitagainst Abbott in August 2005 for breach of contract.  The Company does not expect the eventual liabilityfor marketing fees, if any, to exceed the amount accrued.

 

**ReimbursedDiscounts**

 

The Company receivedreimbursed discounts from one of the settlement agreements reached in itsprevious federal antitrust lawsuit, *Retractable Technologies, Inc.v. Becton Dickinson and Co.* (“BD”)*et al*. Payments under the discount reimbursement program were recognized uponinvoicing of amounts due under the agreement provided collection was reasonablyassured.  Such amounts are presented in the Statements of Operations as aseparate component of revenues.  All funds available under the discountreimbursement program were recognized by the third quarter of 2006.

 

 

F-11

----

 

 

**Incometaxes**

 

The Company provides fordeferred income taxes in accordance with Statement of Financial AccountingStandard No. 109, *Accounting for IncomeTaxes* (“SFAS 109”). SFAS 109 requires an asset and liabilityapproach for financial accounting and reporting for income taxes based on thetax effects of differences between the financial statement and tax bases ofassets and liabilities, based on enacted rates expected to be in effect whensuch basis differences reverse in future periods. Deferred tax assets areperiodically reviewed for realizability. The Company has sufficient taxableincome from prior carryback years to realize all of its current taxablelosses.  The Company has established a valuation allowance for its netdeferred tax asset as future taxable income cannot be reasonably assured. Penaltiesand interest on uncertain tax positions are classified as income taxes in theStatements of Operations.

 

**Earningsper share**

 

The Company has adoptedStatement of Financial Accounting Standards No. 128, *Earnings Per Share*, which establishesstandards for computing and presenting earnings per share. Basic earnings pershare is computed by dividing net earnings for the period (adjusted for anycumulative dividends for the period) by the weighted average number of commonshares outstanding during the period. The Company’s potentially dilutive CommonStock equivalents, consist of options, convertible debt and convertiblePreferred Stock and are all antidilutive as the Company is in a loss positionfor all periods presented.  Accordingly,basic loss per share is equal to diluted loss per share.  Cumulative preferred dividends have beenadded to net losses for the years ended December 31, 2007, 2006 and 2005to arrive at net loss per share.

 

**Shipping and handling costs**

 

TheCompany classifies shipping and handling costs as part of Cost of sales in theStatements of Operations.

 

**Researchand development costs**

 

Research and developmentcosts are expensed as incurred.

 

**Share-basedcompensation**

 

The Company has issuedoptions under three share-based Director, officer, and employee compensationplans as well as several individual option agreements.  The two 1996 planshave terminated; however, the options continue until their expected maturitydates.  The Company adopted the fair value recognition provisions ofStatement 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 to three years.

 

The Company adopted theprovisions of Statement of Financial Accounting Standards No. 123 (Revised2004) (“SFAS No. 123R”), *Share-BasedPayment*, effective January 1, 2006.  It did not have amaterial impact on the financial statements of the Company.  In accordancewith the disclosure requirements of SFAS No. 123R, the Company incurredthe following share-based compensation costs:

 
|                       | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cost of Sales              |       | $                                           | 6,648      |   | $ | 67,561 |   | $ | 29,131 |   |
| Sales and marketing        |       | 3,086                                       |       | 101,608 |   | 182,464 |   |
| Research and development   |       | (7,863                                      | )          | 12,418 |   | 19,432 |   |
| General and administrative |       | 4,607                                       |       | 190,711 |   | 341,396 |   |
|                       |       | $                                           | 6,478      |   | $ | 372,298 |   | $ | 572,423 |   |

 

 

F-12

----

 

 

**RecentPronouncements**

 

In September 2006,the Financial Accounting Standards Board issued Statement No. 157, *Fair Value Measurements* (“SFAS157”).  SFAS 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principles, and expands disclosuresabout fair value measurements.  SFAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those years.  The provisions of the new standardare to be applied prospectively for most financial instruments and retrospectivelyfor others as of the beginning of the fiscal year in which the standard isinitially applied.  The Company is evaluating the effect, if any, that theadoption of SFAS 157 will have on its financial statements.

 

**3.**    **INVENTORIES**

 

Inventories consist of the following:

 

|              | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2007**              | ** ** | **2006** | ** ** |
|              |       |                  |       |   |   |
| Raw materials     |       | $                     | 1,743,990  |   | $ | 1,546,288 |   |
| Finished goods    |       | 5,498,739             |       | 4,889,492 |   |
|              |       | 7,242,729             |       | 6,435,780 |   |
| Inventory reserve |       | (205,600              | )          | (50,000 | ) |
|              |       | $                     | 7,037,129  |   | $ | 6,385,780 |   |

 

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

 

Property, plant, and equipment consist of thefollowing**:**

 

|                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                       |       |                  |       |   |   |
| Land                                       |       | $                     | 261,893    |   | $ | 261,893 |   |
| Buildings and building  improvements       |       | 5,314,725             |       | 5,162,512 |   |
| Production equipment                       |       | 14,169,902            |       | 14,130,874 |   |
| Office furniture and equipment             |       | 1,729,199             |       | 1,226,518 |   |
| Construction in progress                   |       | 2,185,976             |       | 2,238,387 |   |
| Automobiles                                |       | 102,321               |       | 102,321 |   |
|                                       |       | 23,764,016            |       | 23,122,505 |   |
| Accumulated depreciation  and amortization |       | (12,280,593           | )          | (10,910,365 | ) |
|                                       |       | $                     | 11,483,423 |   | $ | 12,212,140 |   |

 

Depreciation expense forthe years ended December 31, 2007, 2006, and 2005 was $1,370,228;$1,380,047; and $1,325,174, respectively.

 

**5.**    **INTANGIBLE ASSETS**

 

Intangible assets consist of the following:

 

|                     | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                     |       |                  |       |   |   |
| License agreement        |       | $                     | 500,000    |   | $ | 500,000 |   |
| Trademarks and patents   |       | 419,591               |       | 231,423 |   |
|                     |       | 919,591               |       | 731,423 |   |
| Accumulated amortization |       | (495,031              | )          | (451,577 | ) |
|                     |       | $                     | 424,560    |   | $ | 279,846 |   |

 

 

F-13

----

 

In 1995, the Companyentered into the license agreement with the Chief Executive Officer of theCompany for the exclusive right to manufacture, market, and distribute productsutilizing automated retraction technology. This technology is the subject ofvarious patents and patent applications owned by such officer of the Company.The initial licensing fee of $500,000 is being amortized over 17 years. Thelicense agreement also provides for quarterly payments of a 5% royalty fee ongross sales. The royalty fee expense is recognized in the period in which it isearned. Royalty fees of $2,087,596; $2,093,822; and $1,715,024 are included inCost of sales for the years ended December 31, 2007, 2006, and 2005,respectively. Royalties payable under this agreement aggregated $619,304 and $2,755 atDecember 31, 2007 and 2006, respectively. Gross sales upon which royalties are based were $41,751,897; $42,026,447;and $34,300,473 for 2007, 2006, and 2005, respectively.

 

Amortization expenses forthe years ended December 31, 2007, 2006, and 2005, were $43,454; $41,657;and $41,733, respectively. Future amortization expense for the years 2008through 2012 is estimated to be $53,000 per year.

 

**6.**    **OTHER ASSETS**

 

In 2006, the Companyinvested $500,000 in a limited liability company (“LLC”).  The Company isin the process of exercising its option to have that investment returned.

 

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

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Long-term debt consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       |                  |       |   |   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **            | ** ** | ** ** | ** ** |
| Note payable to Katie Petroleum. Interest accrues  at prime plus 1%, 8.50%, and 9.25% at December 31, 2007 and 2006,  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.                                                   |       | $                     | 1,735,392  |   | $ | 1,918,666 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                  |       |   |   |
| 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 warehouse and related infrastructure.  Payments were interest only during the first 12 months. After 12 months,  payments are based on a 20-year amortization with a five-year maturity on  March 29, 2010. The interest rate at December 31, 2007 and 2006 was  7.50% and 8.25%, 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. |       | 2,362,852             |       | 2,428,713 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                  |       |   |   |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 23,793                |       | 34,284 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |                  |       |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |            |                       |            |  |  |  |  |

 

 

F-14

----

 
| ** **                                                                                                                     | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                     | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Note payable to GMAC. Sixty (60) monthly  payments at $427. Interest is zero percent. Collateralized by a 2005  Chevrolet van. |       | 13,128                |       | 17,473 |   |
|                                                                                                                           |       | 4,135,165             |       | 4,399,136 |   |
|                                                                                                                           |       |                  |       |   |   |
| Less: current portion                                                                                                          |       | (387,906              | )          | (261,905 | ) |
|                                                                                                                           |       | $                     | 3,747,259  |   | $ | 4,137,231 |   |
|                                                                                                                                |            |                       |            |  |  |  |  |

 

 

 

The aggregate maturities oflong-term debt as of December 31, 2007, are as follows:

 
| 2008   |   | $         | 387,906   |   |
|--------|--------|-----------|-----------|--------|
| 2009   |   | 436,210   |      |
| 2010   |   | 2,551,006 |      |
| 2011   |   | 415,111   |      |
| 2012   |   | 344,932   |      |
|   |   | $         | 4,135,165 |   |

 

**8.**    **COMMITMENTSAND CONTINGENCIES**

 

OnAugust 12, 2005, the Company filed a lawsuit against Abbott in the UnitedStates District Court in the Eastern District of Texas, Texarkana Division. TheCompany is alleging fraud and breach of contract in connection with theNational Marketing and Distribution Agreement dated as of May 4, 2000,which was terminated on October 15, 2003. The Company is seeking damageswhich it estimates to be in millions of dollars of lost profits, out of pocketexpenses, and other damages. In addition, it is seeking punitive damages,pre-judgment, and post-judgment interest and attorney’s fees.  On October 31, 2005, Abbott moved todismiss the suit and to compel arbitration of the dispute.  The Court ruled in the Company’s favor anddenied the motion to compel arbitration.  Abbott appealed the decision to the FifthCircuit on February 27, 2007. Briefing has been completed and oral argument was conducted on March 3,2008.  It is not possible to predict whenexactly the Fifth Circuit will decide the appeal or how.  Whether the matter proceeds in litigation orarbitration, Abbott may counterclaim for amounts that Abbott believes are owedby the Company under the agreement.

 

InAugust 2006, the Company was sued by Occupational and Medical InnovationsLimited (“OMI”) in Federal Court of Australia, alleging that two letterswritten to OMI by outside counsel contained unjustified threats, but seeking nodamages. OMI later amended its complaint to seek a declaratory judgment thatOMI does not infringe the Company’s Australian patents, again seeking nodamages.  Following a one-day trial in June 2007,the Court held that one of the two letters written by outside counsel containedan unjustified threat and awarded costs to OMI. A one-day trial of the declaratory judgment (that OMI does not infringeon the Company’s Australian patents) action is set for April 2008.

 

OnJune 15, 2007, the Company filed a lawsuit against BD in the United StatesDistrict Court for the Eastern District of Texas, Marshall Division.  TheCompany subsequently amended its complaint to add an officer as aplaintiff.  The Company and officer arealleging violations of the federal and state antitrust laws, violation of theLanham Act, and patent infringement.  TheCompany and officer are seeking both damages and injunctive relief in thesuit.  In January 2008, the Courtsevered the patent claims from the other claims and stayed proceedings in theother claims pending resolution of the patent dispute.  BD has denied the allegations and hascounterclaimed for a declaration that the Company’s asserted patents areinvalid and unenforceable.  The patentcase is set for trial in March 2009.

 

OnSeptember 6, 2007, BD and MDC Investment Holdings, Inc. filed acomplaint against the Company in the United States District Court for theEastern District of Texas, Texarkana Division.

 

 

F-15

----

 

Plaintiffsallege that the VanishPoint® product line infringes U.S. patent nos.6,179,812 and 7,090,656.  Plaintiffs seek a declaration of infringement,an injunction against further infringement, compensatory damages (withinterest), the costs of the litigation, and such other relief as the Courtdeems just and proper.  The Company has counterclaimed for a declarationthat the asserted patents are invalid and unenforceable.  No trial datehas been set.

 

On March 14, 2008, MedSafe Technologies LLCfiled a complaint against the Company and BD in the United States DistrictCourt for the District of South Carolina, Greenville Division.  Plaintiffsallege that the Company’s VanishPoint® syringe product line and BD’s IntegraTM product line infringe U.S.patent no. 6,074,370. ****Plaintiffsseek unspecified damages including compensatory damages (with prejudgmentinterest) and any further relief as the Court deems appropriate. No trial datehas been set.

 

**9.**    **INCOME TAXES**

 

The provision for incometaxes consists of the following:
| ** **                             | ** ** | **For the Years Ended December 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current tax  provision (benefit)       |       |                                                          |       |   |   |   |   |
| Federal                                |       | $                                                             | (143,459   | ) | $ | (1,696,318 | ) | $ | (500,514 | ) |
| State                                  |       | (1,310,158                                                    | )          | (117,709 | ) | (15,986 | ) |
| Total current provision (benefit)      |       | (1,453,617                                                    | )          | (1,814,027 | ) | (516,500 | ) |
|                                   |       |                                                          |       |   |   |   |   |
| Deferred tax  provision (benefit)      |       |                                                          |       |   |   |   |   |
| Federal                                |       | —                                                        |       | 458,232 |   | (13,030 | ) |
| State                                  |       | —                                                        |       | 75,833 |   | (75,833 | ) |
| Total deferred tax provision (benefit) |       | —                                                        |       | 534,065 |   | (88,863 | ) |
| Total income tax provision (benefit)   |       | $                                                             | (1,453,617 | ) | $ | (1,279,962 | ) | $ | (605,363 | ) |

 

The Company recognized a tax benefit in 2007 primarily due to the neteffect of a state tax refund for prior years that had not been previouslyrecognized.

 

Deferredtaxes are provided for those items reported in different periods for income taxand financial reporting purposes.  The tax effects of temporarydifferences that give rise to significant portions of the deferred tax assetsand liabilities are presented below:

 

The Company has $2,340,291 in tax benefits attributable to carry backlosses for federal tax purposes. The loss carryforward for 2007 will expire in2027 for federal tax purposes and will begin to expire for state tax purposesin 2012. 

 
| ** **                                         | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets                                |       |       |       |       |       |
| Net operating loss carryforwards                   |       | $          | 1,871,316  |       | $          | 160,608 |   |
| Accrued expenses and reserves                      |       | 1,204,160  |       | 738,878    |       |
| Employee option expense                            |       | 484,212    |       | 484,212    |       |
| Inventory                                          |       | 402,405    |       | 299,233    |       |
| Non-employee option expense                        |       | 313,557    |       | 313,557    |       |
| Deferred tax assets                                |       | 4,275,650  |       | 1,996,488  |       |
| Deferred tax liabilities                           |       |       |       |       |       |
| Property and equipment                             |       | (1,341,293 | )          | (1,344,050 | )          |
| Beneficial conversion feature of debt -  current   |       | (20,626    | )          | (45,697    | )          |
| Beneficial conversion feature of debt -  long-term |       | (36,200    | )          | (56,828    | )          |
| Deferred tax liabilities                           |       | (1,398,119 | )          | (1,446,575 | )          |
| Net deferred assets                                |       | 2,877,531  |       | 549,913    |       |
| Valuation allowance                                |       | (2,934,357 | )          | (652,438   | )          |
| Net deferred tax liabilities                       |       | $          | (56,826    | )          | $          | (102,525 | ) |

 

F-16

----

 

Areconciliation of income taxes based on the federal statutory rate and theprovision (benefit) for income taxes is summarized as follows:

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| 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         |       | 27.2                  |       | 10.7 |   | 5.4 |   |
| Permanent  differences                              |       | 1.0                   |       | 4.0 |   | 0.4 |   |
| State tax  refund                                   |       | (12.0                 | )          | — |   | — |   |
| Return to  accrual adjustments                      |       | 3.2                   |       | — |   | — |   |
| Other                                               |       | 1.2                   |       | (1.7 | ) | (0.7 | ) |
| Effective tax (benefit) rate                        |       | (17.3                 | )%         | (24.9 | )% | (32.8 | )% |

 

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FinancialInterpretation No. 48, *Accounting for Income Tax*Uncertainties**(“FIN 48”). FIN 48 is effective for years beginning afterDecember 15, 2006. FIN 48 prescribes a recognition threshold and measurementattribute for financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. FIN 48 requires that a companyevaluate whether it is “more-likely-than-not” that a tax position will besustained based upon the technical merits of the position. Measurement of thetax position is based upon the largest amount of benefit that is greater than50% likely of being realized upon ultimate settlement. The Company adopted FIN48 on January 1, 2007. FIN 48 had no material effect on the financialstatements upon adoption. During 2007, the Company reserved approximately  $100,000 for state nexus issues.

 

TheCompany files income tax returns in the U.S. federal jurisdiction and invarious state and local jurisdictions. The Company’s federal income tax returnsfor all tax years ended on or after December 31, 2004, remain subject toexamination by the Internal Revenue Service. The Company’s state and localincome tax returns are subject to examination by the respective state and localauthorities over various statutes of limitations, most ranging from three tofive years from the date of filing.

 

**10.**   **STOCKHOLDERS’EQUITY**

 

**PreferredStock**

 

TheCompany has one class of Preferred Stock outstanding: Class B ConvertiblePreferred Stock (“Class B Stock”). The Class B Stock has five series:Series I, Series II, Series III, Series IV, and Series V.

 

Class B

 

TheCompany has authorized 5,000,000 shares of $1 par value Class B Stockwhich have been allocated among Series I, II, III, IV, and V inthe amounts of 144,000; 219,700; 130,245; 553,500; and 1,282,471 shares,respectively. The remaining 2,670,084 authorized shares have not been assigneda series.

 

Series IClass B

 

Therewere 1,000,000 shares of $1 par value Series I Class B ConvertiblePreferred Stock (“Series I Class B Stock”) issued and 144,000 and 164,000outstanding at December 31, 2007 and 2006, respectively.  Holders of Series I Class B Stockare entitled to receive a cumulative annual dividend of $.50 per share, payablequarterly if declared by the Board of Directors. In 2004, the Company paid $2,550,000in dividends.  In 2007, the Company paid $262,819 in dividends.  At December 31, 2007 and 2006approximately $36,000 and $226,000, respectively, of dividends which had notbeen declared were in arrears.

 

Series IClass B Stock is redeemable after three years from the date of issuance atthe option of the Company at a price of $7.50 per share, plus all accrued andunpaid dividends. Each share of Series I Class B Stock may, at theoption of the stockholder, be converted to one share of Common Stock afterthree years from the date of issuance or in the event the Company files aninitial registration statement under the Securities Act of 1933. Pursuant tothese terms, a total of 20,000 shares of Series I Class B Stock wereconverted into Common Stock in 2007. 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”),

 

F-17

----

 

Series IIIClass B Convertible Preferred Stock (“Series III Class B Stock”),Series IV Class B Convertible Preferred Stock (“Series IV Class BStock”), Series V Class B Convertible Preferred Stock (“Series VClass B Stock”) or Common Stock.

 

Series II Class B

 

Therewere 1,000,000 shares of $1 par value Series II Class B Stock issuedand there were 219,700 and 224,700 shares outstanding at December 31, 2007and 2006. Holders of Series II Class B Stock are entitled to receivea cumulative annual dividend of $1.00 per share, payable quarterly if declaredby the 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.  In 2007, the Company paid $790,725 individends.** **AtDecember 31, 2007 and 2006, approximately $111,000 and $678,000,respectively, of dividends which had not been declared were in arrears.

 

Series IIClass B Stock is redeemable after three years from the date of issuance atthe option of the Company at a price of $15.00 per share plus all accrued andunpaid dividends. Each share of Series II Class B Stock may, at theoption of the stockholder, be converted to one share of Common Stock afterthree years from the date of issuance or in the event the Company files aninitial registration statement under the Securities Act of 1933. Pursuant tothese terms, 5,000 shares of Series II Class B Stock were convertedinto Common Stock in 2007. In the event of voluntary or involuntarydissolution, liquidation or winding up of the Company, holders of Series IIClass B Stock then outstanding are entitled to $12.50 per share, plus allaccrued and unpaid dividends, after distribution obligations to holders of Series IClass B Stock have been satisfied and prior to any distributions toholders of Series III Class B Stock, Series IV Class BStock, Series V Class B Stock or Common Stock.

 

Series III Class B

 

Therewere 1,160,445 shares of $1 par value Series III Class B Stock issuedand 130,245 and 135,245 shares outstanding at December 31, 2007 and 2006,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, 2007 and 2006,approximately $2,985,000 and $2,853,000, respectively, of dividends which havenot been declared were in arrears.

 

Series IIIClass B Stock is redeemable after three years from the date of issuance atthe option of the Company at a price of $15.00 per share, plus all accrued andunpaid dividends. Each share of Series III Class B Stock may, at theoption of the stockholder, be converted to one share of Common Stock afterthree years from the date of issuance or in the event the Company files aninitial registration statement under the Securities Act of 1933. Pursuant tothese terms, 5,000****shares of Series IIIClass B Stock were converted into Common Stock in 2007. In the event ofvoluntary or involuntary dissolution, liquidation or winding up of the Company,holders of Series III Class B Stock then outstanding are entitled to$12.50 per share, plus all accrued and unpaid dividends, after distributionobligations to Series I Class B Stock and Series II Class BStock have been satisfied and prior to any distributions to holders of Series IVClass B Stock, Series V Class B Stock or Common Stock.

 

Series IVClass B

 

Therewere 1,133,800 shares issued and  553,500shares outstanding at December 31, 2007 and 2006, respectively. Holders ofSeries IV Class B Stock are entitled to receive a cumulative annualdividend of $1.00 per share, payable quarterly, if declared by the Board ofDirectors. Holders of Series IV Class B Stock generally have novoting rights. At December 31, 2007 and 2006, approximately $6,478,000 and$5,924,000, respectively, of dividends which have not been declared were inarrears.

 

 

F-18

----

 

Series IVClass B Stock is redeemable after three years from the date of issuance atthe option of the Company at a price of $11.00 per share plus all accrued andunpaid dividends. Each share of Series IV Class B Stock may, at theoption of the stockholder any time subsequent to three years from date of issuance,be converted into one share of Common Stock, or in the event the Company filesan initial registration statement under the Securities Act of 1933. Pursuant tothese terms, no****shares of Series IV Class BStock were converted into Common Stock in 2007. 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

 

Therewere 2,416,221 shares issued and 1,282,471 and 1,363,721 outstanding at December 31,2007 and 2006, 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, 2007 and 2006,approximately $2,898,000 and $2,482,000, respectively, of dividends which havenot been declared were in arrears.

 

Series VClass B Stock is redeemable after two years from the date of issuance atthe option of the Company at a price of $4.40 per share plus all accrued andunpaid dividends. Each share of Series V Class B Stock may, at theoption of the stockholder any time subsequent to the date of issuance, beconverted into Common Stock. Pursuant to the terms of the certificate ofdesignation, 81,250****shares of Series VClass B Stock were converted into Common Stock in 2007. In the event ofvoluntary or involuntary liquidation, dissolution, or winding up of theCompany, holders of Series V Class B Stock then outstanding areentitled to receive liquidating distributions of $4.40 per share, plus accruedand unpaid dividends after distribution obligations to Series I Class BStock, Series II Class B Stock, Series III Class B Stock,and Series IV Class B Stock have been satisfied and prior to anydistribution to the holders of the Common Stock.

 

**Commonstock**

 

TheCompany is authorized to issue 100,000,000 shares of no par value Common Stock,of which 23,755,414 and 23,644,164 shares are issued and outstanding at December 31,2007 and 2006, respectively.

 

**11.**   **RELATED PARTY TRANSACTIONS**

 

TheCompany had a lease with Mill Street Enterprises (“Mill Street”), a soleproprietorship owned by a 10% shareholder, for offices and storage inLewisville, Texas. During the years ended December 31, 2007, 2006, and2005, the Company paid $14,500; $34,800; and $34,800, respectively, under thislease. This lease term expired in June 2007.

 

ThroughDecember 31, 2005, the Company had a consulting agreement with MediTradeInternational Corporation, a company controlled by a 10% shareholder.****The shareholder was paid $16,667 per month and reimbursedfor business expenses incurred on behalf of the Company, not to exceed $5,000per month without prior approval for the term of the contract.  Thereafter, the Company paid MediTrade on amonth-to-month consulting agreement whereby MediTrade is paid $6,500 per monthplus expenses.** **Totalamounts paid to MediTrade for the years ending December 31, 2007, 2006,and 2005 totaled $129,618; $91,883; and $27,217, respectively.

 

TheCompany has a license agreement with the Chief Executive Officer of theCompany. See Note 5.

 

 

F-19

----

 

Duringthe years ended December 31, 2007, 2006, and 2005, the Company paid $30,397;$24,162; and $15,618, respectively, to family members of its Chief ExecutiveOfficer for various consulting services.

 

**12.**   **STOCK OPTIONS**

 

**Stock options**

 

The Company had three stock option plans thatprovided for the granting of stock options to officers, employees, and other individuals. During 1999, the Company approved the 1999 Stock Option Plan.  The 1999Plan is the only plan with stock options currently being awarded. The Companyhas reserved 4,000,000 shares of Common Stock for issuance upon the exercise ofoptions under this plan.

 

The Company also has options for commonshares outstanding under the 1996 Incentive Stock Option Plan and the 1996Stock Option Plan for Directors and Other Individuals.  The two 1996 planshave terminated.  However, options issued under those plans are still ineffect.

 

A committee appointed by the Board of Directorsadministers all plans and recommends to the Board exercise prices at whichoptions are granted.  Shares exercised come from the Company’s authorizedbut unissued Common Stock.  The options vest over periods up to threeyears from the date of grant and generally expire ten years after the date ofgrant. All unvested options issued under the plans expire three months aftertermination of employment or service to the Company.

 

**Employee****options**

 

Asummary of Director, officer, and employee options granted and outstandingunder the Plans is presented below:

 
|                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                    | ** ** | **Shares**                                  | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of period                            |       | 2,417,295                                   |       | $ | 8.58 |   | 2,495,125 |   | $ | 8.38 |   | 2,634,885 |   | $ | 8.37 |   |
| Granted                                                       |       | —                                      |       | — |   | — |   | — |   | — |   | — |   |
| Exercised                                                     |       | —                                      |       | — |   | (49,780 | ) | (1.00 | ) | — |   | — |   |
| Forfeited                                                     |       | (229,840                                    | )          | (6.50 | ) | (28,050 | ) | (4.47 | ) | (139,760 | ) | (8.16 | ) |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding  at end of period                                 |       | 2,187,455                                   |       | $ | 8.80 |   | 2,417,295 |   | $ | 8.58 |   | 2,495,125 |   | $ | 8.38 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable  at end of period                                 |       | 2,187,455                                   |       | $ | 8.80 |   | 2,325,770 |   | $ | 8.57 |   | 1,712,100 |   | $ | 8.25 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| 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 2007, 2006, or 2005.

 

 

F-20

----

 

Thefollowing table summarizes information about Director, officer, and employee optionsoutstanding under the aforementioned plans at December 31, 2007:

 

|         | ** **  | ** **      | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|-------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** **  | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** **  | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** **  | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** **  | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
| $            |  10.00 |            | 830,050    |            | 1.87       |            | 830,050    |   |
| $            |  6.90  |            | 451,830    |            | 4.75       |            | 451,830    |   |
| $            |  8.65  |            | 798,400    |            | 4.70       |            | 798,400    |   |
| $            |  7.50  |            | 25,000     |            | 1.36       |            | 25,000     |   |
| $            |  8.87  |            | 82,175     |            | 6.36       |            | 82,175     |   |

 

**Non-employeeoptions**

 

Asummary of options outstanding during the years ended December 31 and heldby non-employees is as follows:

 
|                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                    | ** ** | **Shares**                                  | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding  at beginning of period                           |       | 579,700                                     |       | $ | 8.50 |   | 607,200 |   | $ | 8.16 |   | 843,639 |   | $ | 6.15 |   |
| Granted                                                       |       | —                                      |       | — |   | — |   | — |   | — |   | — |   |
| Exercised                                                     |       | —                                      |       | — |   | (25,000 | ) | (1.00 | ) | (236,436 | ) | (1.00 | ) |
| Forfeited                                                     |       | (30,000                                     | )          | (5.00 | ) | (2,500 | ) | (1.00 | ) | (3 | ) | (1.00 | ) |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding  at end of period                                 |       | 549,700                                     |       | $ | 8.69 |   | 579,700 |   | $ | 8.50 |   | 607,200 |   | $ | 8.16 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable  at end of period                                 |       | 549,700                                     |       | $ | 8.69 |   | 579,700 |   | $ | 8.50 |   | 607,200 |   | $ | 8.16 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| 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.  No options were issued in 2007, 2006,or 2005.

 

The following table summarizes information about non-employeeoptions outstanding under the aforementioned plan at December 31, 2007:

 

|         | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** ** | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** ** | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** ** | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** ** | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
| $10.00       |       | 317,200         |       | 2.11            |       | 317,200         |       |
| $6.90        |       | 232,500         |       | 4.75            |       | 232,500         |       |

 

 

F-21

----

 

The Company recorded$6,478; $372,298; and $572,423 as stock-based compensation expense in 2007,2006, and 2005, respectively.  The total intrinsic value of optionsexercised was $0; $207,924; and $0 in 2007, 2006, and 2005, respectively. The aggregate intrinsic value of options outstanding at December 31, 2007was $0.  The total compensation cost related to non-vested stock optionsto be recognized in the future was $0 at December 31, 2007.

 

**13.**   **LITIGATION SETTLEMENTS**

 

In the second quarter of2003, the Company reached settlement agreements with Premier Inc.; PremierPurchasing Partners, L.P.; VHA, Inc.; Novation, L.L.C.; Tyco International(US) Inc.; and Tyco Healthcare Group L.P. in its previous federal antitrustlawsuit, *Retractable Technologies, Inc. v. BD et al*.As part of the settlements, the litigation against Premier, VHA, Novation, andTyco has been dismissed.

 

Although specific termsare confidential, the agreements included cash payments made in 2004 and otherfinancial consideration as well as provisions that were intended to facilitatethe sale of the Company’s VanishPoint® products to Premier and Novation memberfacilities. In exchange for the settlement provisions, the Company has agreedto give up its claims against these companies.

 

As part of the settlementagreements, a discount reimbursement program of $8,000,000, which was net oflegal fees, was established whereby the Company was being provided quarterlyreimbursements for certain discounts given to participating facilities. The Companyoffered certain discounts to participating facilities and was being reimbursedfor such discounts. These payments were recognized upon delivery of productsprovided collection was reasonably assured.** **Cumulative reimbursements of $8,000,000 were recorded through thethird 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 discount program ended December 31, 2006.

 

**14.**   **401(k) PLAN**

 

The Company implementedan employee savings and retirement plan (the “401(k) Plan”) in 2005 thatis intended to be a tax-qualified plan covering substantially allemployees.  Under the terms of the 401(k) Plan, employees may electto contribute up to 90% of their compensation, or the statutory prescribedlimit, if less.  The Company may, at its discretion, match employeecontributions.  The Company made matching contributions of approximately$111,000; $0; and $0 in 2007, 2006, and 2005, respectively.

 

**15.**   **BUSINESS SEGMENTS**

** **
|                | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**   | ** ** |
|---------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic sales      |       | $         | 21,461,717 |      | $          | 22,240,347 |       | $ | 22,310,150 |   |
| International sales |       | 4,828,003 |       | 3,084,172 |       | 1,924,866  |       |
| Total sales         |       | $         | 26,289,720 |      | $          | 25,324,519 |       | $ | 24,235,016 |   |
|                |       |      |       |      |       |       |       |
| Long-lived assets   |       |      |       |      |       |       |       |
| Domestic            |       | $         | 11,483,423 |      | $          | 12,212,140 |       | $ | 11,925,976 |   |
| Foreign             |       | $         | —     |      | $          | —     |       | $ | — |   |

 

The Company does notoperate in separate reportable segments. The Company has no long-lived assetsin foreign countries. Shipments to international customers generally require aprepayment either by wire transfer or an irrevocable confirmed letter ofcredit.  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 UnitedStates currency.

 

F-22

----

 

         **SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED**

 

The selectedquarterly financial data for the periods ended December 31, 2007 and 2006,have been derived from the Company’s unaudited financial statements and includeall adjustments, consisting only of normal recurring adjustments, necessary fora fair presentation of the results of the interim periods.

 
| ** **                                 | ** ** | **(In thousands, except for per share and outstanding stock amounts)**  | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                       | ** ** | **2007**                                                                | ** ** |
| ** **                                 | ** ** | **Quarter 1**                                                      | ** ** | **Quarter 2** | ** ** | **Quarter 3** | ** ** | **Quarter 4** | ** ** |
| Sales, net                                 |       | $                                                                       | 5,774      |   | $ | 5,275 |   | $ | 8,040 |   | $ | 7,201 |   |
| Reimbursed discounts                       |       | —                                                                  |       | — |   | — |   | — |   |
| Total sales                                |       | 5,774                                                                   |       | 5,275 |   | 8,040 |   | 7,201 |   |
| Cost of Sales                              |       | 4,514                                                                   |       | 3,132 |   | 5,853 |   | 4,801 |   |
| Gross profit                               |       | 1,260                                                                   |       | 2,143 |   | 2,187 |   | 2,400 |   |
| Total operating expenses                   |       | 4,000                                                                   |       | 4,101 |   | 4,616 |   | 5,219 |   |
| Loss from operations                       |       | (2,740                                                                  | )          | (1,958 | ) | (2,429 | ) | (2,819 | ) |
| Interest income                            |       | 541                                                                     |       | 448 |   | 521 |   | 360 |   |
| Interest expense, net                      |       | (77                                                                     | )          | (94 | ) | (86 | ) | (69 | ) |
| Loss before income taxes                   |       | (2,276                                                                  | )          | (1,604 | ) | (1,994 | ) | (2,528 | ) |
| Benefit for income taxes                   |       | —                                                                  |       | — |   | (1,406 | ) | (48 | ) |
| Net loss                                   |       | (2,276                                                                  | )          | (1,604 | ) | (588 | ) | (2,480 | ) |
| Preferred stock dividend  requirements     |       | (355                                                                    | )          | (349 | ) | (348 | ) | (347 | ) |
| Net loss applicable to common shareholders |       | $                                                                       | (2,631     | ) | $ | (1,953 | ) | $ | (936 | ) | $ | (2,827 | ) |
| Net loss per share - basic  and diluted    |       | $                                                                       | (0.11      | ) | $ | (0.08 | ) | $ | (0.04 | ) | $ | (0.12 | ) |
| Weighted average shares  outstanding       |       | 23,677,644                                                              |       | 23,731,664 |   | 23,745,206 |   | 23,754,581 |   |
| Profit margin                              |       | 21.8                                                                    | %          | 40.6 | % | 27.2 | % | 33.3 | % |
|                                       |       |                                                                    |       |   |   |   |   |   |   |
|                                       |       |                                                                    |       |   |   |   |   |   |   |
|                                       | ** ** | **(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 | ) |

 

F-23

----

 

 
| ** **                                 | ** ** | **(In thousands, except for per share and outstanding stock amounts)** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                               | ** ** |
| ** **                                 | ** ** | **Quarter 1**                                                     | ** ** | **Quarter 2** | ** ** | **Quarter 3** | ** ** | **Quarter 4** | ** ** |
| Net loss applicable to common shareholders |       | $                                                                      | (967       | ) | $ | (567 | ) | $ | (1,584 | ) | $ | (2,203 | ) |
| Net loss per share - basic  and 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 | % |

 

F-24

----

# ** **

# **Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

# ** **

                None.

 

**Item 9A(T). Controls and Procedures.**

 

                Pursuantto paragraph (b) of Rule 13a-15 or Rule 15d-15 of the Securities Exchange Actof 1934 (the “Exchange Act”) and on March 28, 2008, Management, with theparticipation of our President, Chairman, and Chief Executive Officer, ThomasJ. Shaw (the “CEO”), and our Vice President and Chief Financial Officer,Douglas W. Cowan (the “CFO”), acting in their capacities as our principalexecutive and financial officers, evaluated the effectiveness of our disclosurecontrols and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e).  The CEO and CFO concluded that, as of December31, 2007 (the end of the period covered by the report), based on the evaluationof these controls and procedures required by paragraph (b) of Rule 13a-15 orRule 15d-15 there were no significant deficiencies in these controls andprocedures. The CEO and CFO concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed inour periodic reports is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms.

 

                Managementis responsible for establishing and maintaining adequate internal control overour financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act. Management used the *Internal Control -Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”) to evaluate the effectivenessof our internal control over financial reporting as required by paragraph (c)of Rule 13a-15 or Rule 15d-15. Management, with the participation of our CEOand CFO, concluded that our internal control over financial reporting as ofDecember 31, 2007, was effective. No material weaknesses in our internalcontrol over financial reporting were identified by Management.

 

                Thisannual report does not include an attestation report of our registered publicaccounting firm regarding internal control over financial reporting.Management’s report was not subject to attestation by our registered publicaccounting firm pursuant to temporary rules of the Securities and ExchangeCommission that permit us to provide only Management’s report in this annualreport.

 

                Ourmanagement, including the CEO and CFO, does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willprevent or detect all errors and all instances of fraud. A control system, nomatter how well designed and operated, can provide only reasonable, notabsolute, assurance that the control system’s objectives will be met.

 

                Therehave been no changes during the fourth quarter of 2007 or subsequent toDecember 31, 2007, in our internal control over financial reporting or in anyother factor that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting.

 

**Item 9B. Other Information.**

 

                We will hold our annual meetingon September 26, 2008, at the Little Elm City Hall; 100 West EldoradoParkway; Little Elm, Texas, 75068.

 

                Our Amended and Restated Bylawswere recently amended.  A copy of theSecond Amended and Restated Bylaws is attached hereto as exhibit No. 3(ii).  The amendments address a number of issuesincluding, but not limited to, formalizing the fact that our shares may be heldin either certificated or electronic form.

 

23

----

 

**PART III**

 

**Item 10. Directors, Executive Officers and CorporateGovernance.**

 

                The following table sets forthinformation concerning our Directors, executive officers, and certain of oursignificant employees as of the date of this filing. Our Board of Directorsconsists of a total of seven (7) members, two (2) members of whichare Class 1 Directors and five (5) of which are Class 2Directors which serve for two-year terms.

 
| ** **          | ** ** | ** ** | ** ** | ** **                                                                             | ** ** | **Term as**  | ** ** |
|---------------------|------------|------------|------------|----------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **          | ** ** | ** ** | ** ** | ** **                                                                             | ** ** | **Director** | ** ** |
| **Name**            | ** ** | **Age**    | ** ** | **Position**                                                                           | ** ** | **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  |       | 45         |       | 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         |       |

 

**INDEPENDENT**** ****DIRECTORS**
| Marco Laterza    |   | 60 |   | 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    |   | 39 |   | Director of Sales and  Marketing Logistics |   | N/A |   |
|------------------|--------|----|--------|--------------------------------------------|--------|-----|--------|
| John W. Fort III |   | 39 |   | Director of Accounting                     |   | N/A |   |
| James A. Hoover  |   | 60 |   | 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, our Founder, hasserved as Chairman of the Board, President, Chief Executive Officer, andDirector since our inception. In addition to his duties overseeing our Management,he continues to lead our design team in product development of other medicalsafety devices that utilize his unique patented friction ring technology. Mr. Shawhas over 25 years of experience in industrial product design and has developedseveral solutions to complicated mechanical engineering challenges. He has beengranted multiple patents and has additional patents pending. Mr. Shawreceived a Bachelor of Science in Civil Engineering from the University ofArizona and a Master of Science in Accounting from the University of NorthTexas.

 

                Douglas W. Cowan is a VicePresident and our Chief Financial Officer, Treasurer, and a Director. Mr. Cowanjoined us as Chief Financial Officer and was elected to the Board of Directorsin 1999. He is responsible for our financial, accounting, risk management, andforecasting functions. Mr. Cowan has a Bachelor of Business Administrationfrom Texas Technological College. He is a CPA licensed in Texas.

 

                Kathryn M. Duesman, RN, joinedus in 1996 and currently serves as the Executive Director, Global Health. Sheprovides clinical expertise on existing products as well as those indevelopment. She has been instrumental in developing training and marketingmaterials and has spoken and been published on safety 

 

24

----

 

issues.Ms. Duesman works with international agencies to promote the use of safetechnologies in developing countries.  Ms. Duesman is a 1985 graduateof Texas Woman’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. Kuhlman joined us in February 1997and is our Vice President, Sales. Mr. Kuhlman is responsible formanagement of the sales force and liaison with GPOs and product training forour sales organization, as well as distribution. Mr. Kuhlman’s effortswith us have resulted in bringing onboard Specialty Distributors, influencinglegislation, and educating influential healthcare representatives about thebenefits of our 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.,a medical device manufacturing company, from 1989 to 1994, where he launchedseveral new products, developed strategic sales territories, and was thetrainer for Sales and Regional Managers. Mr. Kuhlman also worked for BDVacutainer® Systems,a medical products company, in several territories from 1980 to 1989, where hewas recognized as the National Sales Representative for the year 1987. Mr. Kuhlmanholds a Bachelor of Science in Finance from the University of Tennessee.

 

                Michele M. Larios joined us in February 1998and currently serves as our Vice President, General Counsel and Secretary. Ms. Lariosis responsible for our legal and legislative, quality assurance, humanresource, and regulatory functions. In addition to working on legal matters andwith outside counsel, Ms. Larios works with legislators on pertinentissues and relevant legislation.  Ms. Lariosreceived a Bachelor of Arts in Political Science from Saint Mary’s College inMoraga, California, and a Juris Doctorate from Pepperdine University School ofLaw in Malibu, California.

 

                Lawrence G. Salerno has beenemployed with us since 1995 and has served as Director of Operations for ussince 1998. He is responsible for the manufacture of all our products, aswell as all product development and process development projects. In addition,he supervises all aspects of the construction and expansion of our facilitiesin Little Elm, Texas. Mr. Salerno is the brother of Ms. Lillian E.Salerno, a shareholder holding approximately ten percent of the Common Stock. Mr. Salernoreceived his Bachelor of Science in Economics from the University of NorthTexas.

 

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

 

**INDEPENDENTDIRECTORS**

 

                Marco Laterza joined us as aDirector effective as of March 22, 2005. Since 1988, Mr. Laterza hasowned and operated a public accounting practice. His practice includescorporate, partnership and individual taxation, compilation/review of financialstatements, financial planning, business consulting, and trusts and estates.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 ofpositions from 1977 to 1985 with El Paso Natural Gas Company eventually servingas its Director of Accounting. Mr. Laterza received his Bachelors ofBusiness Administration in Accounting from Pace University in 1972. He is a CPAand has received a Certificate of Educational Achievement in Personal FinancialPlanning from the American Institute of CPAs.

 

                Amy Mack joined us as a Directoron November 19, 2007.  Since 2003,she has owned and operated SPA 02, a medical spa. Since April of 2000, shehas owned and operated (and served as Chief Nursing Officer for) EmergiStaff &Associates, a nursing staffing company, in Dallas, Texas.  She served as a registered nurse from August 1997to the date she began EmergiStaff & Associates.  She obtained her Bachelor of Science degreefrom Texas A&M University in College Station, Texas in 1991 and anAssociate degree in Nursing from El Centro College in Dallas, Texas in 1994.  She is a registered nurse in Texas.

 

25

----

 

Marwan Saker joined our Board of Directors in June 2000. Since1983, Mr. Saker has served as Chief Executive Officer of Sovana, Inc.,an export management company that supplies agricultural equipment and suppliesto overseas markets. Since 2000, he has served as Director of Consolidated FoodConcepts Inc.  Since 1986, he has served as President of InternationalExports & Consulting Inc., an export management, consulting, and distributioncompany. Since 2000, he has served as Vice President of Hanneke Corp., anoverseas sourcing company. From 1998 to 2001, he served as a Member of MyInvestments, LLC, an equity investment company. Since 1999, he has served asPresident of Saker Investments Inc., a company that manages an investmentportfolio. Since 1998, he has served as a General Partner of Maya Investments,Ltd., an investment management limited partnership. He also serves as a Memberof MMDA, LLC, a real estate development company. Mr. Saker has acted as arepresentative for U.S. companies seeking distribution, licensing, andfranchising in the Middle East, Europe, and North Africa. Mr. Saker wasinstrumental in developing successful partnerships in more than 15 countries.He offices in Irving, Texas.

 

Clarence Zierhut has served on our Board of Directors since April 1996.Mr. Zierhut founded an industrial design firm in 1955, Zierhut Design, nowOrigin Design, that develops new products from concept through finalprototypes. He ceased management of the company for a period of time but hassince resumed his executive duties. ** **During his professional career, Mr. Zierhuthas created over 3,000 product designs for more than 350 companies worldwide,in virtually every field of manufacturing, and has won many internationalawards for design excellence. His clients have included Johnson &Johnson, Abbott, Gould, and McDonnell Douglas. He received a Bachelor of Artsfrom Art Center College of Design in Los Angeles, California.

 

**SIGNIFICANTEMPLOYEES**

 

Shayne Blythe has been with us for over ten years and is our Directorof Sales and Marketing Logistics.  She is responsible for developing andimplementing strategic directions, objectives, comprehensive sales andmarketing plans, and programs.  In addition, she directs and oversees allaspects of the distribution process and customer service policies in order tomonitor and maintain customer satisfaction.  Prior to joining us, Ms. Blytheassisted Mr. Shaw with the original 3cc syringe and other SBIR grantprojects.  Ms. Blythe has a Bachelors of Business Administration inmanagement from American International University.

 

John W. Fort III is our Director of Accounting. Mr. Fort joined usin March of 2000 as a Financial Analyst and has served as our Director ofAccounting since October of 2002. His primary responsibilities includemanaging the day-to-day operations of the Accounting and Finance Department,coordination of the annual audits, and interim reviews by our independentaccountants, as well as our cost accounting and forecasting functions. Prior tojoining us, he served as the Manager of Financial Planning for theproduct-marketing department of Excel Communications. Mr. Fort also servedas the Manager of Budgeting and Projections for Snelling and Snelling, Inc.,an international personnel services firm. Mr. Fort holds a Bachelor ofBusiness Administration in Accounting from Tarleton State University.

 

James A. Hoover joined us in February 1996 and is our Director ofQuality Assurance. Prior to his becoming Director of Quality Assurance he wasProduction Manager. He is responsible for our quality assurance functions. Mr. Hooverhas also developed and implemented FDA required procedures and has beeninvolved in the FDA inspection process. Mr. Hoover joined us after workingfor Sherwood for 26 years. During his tenure with Sherwood, a medical devicemanufacturing company, he gained hands-on experience in all aspects of themedical device manufacturing process. Mr. Hoover began his career withSherwood as a materials handler and worked his way up through a series ofpositions with added responsibilities to his final position there as ProductionManager of Off-Line Molding, Operating Room/Critical Care. In this capacity, hemanaged several departments, ran several product lines, and hired andsupervised over 200 employees. While at Sherwood, he also gained experiencewith one of the country’s first safety syringes, the Monoject®.

 

R. John Maday joined us in July 1999 and is our Production Manager.He is responsible for supervision of the production of our products. Prior tobecoming Production Manager on January 1, 2005, he served as ourProduction General Supervisor. Mr. Maday has 25 years of manufacturingexperience in both class II and III medical devices. He spent three years withMentor Corp. supervising two production departments and 13 years with Sherwoodin which he gained hands-on experience in all aspects of medical devicemanufacturing including managing the Kit and Packaging department with over 225employees. Mr. Maday’s formal training includes FDA and Total QualityManagement Systems and he is certified as a Black Belt of Six SigmaMethodology.

 

26

----

 

                Dr. Jules Millogo hasserved as our Medical Director since May 2007. His duties includerepresenting us at scientific forums and working with the Ministries of Healthand international organizations on developing injection safety and healthworkers safety standards and policies. From 2004 to April 2007 Dr. Millogowas employed by John Snow, Inc. as the Project Director for theWashington-based Making Medical Injections Safer Project (“MMIS”), a $150million project funded by the U.S. government to decrease unsafe injections andthe medical transmission of HIV/AIDS, hepatitis B and C as part of the U.S.President Emergency Plan for AIDS Relief (PEPFAR which was administered by PATH).Under his leadership, the MMIS Project trained more than 100,000 health workersin safer injection practices and donated more than 100 million safety syringesto high HIV prevalence countries in Africa and the Caribbean. From 2001 to 2004Dr. Millogo was a technical advisor for John Snow, Inc. Dr. Millogo’sexperience includes working in several African and Asian countries under theWorld Health Organization. Dr. Millogo holds a Master’s of Science inEpidemiology of Communicable Diseases from the University College of London,UK, and a MD from the University of Ouagadougou, Burkina Faso. Dr Millogo isfluent in French, English, and several African languages.

 

                Judy Ni Zhu joined us in 1995and is our Research and Development Manager. Her primary focus is on newproduct development and improvement of current products. Prior to joining us, Ms. Zhuworked as a design engineer with Mr. Shaw on the original 3cc syringe andother SBIR grant projects. Ms. Zhu received her Bachelor of Science fromNorthwest Polytechnic University in Xian, China, and her Master of Engineeringfrom the University of Texas at Arlington. Ms. Zhu has assisted in designmodifications for the 3cc syringe, which have maximized both productreliability and production efficiency. She also designed and developed a manualneedle assembly machine and an automatic lubricating and capping system for the3cc syringe and developed and assisted in the design of automated bloodcollection tube holder assembly equipment. Ms. Zhu has collaborated with Ms. Duesmanand Mr. Shaw in the filing of several patent applications.

 

FAMILY RELATIONSHIPS

 

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

 

DIRECTORSHIPS IN OTHERCOMPANIES

 

                No Directors hold Directorships in reportingcompanies other than as set forth above.

 

INVOLVEMENT IN CERTAINLEGAL PROCEEDINGS

 

                None of the above persons or anybusiness in which such person was an executive officer have been involved in abankruptcy petition, been subject to a criminal proceeding (excluding trafficviolations and other minor offenses), been subject to any order enjoining orsuspending their involvement in any type of business, or been found by a courtor administrative body to have violated a securities law.

 

SECTION 16(a) BENEFICIALOWNERSHIP REPORTING COMPLIANCE

 

                Section 16 of the ExchangeAct requires our Directors, executive officers, and persons who own more than10 percent of a registered class of our equity securities to file with the SECinitial reports of beneficial ownership (Form 3) and reports of changes inbeneficial ownership (Forms 4 and 5) of our Common Stock and our other equitysecurities. Officers, Directors, and greater than 10 percent shareholders arerequired by the SEC’s regulations to furnish us with copies of all Section 16(a) reportsthey file. Based solely on a review of Forms 3 and 4 furnished to us, allDirectors, Officers, and holders of more than 10 percent of our equitysecurities registered pursuant to Section 12 of the Exchange Act filedreports required by Section 16(a) of the Exchange Act as of December 31,2007.

 

CODEOF ETHICS

 

                Effective as of March 9, 2004,we adopted a code of ethics that applies to all employees, including, but notlimited to, our principal executive and financial officers.  Our Code ofBusiness Conduct and Ethics is designed to deter wrongdoing and to promote:

 

27

----

 

1.                                       Honest and ethical conduct, including theethical handling of actual or apparent conflicts of interests between personaland professional relationships;

 

2.                                       Full, fair, accurate, timely, andunderstandable disclosure in reports and documents that we file with, or submitto, the SEC and in our other public communications;

 

3.                                       Compliance with applicable governmentallaws, rules, and regulations;

 

4.                                       The prompt, internal reporting ofviolations of the code to an appropriate person or persons identified in thecode; and

 

5.                                       Accountability for adherence to the code.

 

                We have posted a copy of thecode on our website at www.vanishpoint.com/investor.asp.  Please followthe link to Governance then follow the link to Charters, then click on “RVPCorporate Code of Conduct.” Any amendment to this code or waiver of itsapplication to the principal executive officer, principal financial officer,principal accounting officer, or controller or similar person shall bedisclosed to investors by means of a Form 8-K filing with the SEC. We willprovide to any person without charge, upon request, a copy of such code ofethics. Such requests should be submitted in writing to Mr. Douglas W.Cowan at 511 Lobo Lane, P.O. Box 9, Little Elm, Texas 75068-0009.

 

AUDIT COMMITTEE

 

                We have a separately-designatedstanding Audit Committee established in accordance with Section 3(a)(58)(A) ofthe Exchange Act consisting of Messrs. Clarence Zierhut, Marco Laterza,and Marwan Saker. Each of the members of the Audit Committee is independent asdetermined by the AMEX rules and Item 7(d)(3)(iv) of Schedule 14Aunder the Exchange Act.

 

Audit Committee FinancialExpert

 

                The Board of Directors hasdetermined that we have at least one financial expert serving on the AuditCommittee.  Mr. Marco Laterza serves as our designated AuditCommittee Financial Expert.  Mr. Laterza is independent asindependence is defined for Audit Committee members by the listing standards ofthe AMEX.

 

**Item 11. Executive Compensation.**

 

COMPENSATION DISCUSSIONAND ANALYSIS

 

The Objectives of OurCompensation Program

 

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

 

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.

 

Whatthe Compensation Program Is Designed to Award

 

                Our Compensation Program isdesigned to award both superior long-term performance by our executive officersand their loyalty.

 

28

----

 

Summaryof Each Element of Compensation

 

                To achieve these objectives, theCompensation and Benefits Committee has approved an executive officercompensation program that consists of four basic components:

 

base salary;

 

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

 

periodic long-term incentive compensation in the formof stock options; and

 

medical, life, and benefit programs (which aregenerally available on the same terms to all employees).

 

Why We Choose to Pay EachElement of Our Compensation Program

 

*BaseSalary*

 

                We choose to pay a significantcomponent of our compensation in base salary due to the fact that our financialperformance is constrained by the monopolistic activities of BD.  We havebeen blocked from access to the market by exclusive marketing practices engagedin by BD who dominates the market. We believe that its monopolistic businesspractices continue despite its paying $100 million to settle a lawsuit with usin 2004 for anticompetitive practices, business disparagement, and tortiousinterference. Until such time as we believe that we have access to the market,we believe that it is appropriate to weigh our Compensation Program heavily infavor of base salaries rather than in incentive compensation.

 

*CashBonuses*

 

                From time to time and when ourcash reserves allow (taking into account the continued need to compete in thismonopolistic environment and the continued need for significant cash reserves)we grant cash bonuses in order to reward significant efforts or theaccomplishment of short-term goals. The last bonuses were granted in2003.  The CEO has never been granted any bonuses of any kind.

 

*Long-TermIncentives: Stock Options*

 

                Long-term incentives areprovided through grants of stock options primarily under our 1999 Stock OptionPlan.  The grants are designed to align the interests of executiveofficers with those of stockholders and to provide each executive officer witha significant incentive to manage from the perspective of an owner with anequity stake in the Company.

 

How We Determine theAmount or Formula for Payment in Light of Our Objectives

 

                Executive compensation remainsthe same until there is a review of such compensation by the Compensation andBenefits Committee.  Compensation, other than that of the Chief ExecutiveOfficer, is not reviewed annually.  Under the terms of Mr. Shaw’semployment agreement, his compensation is reviewed annually.  In the past,when there is a review of executive compensation, we have retained an outsideconsulting firm, Trinity Executive Recruiters, to provide benchmarks forsimilar compensation given the multiple and varied positions each executivefulfills as well as our size and the hostile environment in which we operate.

 

*BaseSalary*

 

                The base salary for each of ourexecutive officers is subjectively determined primarily on the basis of thefollowing factors:  experience, individual performance, contribution toour performance, level of responsibility, duties and functions, salary levelsin effect for comparable positions within and without our industry, andinternal base salary comparability considerations.

 

29

----

 

                These base salaries are reviewedperiodically and may be adjusted, based upon the factors discussed in theprevious sentence, as well as upon individual performance during the previousfiscal year, changes in the duties, responsibilities and functions of theexecutive officer, and general changes in the compensation peer group in whichwe compete for executive talent.  The relative weight given to each ofthese factors in the Compensation and Benefits Committee’s recommendation, differsfrom individual to individual, as the Compensation and Benefits Committee deemsappropriate.

 

*Periodic Cash Bonuses*

 

                For 2007, we did not grantbonuses to our executive officers.  These bonuses, when paid, are paid ona discretionary basis, as determined by the Compensation and Benefits Committee. Factors considered by the Compensation and Benefits Committee in determiningdiscretionary cash bonuses are personal performance, level of responsibility,and many of the same factors considered by the Compensation and BenefitsCommittee and discussed above when it reviews and sets base salaries, exceptwith a greater focus on the prior fiscal year. The Compensation and Benefits Committee also considers our need toretain cash in deciding whether to grant cash bonuses.

 

*Long-TermIncentive: Stock Options*

 

We have issued stock options to our employees from time to time and maydo so in the future.  We have not issued any stock options in 2005, 2006,and 2007. The options are generally granted to regular full time employees andofficers.  However, no options have ever been granted to Thomas J. Shaw,the Company’s President and CEO.

 

If stock options are to be issued, Management prepares a proposal tothe Compensation and Benefits Committee.  Considerations by Management inits initial proposal in determining a suitable aggregate fair market value ofoptions to be granted include our financial condition, the number of optionsalready outstanding, and the benefit to the employees. The proposal includesinformation relating to the expected expense of such grants to be recognized byus, the approximate number of options to be issued, the number of optionscurrently outstanding, the employees to be included, the amount of stockcurrently outstanding, and the method under which the options would be awarded. If the proposal is approved by the Compensation and Benefits Committee, theproposal is submitted to the Board of Directors.

 

Once the dollar amount of options to be granted is approved, Managementbegins determining the aggregate number of shares underlying options that canbe granted under such approval (based on the fair value of an option for thepurchase of one underlying share). Factors included in the determination of thevalue of an option grant for the purchase of one share include current marketprice of the Company’s stock, the proposed exercise price, the proposedexpiration date, the volatility of the Company’s stock, and the risk free rate.We may retain an independent outside consultant to determine such value. In the past we have utilized the Black-Scholes model; but other methods, suchas the binomial method, may be used in the future as more appropriate methodsare developed.

 

After the aggregate number of shares underlying the options to begranted has been determined, we allocate the options to our various departmentsbased on their annual compensation times their performance rating.  The individual employee’s allocation factoris the numerator of a fraction.  The denominator is the department’s sumof all factors (annual compensation times performance ratings of all the eligibleemployees).  The resulting fraction is multiplied by the stock options, tobe awarded to determine the employee’s individual portion of the aggregateapproved options.

 

The allocation may be further reviewed by the department’s managementif they believe certain employees were not awarded an appropriate number ofoptions, which Management will consider.

 

                Each stock option grant allowsthe executive officer to acquire shares of Common Stock at a fixed price pershare (typically, and never less than, the closing stock price of the CommonStock on the date of grant) for a fixed period (usually ten years).  Eachoption generally becomes exercisable after three years, contingent upon theexecutive officer’s continued employment with us.  Accordingly, the stockoption grant will provide a return to the executive officer only if theexecutive officer remains employed by us during the vesting period, and thenonly if the market price of the underlying Common Stock appreciates.

 

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

 

                All of our long-termcompensation consists of non-cash compensation in the form of stockoptions.  We believe that the granting of stock options incentivizesexecutives to maximize our long-term strengths as well as our stockprice.  However, because we are operating in a monopolistic environmentand our stock price has little relationship with our performance, the mostsignificant component of compensation is base salary and not stockoptions.  Management is incented to maximize shareholder value and will berewarded if they do so.  However, a significant base salary enables us toretain this competent Management despite the current inability to providevaluable equity incentives.

 

HowDeterminations Are Made as to When Awards Are Granted

 

                Generally, option awards aregranted at the discretion of the Board after recommendation of the Compensationand Benefits Committee.

 

                Unfortunately, our stock pricedoes not always react as expected to our achievements.  Accordingly, attimes options have been granted to aid in retaining competent and experiencedexecutives without regard to the then current stock price. However, suchoptions always have exercise prices that are at or above fair market value onthe date of grant.

 

30

----

 

                In addition, there is norelationship between the date of grant of options and our possession ofmaterial non-public information.  Because we are competing in a contentiousantitrust environment, we are often in possession of material non-publicinformation.  However, all options granted to executives require a minimumthree year vesting period.  Furthermore, it is our policy with regard tooptions 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 minimal risk of the executive profitingfrom such material nonpublic information.

 

WhatSpecific Items of Corporate Performance Are Taken into Account in SettingCompensation Policies and Making Compensation Decisions

 

                Cash reserves as well as trendsin sales and costs are taken into account when considering the advisability ofincreasing base salaries or granting cash bonuses.  At such times that anyof these factors make it inadvisable to increase salaries or grant bonuses,then consideration is given to increasing option awards taking into account thevalue of prior option awards.

 

                Awards are granted on the basis of historicalperformance.  Accordingly, there is no discretion to change the awardsonce granted.

 

Factors We Consider inDetermining to Change Compensation Materially

 

                We consider our cash position,current liquidity trends, and the short-term and long-term needs for cashreserves (especially in light of the hostile environment in which we operate)when evaluating whether we can change compensation materially at a given time.

 

On an individual by individual basis, we also consider the value ofpast option compensation, the competitiveness of that individual’s base salary,and their individual contribution to our goals.

 

HowAmounts Realized from Past Compensation Affect Other Elements of Compensation

 

                We are very aware that the vastmajority of options granted to our executives are significantly out of themoney and that they may remain so until we are able to obtain real access tothe market.  Accordingly, future compensation will likely continue to bedominated by base salary as well as periodic bonuses when possible.

 

TheImpact of the Accounting and Tax Treatments of Our Types of Compensation

 

                Stock options granted toexecutives and other employees are expensed for accounting purposes under FAS123(R). We expense all of our option costs as we do the costs of salaries andbonuses.  Accordingly, the impact of tax treatment of various compensationforms does not impact our compensation decisions. Stock option expense is notrecognized for tax purposes, except in the case of non-qualified stockoptions.  For non-qualified stock options, the intrinsic value of theoption is recognized when the option is exercised.

 

OurPolicy Regarding Hedging Stock Ownership

 

                We prohibit certain stocktransactions by employees and Directors, including:

 

1.                                       Purchases and sales of stock within a sixmonth period;

 

2.                                       Short sales; and

 

3.                                       Transactions in puts, calls, or otherderivative securities.

 

                Furthermore, employees andDirectors are required to pre-clear any hedging transactions.

 

31

----

 

Benchmarkingof Our Compensation Program

 

                In 2003, we hired TrinityExecutive Recruiters, Inc. to assist us in providing benchmarks forcompensation by similarly sized companies in similar industries for personsthat hold positions which are currently fulfilled by various members of ourexecutive team.   Trinity Executive Recruiters performed a survey ofother publicly held companies with $20-$50 million in revenues in the MedicalEquipment and Supplies Industry.  Forty-nine companies were included inthe search with a total of 346 executives.  However, for each executive,the list of executives to use as comparisons was tailored to correspond to eachexecutive’s particular job functions.

 

                These benchmarks supported theCompensation and Benefit Committee’s recommendations (and Board’s approval of)an increase in the base salary of Mr. Wisner, Mr. Cowan, and Ms. Lariosboth in 2003 and again in 2005.

 

                Although we have obtainedbenchmarking information with regard to the CEO’s position, such benchmarkswere not utilized as a basis for increasing Mr. Shaw’s salary in2005.  His salary was increased at the recommendation of the Compensationand Benefits Committee as well as a unanimous vote of the Board of Directorsdue to the fact that he had never been granted options or any bonuses and hadnot had a material increase in salary in many years.  However, suchbenchmarks support an increase of at least the amount made.

 

TheRole of Our Executives and Directors in Determining Compensation

 

                Management establishes theinitial proposed recommendations regarding compensation for all employees,including themselves.  Such proposal is then submitted to the Compensationand Benefits Committee.  In the event that a proposal is affirmed theproposal is then recommended to the entire Board of Directors for a vote.

 

CompensationPursuant to Employment Agreement

 

                We have an Employment Agreementwith Mr. Thomas J. Shaw.  However the Employment Agreement is beingmodified to avoid adverse tax consequences to Mr. Shaw created by thepassage of the American  Jobs Creation Act of 2004.  No other executives (or Directors) arecompensated pursuant to employment agreements.

 

                The Employment Agreement with Mr. Shaw(the “Employment Agreement’) provides for an initial period of three yearswhich ended September 2002 that automatically and continuously renews forconsecutive two-year periods. The Employment Agreement is terminable either byus or Mr. Shaw upon 30 days’ written notice.

 

                The Employment Agreementprovides for an annual salary of at least $150,000 with an annual salaryincrease equal to no less than the percentage increase in the Consumer PriceIndex during the previous calendar year. (However, the Board authorized asalary increase to $400,000.)  The Employment Agreement requires that Mr. Shaw’ssalary be reviewed by the Board of Directors each January, which shall makesuch increases as it considers appropriate. In January 2008, the Board ofDirectors accepted the recommendation of the Compensation and BenefitsCommittee to increase Mr. Shaw’s salary by the 2007 percentage increase inthe Consumer Price Index (which increase was required under the EmploymentAgreement).  Mr. Shaw is alsoentitled to participate in all executive bonuses as the Board of Directors, inits sole discretion, shall determine.

 

                Under the Employment Agreement,we are obligated to provide certain fringe benefits, including, but not limitedto, participation in pension plans, profit-sharing plans, employee stockownership plans, stock appreciation rights, hospitalization and healthinsurance, disability and life insurance, paid vacation, and sick leave. We arealso obligated to reimburse him for any reasonable and necessary businessexpenses, including travel and entertainment expenses, necessary to carry onhis duties. Pursuant to the Employment Agreement, we are obligated to indemnifyMr. Shaw for all legal expenses and liabilities incurred with any proceedinginvolving him by reason of his being an officer or agent. We are further obligatedto pay reasonable attorney fees and expenses in the event that, in Mr. Shaw’ssole judgment, he needs to retain counsel or otherwise expend his personalfunds for his defense.

 

32

----

 

                Mr. Shaw has agreed to aone-year non-compete, not to hire or attempt to hire employees for one year,and to not make known our customers or accounts or to call on or solicit ouraccounts or customers in the event of termination of his employment for oneyear unless the termination is without cause or pursuant to a change ofcontrol. Furthermore, Mr. Shaw has the right under this agreement toresign in the event that there is a change in control which is defined in theEmployment Agreement as a change in the majority of Directors within any 12month period without two-thirds approval of the shares outstanding and entitledto vote, or a merger where less than 50% of the outstanding stock survives anda majority of the Board of Directors remains, or the sale of substantially allof our assets, or any other person acquires more than 50% of the votingcapital.  Mr. Shaw retained theright to participate in other businesses as long as they do not compete with usand so long as he devotes to us the necessary working time.

 

                However, we and Mr. Shawhave agreed to operate the Employment Agreement under the final Regulationsissued under Section 409A of the Internal Revenue Code. Accordingly, we will,among other things, defer certain payments until the termination of a periodequal to six months and one day after the occurrence of certain eventswarranting payment, and be obligated to define change in control in theEmployment Agreement as follows:

 

A “Change of Control”shall be deemed to have occurred on either of the following dates: (i) thedate any one person (other than Mr. Shaw), or more than one person actingas a group, acquires (or has acquired during the 12-month period ending on thedate of the most recent acquisition by such person or persons) ownership ofstock of the Company possessing thirty percent (30%) or more of the totalpossible voting power of the stock of the Company (assuming the immediateconversion of all then outstanding convertible preferred stock) or (ii) thedate a majority of members of the Board of Directors is replaced during any12-month period by Directors whose appointment or election is not endorsed by amajority of the members of the Company’s Board of Directors before the date ofthe appointment or election.

 

Wewill also be obligated to define a “Permanent Disability” as:

 

Mr. Shaw being unable toengage in any substantial gainful activity by reason of any medicallydeterminable physical or mental impairment which can be expected to result indeath or can be expected to last for a continuous period of not less than 12months or is, by reason of any medically determinable physical or mentalimpairment which can be expected to result in death or can be expected to lastfor a continuous period of not less than 12 months, receiving incomereplacement benefits for a period of not less than 3 months under an accidentand health plan covering employees of the Company.  Mr. Shaw shall also be deemed to be disabledif he is determined to be totally disabled by the Social SecurityAdministration.

 

33

----

 

SUMMARY OF TOTALCOMPENSATION

 

The following Summary Compensation Table sets forth the totalcompensation paid or accrued by us  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  FOR 2005-2007** | ** ** |
|---------------------------------------------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | **Option** | ** ** | **All Other** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | **Salary** | ** ** | **Awards****(1)** | ** ** | **Compensation** | ** ** | **Total** | ** ** |
| **Name and principal  position**                   | ** ** | **Year** | ** ** | **($)** | ** ** | **($)** | ** ** | **($)** | ** ** | **($)** | ** ** |
| (a)                                                     |       | (b) |   | (c) |   | (f) |   | (i) |   | (j) |   |
| Thomas J. Shaw                                          |       | 2005 |   | 307,702 |   | — |   | — |   | 307,702 |   |
| President and CEO                                       |       | 2006 |   | 400,000 |   | — |   | — |   | 400,000 |   |
| (principal executive officer)                           |       | 2007 |   | 400,000 |   | — |   | 4,500 | (3) | 404,500 |   |
|                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Douglas W. Cowan                                        |       | 2005 |   | 248,318 |   | 114,260 |   | — |   | 362,578 |   |
| Vice President, CFO                                     |       | 2006 |   | 290,130 |   | 58,372 |   | — |   | 348,502 |   |
| (principal financial  officer)                     |       | 2007 |   | 290,109 |   | 778 |   | 4,500 | (3) | 295,387 |   |
|                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Steven R. Wisner                                        |       | 2005 |   | 247,693 |   | 14,240 |   | — |   | 261,933 |   |
| Executive Vice President,                               |       | 2006 |   | 290,000 |   | 8,367 |   | 6,750 | (2) | 305,117 |   |
| Engineering and Production                              |       | 2007 |   | 290,000 |   | 758 |   | 4,500 | (3) | 295,258 |   |
|                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Michele M. Larios                                       |       | 2005 |   | 258,676 |   | 113,977 |   | — |   | 372,653 |   |
| Vice President,                                         |       | 2006 |   | 351,299 |   | 58,265 |   | — |   | 409,564 |   |
| General Counsel                                         |       | 2007 |   | 350,000 |   | 797 |   | 4,500 | (3) | 355,297 |   |
|                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Russell B. Kuhlman                                      |       | 2005 |   | 122,067 |   | 12,182 |   | — |   | 134,249 |   |
| Vice President, Sales                                   |       | 2006 |   | 132,593 |   | 36,615 |   | — |   | 169,208 |   |
|                                                    |       | 2007 |   | 134,779 |   | 369 |   | 2,695 | (3) | 137,843 |   |

 

(1)           Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions used for grants in 2004: no dividend yield; expected volatility of37%; risk free interest rate of 4.89%; and an expected life of 9.0 years. No options were issued in 2006 or 2007.** **The options were issued under the1999 Stock Option Plan, a copy of which Plan and amendment was filed as ExhibitNos. 10.6-10.7.

 

(2)           Thisamount constitutes the excess market value of the underlying shares of anexercised stock option over the exercise price.

 

(3)           Thisamount was compensation pursuant to our matching contributions to the 401(k)plan.

 

34

----

 

OUTSTANDING EQUITY AWARDSAT FISCAL YEAR-END

 

                The following Outstanding EquityAwards at Fiscal Year-End Table sets forth information regarding unexercisedoptions currently held by the principal executive officer, the principalfinancial officer, and the three highest paid additional executive officers.

 

** **
| **Outstanding  Equity Awards at 2007 Fiscal Year End** | ** ** |
|--------------------------------------------------------|------------|
|                                                   | ** ** | **Option Awards** | ** ** |
|                                                   | ** ** | **Number of** |   |   |   |   |   |
|                                                   | ** ** | **Securities** |   |   |   |   |   |
|                                                   | ** ** | **Underlying** |   |   |   |   |   |
|                                                   | ** ** | **Unexercised** | ** ** | **Option** |   |   |   |
|                                                   | ** ** | **Options** | ** ** | **Exercise** | ** ** | **Option** | ** ** |
|                                                   | ** ** | **(#)** | ** ** | **Price** | ** ** | **Expiration** | ** ** |
| **Name**                                               | ** ** | **Exercisable** | ** ** | **($)** | ** ** | **Date** | ** ** |
|   (a)                                        |       | (b) |   | (e) |   | (f) |   |
|                                                   |       |   |   |   |   |   |   |
| Thomas J. Shaw                                         |       |   |   |   |   |   |   |
| President, 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 Production                             |       | 20,000 | (8) | 6.90 |   | 09/30/12 |   |
|                                                   |       | 12,500 | (9) | 8.65 |   | 06/23/13 |   |
|                                                   |       | 3,900 | (10) | 8.87 |   | 05/11/14 |   |
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Michele M. Larios                                      |       | 5,000 | (11) | 10 |   | 07/09/08 |   |
| Vice President,                                        |       | 5,000 | (12) | 10 |   | 03/09/08 |   |
| General Counsel                                        |       | 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                                     |       | 7,500 | (18) | 10 |   | 07/08/08 |   |
| Vice President, Sales                                  |       | 15,600 | (19) | 10 |   | 06/30/09 |   |
|                                                   |       | 10,000 | (20) | 10 |   | 11/01/10 |   |
|                                                   |       | 20,000 | (21) | 6.90 |   | 09/30/12 |   |
|                                                   |       | 79,400 | (22) | 8.65 |   | 06/23/13 |   |
|                                                   |       | 1,900 | (23) | 8.87 |   | 05/11/14 |   |

 

(1)                            Options for the purchase of 12,500 sharesvested on July 1, 2001, and for the remaining shares vested on July 1,2002.

 

(2)                            These options vested on November 1,2003.

 

(3)                            These options vested on September 30,2005.

 

(4)                            These options vested on June 23,2006.

 

35

----

 

(5)                            These options vested on May 11,2007.

 

(6)                            Options for the purchase of 75,000 sharesvested on October 25, 2001, and the remainder vested on October 25,2002.

 

(7)                            These options vested on November 1,2003.

 

(8)                            These options vested on September 30,2005.

 

(9)                            These options vested on June 23,2006.

 

(10)                      These options vested on May 11,2007.

 

(11)                      These options vested on July 9,2001.

 

(12)                      These options vested on March 9, 2001.

 

(13)                      Options for the purchase of 7,700 sharesvested on July 1, 2001, and the remainder vested on July 1, 2002.

 

(14)                      These options vested on November 1,2003.

 

(15)                      These options vested on September 30,2005.

 

(16)                      These options vested on June 23,2006.

 

(17)                      These options vested on May 11,2007.

 

(18)                      These options vested on July 9,2001.

 

(19)                      Options for the purchase of 7,800 sharesvested on July 1, 2001, and the remainder vested on July 1, 2002.

 

(20)                      These options vested on November 1,2003.

 

(21)                      These options vested on September 30,2005.

 

(22)                      These options vested on June 23,2006.

 

(23)                      These options shares vested on May 11,2007.

 

PENSIONBENEFITS

 

                We do not have a pension planother than the 401(k) plan available to all employees.

 

401(k) Plan

 

                We implemented an employeesavings and retirement plan (the “401(k) Plan”) in 2005 that is intendedto be a tax-qualified plan covering substantially all employees.  Underthe terms of the 401(k) Plan, employees may elect to contribute up to 90%of their compensation, or the statutory prescribed limit, if less.  Wemay, at our discretion, match employee contributions.  We made matchingcontributions of approximately $111,000, $0, and $0 in 2007, 2006, and 2005, respectively.

 

36

----

 

POTENTIAL PAYMENTS UPONTERMINATION OR CHANGE IN CONTROL

 

                The following table identifiesthe types and amounts of payments that shall be made to Mr. Thomas Shaw,our Chief Executive Officer, in the event of a termination of his employment ora change in control per his Employment Agreement.  Such payments shall bemade by us and shall be one-time, lump sum payments.

 

**SUMMARY OF PAYMENTS UPON TERMINATIONOR CHANGE IN CONTROL**

**ASSUMING OCCURRENCE AS OF DECEMBER31, 2007****(1)**

 
| ** **                                          | ** ** | ** **          | ** ** | ** **          | ** ** | ** **          | ** ** | **A Payment**            | ** ** | ** **             | ** ** | ** **          | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|-------------------------------|------------|------------------------|------------|---------------------|------------|
|                                                | ** ** | ** **          |       |                |       |                |       | **Equal to the**    |       |                   |       |                |       |
|                                                | ** ** | **Salary**          | ** ** | **Amounts**         | ** ** | **Pro-Rata**        | ** ** | **Greater of**           | ** ** | **Payment**            |       |                |       |
|                                                | ** ** | **Through**         | ** ** | **Owed Under** | ** ** | **Portion of** | ** ** | **Salary Through**       | ** ** | **Equal to**      |       |                |       |
|                                                | ** ** | **Trigger**         | ** ** | **Benefit**         | ** ** | **Eligible**        | ** ** | **Trigger Date or** | ** ** | **90 Days’** | ** ** | **Value of**   | ** ** |
| **Payment Triggering Event**              | ** ** | **Event Date** | ** ** | **Plans****(2)**    | ** ** | **Bonus**           | ** ** | **for 24 Months**   | ** ** | **Salary**             | ** ** | **Payments****(3)** | ** ** |
| 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)                    The abovepayments describe obligationsunder Mr. Shaw’s agreement as written. However, we and Mr. Shaw have agreed tooperate his plan under the final Regulations issued under Section 409A of theInternal Revenue Code such that any accrued payment would not constitutenon-qualified defined compensation. The Employment Agreement is in the process ofbeing modified to ensure that no rights thereunder would constitutenon-qualified defined compensation.

 

(2)                    Mr. Shaw participates in our benefitplans which do not discriminate in scope, terms, or operation in favor ofexecutive officers.  Such plans are generally available to all salariedemployees.  Accordingly, the value of such payments is not included in the“Value of Payments” column.

 

(3)                      This value does not include paymentsunder our  benefit plans for reasons setforth in footnote 1 above.  In addition, it does not include a value for abonus as bonuses are authorized only periodically and there is currently noauthorized bonus program.  Furthermore, Mr. Shaw has never been givena bonus.  In addition, this value assumes that the triggering eventoccurred on December 31, 2007.  Authorized payments under theEmployment Agreement are also capped to one dollar less than the amount thatwould cause Mr. Shaw to be the recipient of a parachute payment under Section 280G(b) ofthe Internal Revenue Code of 1986.

 

                Mr. Shaw is obligated underthe Employment Agreement for one year not to compete with us, 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 histermination was without cause or occurs after a change in control.

 

37

----

 

COMPENSATION OF DIRECTORS

 

                The following table identifiesthe types and amounts of compensation earned by our Directors (with theexception of those that are named Executive Officers as described in footnote 1to the table) in the last Fiscal Year:

 

**DIRECTOR COMPENSATION TABLE FOR2007**

 

| ** **                    | ** ** | **Fees**           | ** **  | ** **       | ** ** | ** ** | ** ** |
|-------------------------------|------------|--------------------|-------------|------------------|------------|------------|------------|
| ** **                    | ** ** | **Earned or** | ** **  | ** **       | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Paid in**   | ** **  | **All Other**    | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Cash**           | ** **  | **Compensation** | ** ** | **Total**  | ** ** |
| **Name**                      | ** ** | **($)**            | ** **  | **($)**          | ** ** | **($)**    | ** ** |
| (a)(1)                        |       | (b)                |        | (g)              |       | (h)        |       |
| Marco Laterza                 |       | $                  |  3,000 |             | $          | —     |       | $ |  3,000 |   |
| Amy Mack                      |       | —             |        | 4,500            | (2)        | 4,500      |       |
| Marwan Saker                  |       | 1,500              |        | —           |       | 1,500      |       |
| Jimmie Shiu, Former  Director |       | 2,000              |        | —           |       | 2,000      |       |
| Clarence Zierhut              |       | 3,000              |        | —           |       | 3,000      |       |
|                               |            |                    |             |                  |            |            |            |  |  |  |

 

(1)           Messrs. ThomasJ. Shaw, Douglas W. Cowan and Steven Wisner are Named Executive Officers whoare also Directors.  Their compensation is reflected in the SummaryCompensation and other tables presented earlier.

 

(2)           Ms. Mack’s Company was paid these funds in 2007 forparticipation in a clinical trial.

 

NarrativeExplanation of Director Compensation Table for 2007

 

                In 2007 we paid eachnon-employee Director a fee of $500 per meeting and reimbursed travelexpenses.  In the past, we have granted to each Director (except Mr. Shaw)stock options for Common Stock. We do not pay any additional amounts forcommittee participation or special assignment.

 

                Generally, employee Directorsare compensated as discussed in the COMPENSATION DISCUSSION AND ANALYSIS. However, one employee, Mr. Thomas J. Shaw, our President and CEO, iscompensated pursuant to an employment agreement.  Please see the CompensationPursuant to Employment Agreement, set forth above for an in depth summaryof the terms of such agreement.

 

CompensationCommittee Interlocks and Insider Participation

 

                The Compensation and BenefitsCommittee is currently composed of Messrs. Clarence Zierhut and MarcoLaterza.  Dr. Jimmie Shiu, a former independent Director was appointed to the committeeon August 8, 2006.  Dr. Shiuresigned as a Director on November 19, 2007.  Each of these current and former members ofthis committee is/was an independent Board member at the time of their serviceon the committee and none have ever been employees.

 

                There are no interlockingDirectors or executive officers between us and any other company. ** **Accordingly, none ofour executive officers or Directors served as a Director for another entity oneof whose executives or Directors served on our Board of Directors.

 

CompensationCommittee Report

 

                The Compensation and BenefitsCommittee has reviewed and discussed the COMPENSATION DISCUSSION AND ANALYSIS requiredby Item 402(b) with Management and, based on the review and discussionsreferred to in paragraph (e)(5)(i)(A) of Item 402, has recommended to theBoard of Directors that the COMPENSATION DISCUSSION AND ANALYSIS be included inthis report.

 
|   |   | Clarence Zierhut |
|--------|--------|------------------|
|   |   | Marco Laterza    |

 

38

----

 

**Item 12. Security Ownership ofCertain Beneficial Owners and Management and Related StockholderMatters.**

 

EQUITYCOMPENSATION PLAN INFORMATION

 

                The following table sets forthinformation relating to our equity compensation plans as of December 31,2007:

 

**Equity Compensation Plan Information**

 
| ** **                                                  | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **Number of securities**    | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **remaining available for** | ** ** |
| ** **                                                  | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **future issuance under**   | ** ** |
| ** **                                                  | ** ** | **Number of securities to** | ** ** | **Weighted average**         | ** ** | **equity compensation**          | ** ** |
| ** **                                                  | ** ** | **be issued upon exercise** | ** ** | **exercise price of**   | ** ** | **plans (excluding**                  | ** ** |
| ** **                                                  | ** ** | **of outstanding options,**      | ** ** | **outstanding options,**     | ** ** | **securities reflected**         | ** ** |
| ** **                                                  | ** ** | **warrants and rights**          | ** ** | **warrants and rights** | ** ** | **in column(a))**                | ** ** |
| **Plan category**                                      |       | (a)                                        |       | (b)                               |       | (c)                                   |       |
| Equity compensation plans approved by security holders      |       | 2,451,155                                  |       | $                                 | 8.92       |                                  | 2,548,845  |   |
|                                                        |       |                                       |       |                              |       |                                  |       |
| Equity compensation plans not approved by security holders* |       | 286,000                                    |       | $                                 | 7.56       |                                  | N/A        |   |
|                                                        |       |                                       |       |                              |       |                                  |       |
| Total                                                       |       | 2,737,155                                  |       | N/A                               |       | 2,548,845                             |       |

 

*              In conjunction with a $3 million Loan Agreement andthe purchase of 525,000 Series V shares by Katie Petroleum, we issuedoptions for the purchase of 136,439 shares of our Common Stock at an exerciseprice of $1 per share to Katie Petroleum and two affiliates. Options for136,436 shares were exercised in 2005.

 

                In conjunction with a $2.5million working capital loan, purchase of a real estate note and a $1,000,000construction loan (which was never drawn on) we issued an option to KatiePetroleum for the purchase of 100,000 shares of our Common Stock at an exerciseprice of $1 per share. The options were exercised in 2005.

 

                We authorized the issuance of anoption for the purchase of 200,000 shares of Common Stock to Jimmie Shiu, M.D.,for his past services in introducing us to purchasers of various series ofPreferred Stock as well as for introducing us to Mr. Jack Jackson, whocontrolled Katie Petroleum. The option is exercisable at $6.90 per share andwill terminate in 2012.

 

                We authorized the issuanceof an option for the purchase of 25,000 shares of Common Stock to Mr. HarryWatson for his past services in assisting us in protecting our intellectualproperty. The option is exercisable at $6.90 per share and will terminate in2012.

 

                In connection with a ConsultingAgreement with International Export and Consulting, we issued an option for thepurchase of 61,000 shares of Common Stock to Marwan Saker. The option isexercisable at $10.00 and will expire in 2010.

 

39

----

 

SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

                The following table sets forthcertain information regarding the beneficial ownership of our capital stock asof March 1, 2008, for each person known by us to own beneficially fivepercent or more of the voting capital stock. Each shareholder identified in thetable possesses sole voting and investment power with respect to his or hershares except as noted below.

 
| ** **                   | ** ** | **Name and Address of**                                                               | ** ** | **Amount and Nature of** | ** ** | **Percent of** | ** ** |
|------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------|------------|
| **Title of Class** | ** ** | **Beneficial Owner**                                                                            | ** ** | **Beneficial Ownership**           | ** ** | **Class****(1)**    | ** ** |
| Common Stock                 |       |                                                                                                 |       |                                    |       |                |       |
|                         |       | Thomas J. Shaw(2)  511 Lobo Lane,  P.O. Box 9  Little Elm, TX 75068-0009                        |       | 11,280,000                              |       | 47.2%               | (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                                  |       | 3.5%                |       |
|                         |       | Lillian E. Salerno                                                                                   |       | 12,500                                  |       | 1%                  |       |

 

(1)                  The percentages of Common Stock are basedon 23,892,564 shares of Common Stock equivalents consisting of 23,800,064shares of Common Stock outstanding and 92,500 shares of Preferred Stockconvertible by the above persons within 60 days of this Report. The percentagesof Class B Stock are based on 2,285,266 shares of Class B Stockoutstanding.

 

(2)                  80,000 of the shares identified as CommonStock are preferred shares which are eligible for conversion into Common Stockwithin 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 are permanently controlled by Mr. Shawuntil such time as they are sold by Ms. August.  These shares areincluded in calculating Mr. Shaw’s Common Stock equivalents andpercentages in the above table.

 

(3)                      Ms. August’s 2,800,000 shares arecontrolled by Mr. Thomas J. Shaw, pursuant to a Voting Agreement. See footnote 2 for a more detailed explanation.  Accordingly, they arealso included in the Common Stock equivalents and percentages for Thomas Shawin the above table.

 

(4)                    12,500 of the shares identified as CommonStock are preferred shares which are eligible for conversion into Common Stockwithin 60 days of the Report.

 

(5)                    The number of shares held by this entitywas obtained from a Schedule 13G/A filed on February 4, 2008.  Pursuant to the Schedule 13G/A, SigniaCapital Management, LLC has sole voting power for 635,938 of the shares andsole dispositive power for a total of 1,549,462 shares (inclusive of the solevoting power shares).

 

40

----

 

SECURITYOWNERSHIP OF 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                       |       | 12,565,900                                                 |       | 50.0                                | %          |
| As Individuals               |       | Thomas J.  Shaw(2)                            |       | 11,280,000                                                 |       | 44.9                                | %          |
|                         |       | Marwan Saker(3)                               |       | 461,000                                                    |       | 1.8                                 | %          |
|                         |       | Clarence  Zierhut(4)                          |       | 61,000                                                     |       | < 1                              | %          |
|                         |       | Douglas W.  Cowan(5)                          |       | 204,000                                                    |       | 1                                   | %          |
|                         |       | Steven R.  Wisner(6)                          |       | 206,400                                                    |       | 1                                   | %          |
|                         |       | Russell B.  Kuhlman(7)                        |       | 134,400                                                    |       | 1                                   | %          |
|                         |       | Michele M.  Larios(8)                         |       | 209,100                                                    |       | 1                                   | %          |
|                         |       | Marco Laterza                                 |       | 10,000                                                     |       | < 1                              | %          |
|                         |       |                                          |       |                                                       |       |                                |       |
| Class B  Stock          |       |                                          |       |                                                       |       |                                |       |
| As a Group                   |       | Officers and  Directors                       |       | 435,000                                                    |       | 19.0                                | %          |
| As Individuals               |       | Thomas J.  Shaw                               |       | 80,000                                                     |       | 3.5                                 | %          |
|                         |       | Marwan Saker                                  |       | 355,000                                                    |       | 15.5                                | %          |

 

(1)       The percentages of Common Stock are based on25,130,964 shares of Common Stock equivalents consisting of 23,800,064 sharesof Common Stock outstanding at March 1, 2008, 435,000 shares of PreferredStock convertible by the above persons and options for the purchase of 895,900shares of Common Stock obtainable by the above persons within 60 days of thisReport. The percentages of Class B stock are based on 2,285,266 shares of Class BStock outstanding.

 

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

 

(3)       355,000 shares identified as Common Stock arepreferred shares which are eligible for conversion into Common Stock within 60days of this Report. The shares are held as follows: Saker Investments holds15,500 shares of Series IV Class B Convertible Preferred Stock and25,000 shares of Series V Class B Convertible Preferred Stock, SovanaCayman Islands, Inc. holds 300,000 shares of Series IV Class BConvertible Preferred Stock, and My Investments holds 14,500 shares of Series IVClass B Convertible Preferred Stock. Mr. Saker is an Officer orDirector and shareholder for each of these companies. The remaining 106,000shares identified as Common Stock are shares obtainable through the exercise ofoptions held by Mr. Saker within 60 days of the Report.

 

(4)       51,000 of these shares identified as CommonStock are shares acquirable by the exercise of stock options within 60 days ofthe Report.

 

(5)       These shares identified as Common Stock areshares acquirable by the exercise of stock options within 60 days of theReport.

 

(6)       201,400 of these shares identified as CommonStock are shares acquirable by the exercise of stock options within 60 days ofthe Report.

 

(7)       These shares identified as Common Stock areshares acquirable by the exercise of stock options within 60 days of theReport.

 

 

 

41

----

 

(8)       199,100 of these shares identified as CommonStock are shares acquirable by the exercise of stock options within 60 days ofthe Report.

 

                                                There are no arrangements, the operation ofwhich would result in a change in control of the Company, other than the factthat Ms. August’s shares shall cease to be controlled by Mr. Shawunder their Voting Agreement upon their sale to a third party.

 

**Item 13. Certain Relationships andRelated Transactions, and Director Independence.**

 

RelatedParty Transactions

 

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

 

                                                Thomas J. Shaw, our President and ChiefExecutive Officer who beneficially owned 35.3% of the outstanding Common Stock(and controlled another 11.8% pursuant to a Voting Agreement with Ms. SuzanneAugust) as of March 1, 2008, was paid a licensing fee of $500,000(amortized over 17 years) by us for the exclusive worldwide licensing rights tomanufacture, market, sell, and distribute retractable medical safety products.In addition, Mr. Shaw and Ms. August, together, receive an aggregatefive percent royalty on gross sales of all licensed products sold to customersover the life of the Technology Licensing Agreement.  Such license is in the process of beingamended to cover additional patents and products.  A royalty of $1,471,046 was paid in 2007.

 

                                                Wehave an oral consulting agreement with MediTrade International Corporation, acompany controlled by Ms. Lillian Salerno, a shareholder holding approximately10% of the Common Stock.  It is paid$6,500 per month plus expenses.  In 2007,it was paid aggregate consideration of $129,618.

 

DirectorIndependence

 

                                                The Board of Directors has the responsibilityfor establishing corporate policies and for our overall performance, althoughit is not involved in day-to-day operations. Currently, a majority (four ofseven) of the Directors serving on our Board of Directors are independentDirectors as defined in Section 121(A) of the listing standards ofthe AMEX. Our current independent Directors are Messrs. Clarence Zierhut,Marwan Saker, Marco Laterza, and Ms. Amy Mack.  Jimmie Shiu, M.D. also served as a Director(prior to Ms. Mack’s appointment) until November 19, 2007.

 

                                                The Board of Directors, in reviewing theindependence of its members, further considered the fact that we paid Ms. Mack’scompany $4,500 in 2007 for participation in a clinical trial.  The Board of Directors determined that herindependence was not compromised by such transaction.

 

**Item 14. Principal Accounting Feesand Services.**

 

AUDITFEES

 

                                                The aggregate fees billed by CF &Co., L.L.P. for professional services rendered for the audit of our annualfinancial statements for 2007 and 2006 and the reviews of the financialstatements included in our Forms 10-Q or services normally provided by theaccountant in connection with statutory and regulatory filings for those fiscalyears were $174,583 and $160,671, respectively.

 

AUDIT RELATED FEES

 

                                                The aggregate fees billed by CF &Co., L.L.P. for professional services rendered for the audit of our 401(k) planfor 2007 and 2006 were $13,500 and $0, respectively.

 

 TAX FEES

 

                                                The aggregate fees billed by CF &Co., L.L.P. for preparation of federal and state income tax returns and taxconsulting costs related to notices from taxing authorities for 2007 and 2006were $149,291 and $56,118, respectively.

 

42

----

 

PRE-APPROVAL POLICIES AND PROCEDURES

 

                                                The engagement of CF & Co.,L.L.P. was entered into pursuant to the approval policies and procedures of theAudit Committee. Before CF & Co., L.L.P. was engaged to renderservices the engagement was approved by the Audit Committee.  The engagement is for audit and tax serviceswhich were detailed separately. The Audit Committee implemented its approvalprocedures i.e. they were not delegated to any other party. All of the servicesprovided were pre-approved by the Audit Committee.

 

**PART IV**

 

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

 
| (a)    | (1)    | All  financial statements:  See Retractable Technologies, Inc. Index to  Financial Statements on Page F-2.                                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                             |
|   | (2)    | Those financial statement schedules  required to be filed by Item 8 of this form, and by paragraph (b) below.  Schedule II-Schedule of Valuation and Qualifying Accounts for the years ended  December 31, 2007, 2006, and 2005: |

** **
| ** **                                                                                                                                                                                                                                    | ** ** | **Balance at  beginning  of period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at  end of period** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|---------------|------------|----------------|------------|----------------------------------------------|------------|
| Provision  for Inventories                                                                                                                                                                                                                    |       |                                           |       |          |       |           |       |                                         |       |
| Fiscal year ended 2005                                                                                                                                                                                                                        |       | $                                              | 97,319     |          | $          | 25,273         |       | $                                            | (11,296    | ) | $ | 111,296 |   |
| Fiscal year ended 2006                                                                                                                                                                                                                        |       | $                                              | 111,296    |          | $          | —         |       | $                                            | (61,296    | ) | $ | 50,000 |   |
| Fiscal year ended 2007                                                                                                                                                                                                                        |       | $                                              | 50,000     |          | $          | 155,600        |       | $                                            | —     |   | $ | 205,600 |   |
|                                                                                                                                                                                                                                          |       |                                           |       |          |       |           |       |                                         |       |
| Provision  for Accounts Receivables                                                                                                                                                                                                           |       |                                           |       |          |       |           |       |                                         |       |
| Fiscal year ended 2005                                                                                                                                                                                                                        |       | $                                              | 196,320    |          | $          | 70,854         |       | $                                            | —     |   | $ | 267,174 |   |
| Fiscal year ended 2006                                                                                                                                                                                                                        |       | $                                              | 267,174    |          | $          | —         |       | $                                            | (180,144   | ) | $ | 87,030 |   |
| Fiscal year ended 2007                                                                                                                                                                                                                        |       | $                                              | 87,030     |          | $          | 166,978        |       | $                                            | —     |   | $ | 254,008 |   |
|                                                                                                                                                                                                                                          |       |                                           |       |          |       |           |       |                                         |       |
| Deferred Tax  Valuation                                                                                                                                                                                                                       |       |                                           |       |          |       |           |       |                                         |       |
| Fiscal year ended 2005                                                                                                                                                                                                                        |       | $                                              | —     |          | $          | 99,280         |       | $                                            | —     |   | $ | 99,280 |   |
| Fiscal year ended 2006                                                                                                                                                                                                                        |       | $                                              | 99,280     |          | $          | 541,143        |       | $                                            | —     |   | $ | 640,423 |   |
| Fiscal year ended 2007                                                                                                                                                                                                                        |       | $                                              | 640,423    |          | $          | 3,026,509      |       | $                                            | —     |   | $ | 3,666,932 |   |
|                                                                                                                                                                                                                                          |       |                                           |       | ** **    | ** ** | ** **     |       |                                         |       |
| Provision for Rebates                                                                                                                                                                                                                         |       |                                           |       | **(A)**       | ** ** | **(B)**        |       |                                         |       |
| Fiscal year ended 2005                                                                                                                                                                                                                        |       | $                                              | 3,955,857  |          | $          | 12,540,897     |       | $                                            | 14,052,794 |   | $ | 2,443,960 |   |
| Fiscal year ended 2006                                                                                                                                                                                                                        |       | $                                              | 2,443,960  |          | $          | 20,329,974     |       | $                                            | 20,061,184 |   | $ | 2,712,750 |   |
| Fiscal year ended 2007                                                                                                                                                                                                                        |       | $                                              | 2,712,750  |          | $          | 15,329,840     |       | $                                            | 13,404,097 |   | $ | 4,638,493 |   |
|                                                                                                                                                                                                                                          |
| (A)                              Represents estimated rebates deducted from  gross revenues  |
|                                                                                                                                                                                                                                          |
| (B)                                Represents rebates credited to the  distributor |

 

43

----

 

(3).        Exhibits:

 

                                                The following exhibits are filed herewith orincorporated herein by reference to exhibits previously filed with the SEC.

 

 (b)         EXHIBITS

 
| Exhibit No. | ** ** | **Description of Document**                                                                                                                                       |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3(i)             |       | Third Amended and  Restated Articles of Incorporation of RTI filed on November 1, 2004* as  amended by that Statement of Change of Registered Office/Agent** |
|             |       |                                                                                                                                                              |
| 3(ii)            |       | Second Amended and  Restated Bylaws of RTI**                                                                                                                      |
|             |       |                                                                                                                                                              |
| 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***                                                              |
|             |       |                                                                                                                                                              |
| 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            |       | 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**                                                                                                                                |

 

----

| *            |   | Incorporated herein by  reference to RTI’s Form 10-Q filed on November 14, 2005                         |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                   |
| **           |   | Filed  herewith                                                                                                        |
|         |   |                                                                                                                   |
| ***          |   | Incorporated herein by  reference to RTI’s Registration Statement on Form 10-SB filed on  June 23, 2000 |
|         |   |                                                                                                                   |
| ****         |   | Incorporated herein by reference  to RTI’s Form 8-K filed on October 10, 2002                           |
|         |   |                                                                                                                   |
| **** *       |   | Incorporated herein by  reference to RTI’s Form 10-KSB filed on March 31, 2003                          |
|         |   |                                                                                                                   |
| †       |   | Incorporated herein by  reference to RTI’s Form 10-Q filed on August 15, 2005                           |
|         |   |                                                                                                                   |
| †† |   | Incorporated herein by  reference to RTI’s Form 10KSB-A2 filed on September 24, 2004                    |
|         |   |                                                                                                                   |
| (c)          |   | Excluded  Financial Statement Schedules: None                                                                          |

 

44

----

 

**SIGNATURES**

 

                                                Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | RETRACTABLE  TECHNOLOGIES, INC.                        |
|--------|--------------------------------------------------------|
|   |        (Registrant) |
|   |                                                   |   |
|   | By:                                                    | /s/  Thomas J. Shaw |
|   |                                                   | THOMAS  J. SHAW |
|   |                                                   | CHAIRMAN,  PRESIDENT, AND |
|   |                                                   | CHIEF  EXECUTIVE OFFICER |
|   |                                                   |   |
|   | Date:                                                  | March 31,  2008 |

 

                                                Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
|   |                                                              |
|--------|-------------------------------------------------------------------|
|   | /s/  Steven R. Wisner                                             |
|   | Steven  R. Wisner                                                 |
|   | Executive  Vice President, Engineering &                 |
|   | Production  and Director                                          |
|   |                                                              |
|   | March 31,  2008                                              |
|   |                                                              |
|   |                                                              |
|   | /s/  Douglas W. Cowan                                             |
|   | Douglas  W. Cowan                                                 |
|   | Vice  President, Chief Financial Officer, Treasurer, and Director |
|   |                                                              |
|   | March 31,  2008                                              |
|   |                                                              |
|   |                                                              |
|   | /s/  Clarence Zierhut                                             |
|   | Clarence  Zierhut                                                 |
|   | Director                                                          |
|   |                                                              |
|   | March 31,  2008                                              |
|   |                                                              |
|   |                                                              |
|   | /s/  Amy Mack                                                     |
|   | Amy  Mack                                                         |
|   | Director                                                          |
|   |                                                              |
|   | March 31,  2008                                              |
|   |                                                              |
|   |                                                              |
|   | /s/  Marco Laterza                                                |
|   | Marco  Laterza                                                    |
|   | Director                                                          |
|   |                                                              |
|   | March 31,  2008                                              |

 

45

----