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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

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

 

**For the fiscal year ended December 31, 2009**

 

**or**

 

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

 

**For the transition period from                      to**

** **

**Commission file number 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)                              |       | (Zip Code)                                  |

 

**972-294-1010**

Registrant’s telephone number, including area code

 

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

** **

| **Title of  each class** | ** ** | **Name of  each exchange on which registered** |
|--------------------------|------------|------------------------------------------------|
| Common                   |       | NYSE Amex LLC                                  |

 

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

 

**Preferred Stock**

(Title of class)

 

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

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) 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 markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “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 |

 

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

 

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, as of the last business day of the registrant’smost recently completed second fiscal quarter. The aggregate market value of the common equity held by non-affiliatesas of June 30, 2009 was $11,059,334.10, assuming a closing price of $0.90and outstanding shares held by non-affiliates of 12,288,149.

 

APPLICABLE ONLY TOREGISTRANTS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THEPRECEDING FIVE YEARS:

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13, or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.  Yes o  No o

 

(APPLICABLEONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock, as of thelatest practicable date.  As ofMarch 1, 2010, there were 23,825,149 shares of our Common Stock issued andoutstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

List hereunder the followingdocuments if incorporated by reference and the Part of the Form 10-K(e.g., Part I, Part II, etc.) into which the document isincorporated:  (1) Any annual reportto security holders; (2) Any proxy or information statement; and(3) Any prospectus filed pursuant to Rule 424(b) or (c) underthe Securities Act of 1933.  The listeddocuments should be clearly described for identification purposes (e.g., annualreport to security holders for fiscal year ended December 24, 1980).

 

None except exhibits.

 

 

 

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**RETRACTABLETECHNOLOGIES, INC.**

**FORM 10-K**

**For theFiscal Year Ended December 31, 2009**

** **

**TABLE OFCONTENTS**

** **
| **PART I**   |
|-------------------|
| ** **        | ** ** | ** ** |
| **Item 1.**       | **Business** | **1** |
| **Item 1A.**      | **Risk Factors** | **9** |
| **Item 1B.**      | **Unresolved  Staff Comments** | **12** |
| **Item 2.**       | **Properties** | **12** |
| **Item 3.**       | **Legal Proceedings** | **13** |
|              |   |   |
| **PART II**  |
|              |   |   |
| **Item 5.**       | **Market for  Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases  of Equity Securities** | **14** |
| **Item 6.**       | **Selected  Financial Data** | **15** |
| **Item 7.**       | **Management’s  Discussion and Analysis of Financial Condition and Results of Operation** | **16** |
| **Item 7A.**      | **Quantitative  and Qualitative Disclosures About Market Risk** | **24** |
| **Item 8.**       | **Financial  Statements and Supplementary Data** | **F-1** |
| **Item 9.**       | **Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure** | **25** |
| **Item 9A.**      | **Controls and  Procedures** | **25** |
| **Item 9B.**      | **Other Information** | **26** |
|              |   |   |
| **PART III** |
|              |   |   |
| **Item 10.**      | **Directors,  Executive Officers and Corporate Governance** | **26** |
| **Item 11.**      | **Executive  Compensation** | **31** |
| **Item 12.**      | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters** | **44** |
| **Item 13.**      | **Certain  Relationships and Related Transactions, and Director Independence** | **47** |
| **Item 14.**      | **Principal  Accounting Fees and Services** | **48** |
|              |   |   |
| **PART IV**  |
|              |   |   |
| **Item 15.**      | **Exhibits,  Financial Statement Schedules** | **48** |
| **SIGNATURES**    | **51** |

 

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**PART I**

 

FORWARD-LOOKINGSTATEMENT WARNING

 

Certain statements included by reference in thisfiling containing the words “could,” “may,” “believes,” “anticipates,”“intends,” “expects,” and similar such words constitute forward-lookingstatements within the meaning of the Private Securities Litigation ReformAct.  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, the impact of current litigation (as itaffects our costs as well as market access), our ability to maintain favorablesupplier arrangements and relationships, our ability to receive royalties fromBaiyin Tonsun Medical Device Co., Ltd. (“BTMD”), our ability to quicklyincrease capacity in response to an 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 Becton Dickinson and Company (“BD”), in providing devices to thesafety market, and other factors referenced in **Item 1A. Risk Factors**. Given these uncertainties, undue reliance should not be placed onforward-looking statements.

 

**Item 1. Business.**

 

DESCRIPTIONOF BUSINESS

 

GeneralDevelopment of Business

 

On May 9,1994, our company was incorporated in Texas to design, develop, manufacture,and market innovative patented safety medical products for the healthcareindustry.

 

OurVanishPoint® safety products (consisting of 1mL tuberculin,insulin, and allergy antigen VanishPoint® syringes; 0.5mL, 3mL, 5mL, and 10mLVanishPoint® syringes; the VanishPoint® bloodcollection tube holder; autodisable syringe; and the VanishPoint® IV safetycatheter) utilize a unique friction ring mechanism patented by Thomas J. Shaw,our Founder, President, and Chief Executive Officer.  VanishPoint® safety needle products are designedspecifically to prevent needlestick injuries and to prevent reuse.  The friction ring mechanism permits theautomated retraction of the needle into the barrel of the syringe, directly fromthe patient, after delivery of the medication is completed.  The VanishPoint® blood collection tube holder utilizes the samemechanism to retract the needle after blood has been drawn from thepatient.  Closure of an attached end capof the blood collection tube holder causes the needle to retract directly fromthe patient into the closed blood collection tube holder.  The IV catheter also operates with a frictionring mechanism whereby the needle is retracted after insertion of the catheterinto the patient.  We also have a PatientSafe® syringe which is uniquely designed to reducethe risk of bloodstream infections resulting from catheter hubcontamination.  Patient Safe®’s unique luer guard reduces the risk of luer tipcontact contamination and the risk of contamination of intravenous fluid.

 

Advantagesof our VanishPoint® safety products include protection fromneedlestick injuries, prevention of cross contamination through reuse, andreduction of disposal and other associated costs.  Federal regulation now requires the use ofsafe needle devices.

 

We andThomas J. Shaw, our Founder and CEO, entered into a Technology LicenseAgreement dated effective as of the 23rd day of June 1995, whereby Mr. Shawgranted us a worldwide exclusive license to manufacture, market, sell, anddistribute ‘Licensed Products’ and ‘Improvements’ until the expiration of thelast ‘Licensed Patents’ unless sooner terminated under certain conditionswithout right to sublicense.  ‘LicensedProducts’, ‘Improvements’, and ‘Licensed Patents’ are all terms that areextensively defined in the Technology License Agreement.  In exchange, we paid a $500,000 initiallicensing fee and a 5% royalty on gross sales after returns of ‘LicensedProducts’.  Mr. Shaw entered into anagreement whereby Ms. Suzanne August, his former spouse, is entitled to$100,000 per quarter payable out of any royalties.  See “Patents, Trademarks, Licenses, andProprietary Rights” for a more detailed discussion.  We and Mr. Shaw entered into the FirstAmendment to Technology Agreement July 3, 2008, whereby we amended theTechnology License Agreement in order to include

 

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certain additional patentapplications (addressing non-syringe patents) owned by Mr. Shaw in thedefinition of “Patent Properties” as set forth in the Technology LicenseAgreement so that such additional patent applications would be covered by thelicense granted by Mr. Shaw to us.

 

Ourgoal is to become a leading provider of safety medical products.

 

Ourproducts have been and continue to be distributed nationally through numerousdistributors.  However, we have beenblocked from access to the market by exclusive marketing practices engaged inby BD which dominates our market.  Weinitiated a lawsuit in 2007 against BD. The suit was for patent infringement, antitrust practices, and falseadvertising.  The court severed thepatent claims from the other claims pending resolution of the patentdispute.  On November 9, 2009, thejury returned a verdict finding that all three patents were valid andinfringed.

 

Wecontinue to attempt to gain access to the market through our sales efforts, ourinnovative technology, introduction of new products, and, when necessary,litigation.  We are focusing on methodsof upgrading our manufacturing capability and efficiency in order to enable usto offer our technology at a reduced price. We believe our current capitalization provides the resources necessaryto implement these changes and improve our manufacturing capacity andefficiency, thereby reducing our unit cost.

 

Wehave developed and are developing new safety medical products, some of which donot utilize our patented retraction technology. The Patient Safe® syringe is one such product.  This product is uniquely designed to reducethe risk of bloodstream infections resulting from catheter hubcontamination.  Patient Safe®’s unique luer guard reduces the risk of luer tipcontact contamination and the risk of contamination of intravenous fluid.

 

FinancialInformation

 

Pleasesee the financial statements in **Item 8Financial Statements and Supplementary Data** for information aboutour revenues, profits and losses for the last three years, and total assets forthe last two years.

 

Principal Products

 

Ourproducts with Notice of Substantial Equivalence to the U.S. Food and DrugAdministration (“FDA”) and which are currently sold include the 1mL tuberculin;insulin; allergy antigen VanishPoint® syringes; 3mL, 5mL, and 10mL VanishPoint® syringes; theVanishPoint® blood collection tube holder; the VanishPoint® IV safetycatheter; small diameter tube adapter and the Patient Safe® syringe, whichis uniquely designed to reduce the risk of bloodstream infections resultingfrom catheter hub contamination.  PatientSafe®’s unique luer guard reduces the risk of luer tip contact contamination andthe risk of contamination of intravenous fluid. We are also selling autodisable syringes in the international market.

 

In theAugust 2007 issue of *Health Devices*,ECRI listed two syringes with the highest possible rating: our VanishPoint® syringe andBD’s IntegraTM syringe. ** **A jury returned a verdict in November 2009finding that all three patents asserted by us against BD are valid and infringedby BD (with regard to its IntegraTM product).

 

Syringesales comprised 98.0%; 98.6%; and 98.9% of revenues in 2007, 2008, and 2009.

 

Principal Markets

 

Ourproducts are sold to and used by healthcare providers primarily in the U.S.(with 11.6% of revenues in 2009 generated from sales outside the U.S.) whichinclude, but are not limited to, acute care hospitals, alternate carefacilities, doctors’ offices, clinics, emergency centers, surgical centers,convalescent hospitals, Veterans Administration facilities, militaryorganizations, public health facilities, and prisons.

 

Thesyringe and needle device market continues to be a market in transition.  The nature of the products comprising themarket is slowly****changing fromstandard to safety devices.  The impetusfor the change to safety devices is the risk that is carried with eachneedlestick injury which includes the transmission of over 20 bloodborne

 

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pathogens, including thehuman immunodeficiency virus (“HIV,” which causes AIDS), hepatitis B, andhepatitis C.  Because of the occupationaland public health hazards posed by conventional disposable syringes, public healthpolicy makers, domestic organizations, and government agencies have beeninvolved in the effort to get more effective safety needle products tohealthcare workers.  Federal legislationwas signed into law on November 6, 2000, by former President WilliamJefferson Clinton.  This legislation,which became effective for most states on April 12, 2001, now requiressafety needle products be used for the vast majority of procedures.  However, even with this requirement, manyhospitals are neglecting to follow the law intended to protect healthcareworkers.

 

Methods ofMarketing and Distribution

 

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

 

We distribute our products throughout the U.S. and itsterritories through general line and specialty distributors.  We also utilize internationaldistributors.  We have developed anational direct marketing network in order to market our products to healthcare customers and their purchaser representatives.  Our marketers make contact with all of thedepartments that affect the decision-making process for safety products,including the purchasing agents.  Theycall acute care and alternate care sites and speak directly with thedecision-makers of these facilities.  Weemploy trained clinicians, including registered nurses and/or medicaltechnologists that educate healthcare providers and healthcare workers on theuse of safety devices through exhibits at related tradeshows and publicationsof relevant articles in trade journals and magazines.  These nurses provide clinical support tocustomers.  In addition to marketing ourproducts, the network demonstrates the safety and cost effectiveness of theVanishPoint® automated retraction products to customers.

 

In theneedle and syringe market, the market share leader, BD, has utilized, amongother things, long-term exclusive contracts which have restricted our entryinto the market.  Other needle relatedproducts manufactured by us that are being denied market access as a result ofBD’s anti-competitive actions include the Patient Safe®, catheters, and blood tube holders.

 

Wehave numerous agreements with organizations for the distribution of ourproducts in foreign markets.  The totalpopulation of Western Europe is almost 400 million, and the recognition for theurgency of safe needle devices in parts of Europe has followed the U.S.model.  The European Hospital andHealthcare Employers’ Association (HOSPEEM) and the European Federation ofPublic Services Union (EPSU) have entered into an agreement to help preventneedlestick injuries among hospital staff. The European Commission has issued a proposal for a council directive toimplement the agreement.  Regions withinAsia, South America, and Africa are also recognizing the need for ourproducts.  Beginning in 2004, we weregiven an award (from PATH) to supply syringes to various African countriesunder the President’s Emergency Plan for AIDS relief (PEPFAR).  Awards increased significantly from 2004 to2007.  The continuation of PEPFAR hasbeen reauthorized by Congress through 2013. However, funding for the procurement of safety syringes in this programhas not occurred to date.

 

As aresult of the introduction of VanishPoint® syringes through the PEPFAR initiative,African countries have begun to procure products outside of the U.S.-fundedprogram.  In 2007, the Director Generalof Nigeria’s National Agency for Food and Drug Administration and Control(NAFDAC), endorsed automated retraction syringes for use throughoutNigeria.  We are currently sellingsyringes to a Nigerian distributor for use in that country.  At the end of 2008, the Deputy Prime Ministerof Namibia also publically endorsed automated retraction syringes as a publicintervention that would “protect health workers and save their patient’slives.”

 

Keycomponents of our strategy to increase our market share are to: (a) defeatmonopolistic practices through litigation; (b) focus on methods ofupgrading our manufacturing capability and efficiency in order to enable us toreduce costs and improve profit margins; (c) continue marketing emphasisin the U.S.; (d) continue to add Veterans Administration facilities,health departments, emergency medical services, federal prisons, long-termcare, and home healthcare facilities as customers; (e) educate healthcareproviders, insurers, healthcare workers, government agencies, governmentofficials, and the general public on the reduction of risk and the costeffectiveness

 

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afforded by our products;(f) supply product through GPOs and Integrated Delivery Networks wherepossible; (g) consider possibilities for future licensing agreements andjoint venture agreements for the manufacture and distribution of safetyproducts in the U.S. and abroad; (h) introduce new products; and (i) increaseinternational sales.

 

Status of PubliclyAnnounced New Products

 

Wehave patented and are in the process of developing additional safety medicalproducts which have yet to be announced.

 

Sources andAvailability of Raw Materials

 

Wepurchase most of our product components from single suppliers, including needleadhesives and packaging materials.  Thereare multiple sources of these materials. We own the molds that are used to manufacture the plastic components ofour products in the U.S.  Our suppliersinclude Magor Mold, Inc., Helix Medical (formerly APEC), Channel PrimeAlliance, Exacto Spring Corporation, Sterigenics, and ISPG.

 

Patents,Trademarks, Licenses, and Proprietary Rights

 

We andMr. Shaw entered into a Technology License Agreement dated effective as ofthe 23rd day of June, 1995 (the “Technology License Agreement”), whereby Mr. Shawgranted us “... a worldwide exclusive license and right under the ‘LicensedPatents’ and ‘Information’, to manufacture, market, sell and distribute ‘LicensedProducts’ and ‘Improvements’ without right to sublicense and subject to suchnonexclusive rights as may be possessed by the Federal Government...”.  ‘Licensed Patents’, ‘Information’, ‘LicensedProducts’, and ‘Improvements’ are all defined extensively in the TechnologyLicense Agreement.  We may enter intosublicensing arrangements with Mr. Shaw’s written approval of the termsand conditions of the licensing agreement. The ‘Licensed Products’ include all retractable syringes and retractablefluid sampling devices and components thereof, assembled or unassembled, whichcomprise an invention described in ‘Licensed Patents’, and improvements theretoincluding any and all ‘Products’ which employ the inventive concept disclosedor claimed in the ‘Licensed Patents’.  Weand Mr. Shaw entered into the First Amendment to Technology Agreement July 3,2008, whereby we amended the Technology License Agreement in order to includecertain additional patent applications (addressing non-syringe patents) ownedby Mr. Shaw to the definition of “Patent Properties” as set forth in theTechnology License Agreement so that such additional patent applications wouldbe covered by the license granted by Mr. Shaw to us.

 

Inexchange for the Technology License Agreement, we negotiated a licensing feeand agreed to pay a 5% royalty on gross sales after returns.  The license terminates upon expiration of thelast licensed patents unless sooner terminated under certain circumstances.  The licensing fees have been paid inaccordance with this agreement with the exception of $1,500,000 in fees whichwere waived in 2002 and $1,000,000 in fees which were waived in 2009.

 

Wehave the right and obligation to obtain protection of the inventions, includingprosecution of patent properties.  Thelicense unilaterally changes to a nonexclusive license in the event of ahostile takeover.  Also, if Mr. Shawinvoluntarily loses control of the Company, the license becomes a nonexclusivelicense and a right to information.

 

Weseek foreign patent protection through the Patent Cooperation Treaty and havefiled applications for regional and national patent protection in selectedcountries where we believe our products can be utilized most.

 

Wehold numerous U.S. patents related to our automated retraction technology,including patents for IV safety catheters, winged IV sets, syringes, dentalsyringes, and blood collection tube holders. In addition, we have multiple applications for patents currentlypending.  The principal syringe patent inthe U.S., as well as its foreign counterpart, will expire in May 2015.  We have also registered the following tradenames and trademarks: VanishPoint, VanishPoint logos, RT with a circle mark,the Spiral Logo used in packaging our products, and the color coded spots onthe ends of our syringes.  We also havetrademark protection for the phrase “The New Standard for Safety.”  We have applied for a trademark for the PortPrep.

 

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We areinvolved in patent litigation detailed in **Item3.  Legal Proceedings**.  We have decided, on the advice of patentcounsel, not to purchase patent insurance because it would requireinappropriate disclosure of information that is currently proprietary andconfidential.

 

In2009 we obtained roughly 67.5% of our finished products through Double Dove, aChinese manufacturer.  We believe wecould make up any long-term disruption in these supplies by utilizing more ofthe capacity at the Little Elm facility, except for 0.5mL, autodisable, 5mL,and 10mL syringes which comprised about 3.8% of our 2009 revenues.

 

Wepreviously entered into a License Agreement with BTMD as of May 13,2005.  That license expired on May 13,2008 (prior to the manufacture and delivery of any products).  Nevertheless, BTMD continued to work towardcompleting the facility and gaining the necessary approvals in order tomanufacture and sell products.  Thefacility has been completed and BTMD has met Chinese governmentrequirements.  BTMD received aRegistration Certificate for Medical Device on August 24, 2009.  Production efforts are currently underway andare being tested. We entered into a new agreement (effective as of July 1,2009) with BTMD along similar terms as the prior agreement.  This agreement expires on July 1, 2010which may automatically extend under certain conditions.  Such terms include granting to BTMD a limitedexclusive license to manufacture and a limited exclusive right to sell syringesin the People’s Republic of China (“PRC”) having retractable needles thatincorporate our technology.  This LicenseAgreement is subject to the Technology License Agreement dated June 23,1995 between Mr. Thomas J. Shaw, our founder and CEO, as licensor, and theCompany, as licensee (as amended). Accordingly, Mr. Shaw will receive 5% of the licensing proceeds wereceive.  BTMD has agreed to manufactureand sell these products in the PRC and to pay us a quarterly royalty of two andone-half cents per unit on 3mL and 5mL syringes and a royalty of three andone-half cents per unit on 0.5mL, 1mL, and 10mL syringes.  The obligation to pay the royalties continueseven if any and all of our patent rights in the PRC are found to be invalid orunenforceable for any reason.  We stillcontinue to expect royalty payments although we are unable to predict the datewe will begin to receive such royalties.

 

Flu and Swine FluImpact

 

Historically, unit sales have increased in the latterpart of the year due, in part, to the demand for syringes during the fluseason.  We expect the H1N1 virus (“Swine Flu”) to have a longer worldwideimmunization duration than the seasonal flu.  In the third quarter of 2009, we were awarded a contract bythe Department of Health and Human Services (“DHHS”) to supply a portion of thesafety engineered syringes to be used in the U.S. efforts to vaccinate the U.S.population against the Swine Flu.  Theimpact on us was material.  Sales to theDHHS comprised 52.0% and 24.4% of our revenues for the three months and twelvemonths ended December 31, 2009, respectively.  This program, which was estimated to run fromAugust 2009 through March 2010, ended in December 2009.  Our revenue increased 142.1% in the fourthquarter principally due to the DHHS contract. We do not know if there will be a similar program in 2010.

 

Working CapitalPractices

 

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

 

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

 

Inventoriesare valued at the lower of cost or market, with cost being determined usingactual average cost.  A reserve isestablished for any excess or obsolete inventories.

 

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

 

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Accountspayable and other short-term liabilities include amounts that we believe wehave an obligation for at the end of year. These included charges for goods or services received in 2009 but notbilled to us at the end of the year.  Italso included estimates of potential liabilities such as rebates and otherfees.

 

Ourdomestic return policy is set forth in our standard Distribution Agreement, a copyof which was attached as Exhibit no. 6.3 to our Form 10-SB filed on June 23,2000.  This policy provides that acustomer may return incorrect shipments within 10 days following arrival at thedistributor’s facility.  In all suchcases the distributor must obtain an authorization code from us and affix thecode to the returned product.  We willnot accept returned goods without a returned goods authorization number.  We may refund the customer’s money or replacethe product minus a restocking fee of 10% and all applicable freight charges.

 

Ourinternational contracts do not provide for any returns.

 

Ourreturn policy also provides that a customer may return product that isoverstocked.  Overstocking returns arelimited to two times in each 12 month period up to 1% of distributor’s totalpurchase of products for the prior 12 month period upon the following terms: i)an “overstocked” product is that portion of distributor’s inventory of theproduct which exceeds distributor’s sales volume for the product during thepreceding four months; ii) distributor must not have taken delivery of theproduct which is overstocked during the preceding four months; iii) overstockedproduct held by distributor in excess of 12 months from the date of originalinvoice will not be eligible for return; iv) the product must have anexpiration date of at least 24 months from the date of return; v) theoverstocked product must be returned to us in our saleable case cartons whichare unopened and untampered, with no broken or re-taped seals; vi) distributorwill be granted a credit which may be used only to purchase other products fromus, the credit to be in the amount of the invoice price of the returned productless a 10% restocking fee which will be assessed against distributor’ssubsequent purchase of product; vii) distributor must obtain an authorizationcode from our distribution department and affix the code to the returnedproduct; and viii) distributor shall bear the cost of shipping the returnedproducts to us.  All product overstocksand returns are subject to inspection and acceptance by manufacturer.

 

Dependence onMajor Customers

 

Twocustomers, DHHS and McKesson, accounted for an aggregate of 38.4% of ourrevenue in 2009.  We have numerous othercustomers and distributors that sell our products in the U.S. andinternationally.  The DHHS program, whichwas estimated to run from August 2009 through March 2010, ended in December 2009.  We do not know if there will be a similarprogram in 2010.

 

Two customers, DHHS and Cardinal Health, comprised68.4% of our accounts receivable at December 31, 2009.

 

Backlog Orders

 

Orderbacklog is not material to our business inasmuch as orders for our productsgenerally are received and filled on a current basis, except for itemstemporarily out of stock.

 

Government Fundingof Research and Right to License

 

ThomasJ. Shaw developed his initial version of a safety syringe with the aid ofgrants by the National Institute of Drug Abuse, a subsidiary of the NationalInstitutes of Health.  As a result, thefederal government has the right, where the public interest justifies it, todisperse the technology to multiple manufacturers so that this early version ofa safety syringe could be made widely available to the public.  However, the earlier design of 1991 was abulkier, less effective, and more expensive version of the current VanishPoint® syringeproduct.  Accordingly, Managementbelieves that the risk of the government demanding manufacture of thisalternative product is minimal.  TheVanishPoint® syringe design was only partly funded withgrant money and the product, as sold, incorporates technology for which thegovernment has no rights.  Therefore thegovernment has no right to allow others to manufacture the VanishPoint®  syringe.

 

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GovernmentApproval and Government Regulations

 

Forall products manufactured for sale in the domestic market we have given noticeof intent to market to the FDA and the devices were shown to be substantiallyequivalent to the predicate devices for the stated intended use.

 

Forall products manufactured for sale in the foreign market, we hold a certificateof Quality System compliance with ISO 13485. We also have approval to label products for sale into European Unioncountries with a CE Mark.  We will complywith the regulatory regulations of all countries in which our products areregistered for sale.

 

Competitive Conditions

 

Ourproducts are sold to and used by healthcare providers primarily in the U.S.(with 11.6% of revenues in 2009 generated from sales outside the U.S.) whichinclude, but are not limited to, acute care hospitals, alternate carefacilities, doctors’ offices, clinics, emergency centers, surgical centers,convalescent hospitals, Veterans Administration facilities, militaryorganizations, public health facilities, and prisons.

 

Wecompete primarily on the basis of product performance and quality.  We believe our competitive advantagesinclude, but are not limited to, our leadership in quality and innovation. Webelieve our products continue to be the most effective safety devices intoday’s market.  Our syringe productsinclude passive safety activation, require less disposal space, and areactivated while in the patient.  Ourprice per unit is competitive or even lower than the competition once all thecosts incurred during the life cycle of a syringe are considered. Such lifecycle costs include disposal costs, testing and treatment costs for needlestickinjuries, and treatment for contracted illnesses through needlestickinjuries.  We sued Occupational andMedical Innovations Limited (“OMI”) in April 2008 and separately sued BDin June 2007 for claims of patent infringement (See **Item 3.Legal Proceedings**), and in December 2009 and November 2009,respectively, such companies were found to infringe our patents.  These judgments could increase demand for ourproduct.  However, there is no assurancewhen or if such increase will occur.

 

Wehave three major competitors: BD, Covidien Ltd. (formerly known as TycoHealthcare which was spun off from Tyco International) (“Covidien”), and TerumoMedical Corp. (“Terumo”).

 

Foundedin 1897, BD is headquartered in New Jersey. BD’s safety-engineered device sales accounted for approximately 23% ofBD’s total 2009 sales.  BD currentlymanufactures the SafetyLokTM, 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 the needletip.  BD also manufactures a safety bloodcollection and hypodermic needle that utilizes the EclipseTM needle cover.  BD also manufactured a 3mL and 1mL retractingneedle product based on a license agreement with Specialized Health ProductsInternational, Inc. (formerly the Med-Design Corporation).  The IntegraTM, a retractable syringe offeredby BD, was the subject product in a patent infringement case in which a juryfound in our favor.  A final judgment hasnot been entered. See **Item 3. Legal Proceedings**. The introduction of this syringe hadlittle impact on our sales due to BD’s historic market dominance.  BD’s “Vacutainer®”blood collection products are commonly used as industry jargon to refer toblood collection products in general.

 

SherwoodMedical Co. (“Sherwood”) was acquired by Tyco International.  Sherwood is now part of Covidien.  Covidien manufactures various safety syringesand needles.

 

Terumowas the first company to sell disposable syringes in Japan.  Today, Terumo manufactures standard syringes,blood collection tube holders, safety syringes, and blood collectiondevices.  It operates internationally andhas sales in more than 150 countries.

 

BothBD’s SafetyLokTM and Covidien’s Monoject® safety syringes require the use of two handsand several extra steps to activate the tubular plastic shield which must beslid and locked into place to protect the needle.  These products must be removed from thepatient in order for the safety mechanism to be activated.  In contrast, use of the VanishPoint® syringe isidentical to that of a standard syringe until the end of an injection, when theautomated retraction mechanism retracts the needle directly from the patientsafely into the barrel of the syringe. This allows

 

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both hands to remainsafely out of harm’s way.  If the IntegraTM is removed fromthe market, VanishPoint® will be the only fully passive retractablesyringe being manufactured in commercial quantities in the U.S.

 

BD andCovidien have controlling U.S. market share; greater financial resources;larger and more established sales, marketing, and distribution organizations;and greater market influence, including the long-term and/or exclusivecontracts.  The current conditions haverestricted competition in the needle and syringe market.  BD may be able to use its resources toimprove its products through research or acquisitions or develop new products,which may compete more effectively with our products.

 

Wecontinue to attempt to gain access to the market through our sales efforts, ourinnovative technology, introduction of new products, and, when necessary,litigation.  We are focusing on methodsof upgrading our manufacturing capability and efficiency in order to enable usto compete by offering our technology 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.

 

Ourproducts have consistently received high quality ratings.  In the August 2007 issue of *Health Devices*, ECRI listed two syringes with the highestpossible rating: our VanishPoint® syringe and BD’s IntegraTM syringe.  BD’s IntegraTM syringe has been found toinfringe on our patents. See **Item 3. Legal Proceedings**.

 

Oursafety needle products have an advantage over non-retracting safety needlesbecause minimal training and changes to practitioners’ normal routines arerequired.  Use of our products alsoprohibits unfortunate and improper reuse. Several factors could materially and beneficially affect themarketability of our products.  Demandcould be increased by existing legislation and other legislative and investigative****efforts. Licensing agreements could provide entry into new markets and generateadditional revenue.  Further, outsourcingarrangements such as our purchases from Double Dove have increased ourmanufacturing capacity with little or no capital outlay and provide acompetitive cost.

 

Ourcompetitive weaknesses include our current lack of market share because twowell-established companies control 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.  Demand for our products could decrease due tothe sale of the IntegraTM, a retractable syringe manufactured by BD, whichdominates the market and has a wider range of product offerings and morecapital resources.  However, a jury hasreturned a verdict that the IntegraTM infringes our patents.

 

Research andDevelopment

 

We spent$1,071,143; $1,066,068; and $1,030,622 in fiscal 2007, 2008, and 2009,respectively, on research and development. Costs in 2009 were primarily for compensation and validation.** **Ourongoing research and development activities are performed by an internalresearch and development staff.  Thisteam of engineers is developing process improvements for current and futureautomated machines.  Our limited accessto the market has slowed the introduction of products.  Possible future products include needle medicaldevices to which the automated retraction mechanism can be applied as well asother safety medical devices.

 

EnvironmentalCompliance

 

Webelieve that we do not incur material costs in connection with compliance withenvironmental laws.  We are considered aConditionally Exempt Small Quantity Generator because we generate less than 100kilograms (220 lbs.) of hazardous waste per month.  Therefore, we are exempt from the reportingrequirements set forth by the Texas Commission on Environmental Quality.  The waste that is generated at our facility isprimarily made up of flammable liquids and paint-related waste and is sent forfuel blending by Safety Kleen.  This fuelblending process completely destroys our waste and satisfies our“cradle-to-grave” responsibility.

 

Othernonhazardous production waste includes clean polypropylene regrind that isrecycled.  All other nonhazardous wasteproduced is considered municipal solid waste and sent to a sanitary landfill byWaste Management.

 

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Wealso produce small amounts of regulated biohazardous waste from contaminatedsharps and laboratory wastes.  This wasteis sent for incineration by Stericycle.

 

Employees

 

As of March 1,2010, we had 159 full-time employees, 5 part-time employees, and 3independently contracted consultants.  Ofthe 159 full-time employees, 4 persons were engaged in research and developmentactivities, 86 persons were engaged in manufacturing and engineering, 16persons were engaged in quality assurance and regulatory affairs, 22 personswere engaged in sales and marketing, 29 persons were engaged in general andadministrative functions, and 2 persons in facilities.  No employees are covered by collectivebargaining agreements.  We are dependentupon a number of management and technical personnel, and the loss of servicesof one or more of such employees could have a material adverse effect onus.  Our President and Chief ExecutiveOfficer, Thomas J. Shaw, has an employment contract that will end on December 31,2010 which contains an automatic and continuous renewal provision forconsecutive two-year periods.

 

FinancialInformation About Geographic Areas

 

Wehave no long-lived assets in foreign countries. Shipments to international customers generally require a prepaymenteither by wire transfer or an irrevocable confirmed letter of credit.  We do extend credit to internationalcustomers on some occasions depending upon certain criteria, including, but notlimited to, the credit worthiness of the customer, the stability of thecountry, banking restrictions, and the size of the order.  All transactions are in U.S. currency.  We attribute sales to countries based on thedestination of shipment.

** **

| ** **           | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|----------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic  sales      |       | $         | 34,466,797 |      | $          | 23,244,370 |       | $ | 21,461,717 |   |
| International  sales |       | 4,515,040 |       | 4,654,948 |       | 4,828,003  |       |
| Total  sales         |       | $         | 38,981,837 |      | $          | 27,899,318 |       | $ | 26,289,720 |   |
|                 |       |      |       |      |       |       |       |
|                 |       |      |       |      |       |       |       |
| Long-lived  assets   |       |      |       |      |       |       |       |
| Domestic             |       | $         | 13,961,445 |      | $          | 14,435,667 |       | $ | 11,483,423 |   |
| Foreign              |       | $         | 272,736    |      | $          | —     |       | $ | — |   |

 

We have no sales in any foreign country that exceeds5% of revenue.  Most international salesare filled by production from Double Dove.  In the event that we becomeunable to purchase such product from Double Dove, we would need to find analternate supplier for the 0.5mL insulin syringe, the 0.5mL autodisablesyringe, and the 5mL and 10mL syringes.  We would increase domesticproduction for the 1mL and 3mL syringes to avoid a disruption in supply.

 

AvailableInformation

 

Wemake available, free of charge on our website (www.vanishpoint.com), our Form 10-KAnnual Report and Form 10-Q Quarterly reports and current reports on Form 8-K(and any amendments to such reports) as soon as reasonably practical after suchreports are filed.

 

# **Item 1A. Risk Factors.**

# ** **

You should carefully consider the following materialrisks facing us.  If any of these risksoccur, our business, results of operations, or financial condition could bematerially affected.

 

WeCompete in a Monopolistic Marketplace

 

We operate in an environment that is dominated by BD,the major syringe manufacturer in the U.S. We believe that its monopolistic business practices continue despite: (i) itspaying $100 million in 2004 to settle a prior lawsuit with us foranticompetitive practices, business disparagement, and tortious interferenceand (ii) the fact that a jury returned a verdict in November 2009finding that all three patents asserted by us against BD are valid andinfringed by BD (with regard to its IntegraTM product).

 

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Although we have made limited progress in some areas,such as the alternate care and international markets, our volumes are not ashigh as they should be given the nature and quality of our products and thefederal and state legislation requiring the use of safe needle devices.

 

OurCash Position Is Decreasing and Legal Expenses Are Increasing

 

Due to our operating losses and increased legal fees,our cash position declined $15.2 million as of December 31, 2009 ascompared to December 31, 2008.  Ourlitigation efforts will continue to require a significant amount of cash untilthe issues are resolved.

 

In the event we continue to have only limited marketaccess, the cash provided by the prior litigation settlements and generatedfrom operations becomes insufficient, and royalties from BTMD are notforthcoming, we would take additional cost cutting measures to reduce cashrequirements.  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

 

We have a history of incurring net operatinglosses.  We may experience operatinglosses in the future.  If we are unableto gain sufficient market access and market share, we may be unable to continueto finance research and development as well as support operations and expansionof production.

 

WeAre Dependent On Our Aging Patent Protection

 

Our main competitive strength is our technology.  We are dependent on our patent rights, and ifour patent rights are invalidated or circumvented, our business would beadversely affected.  Patent protection isconsidered, in the aggregate, to be of material importance in our marketing ofproducts in the U.S. and in most major foreign markets.  Patents covering products that we haveintroduced normally provide market exclusivity, which is important for thesuccessful marketing and sale of our products.

 

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

 

OurPatents Are Subject to Litigation

 

We were involved in two patent disputes both of whichthe jury found in our favor. Further, we have been sued by BD for patent infringement.  See **Item 3. Legal Proceedings**formore information. ** **Patent litigation and challengesinvolving our 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 productlines and technology (currently predominantly retractable needle products), weare vulnerable to the development of superior competing products and to changesin technology which could eliminate or reduce the need for our products.  If a superior technology is created, thedemand for our products could greatly diminish.

 

OurCompetitors Have Greater Resources

 

The three leading manufacturers of hypodermic syringesand blood collection products are BD, Covidien, and Terumo.  All three companies offer both standardsyringes and at least one safety syringe alternative.

 

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BDalso offers a retractable syringe which was found by a jury to infringe on ourpatents.  See **Item 3.Legal Proceedings**.****These competitorshave greater financial resources, larger and more established sales andmarketing and distribution organizations, and greater market influence,including long-term contracts.  Thesecompetitors 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.  Ifour competitors choose to use their resources to create products superior toours, we may be unable to sell our products and our ability to continueoperations would be weakened.

 

TheMajority of Our International Sales Are Filled Using One Supplier

 

Most international sales are filled by production fromDouble Dove.  In the event that we becomeunable to purchase such product from Double Dove, we would need to find analternate supplier for the 0.5mL insulin syringe, the 0.5mL autodisablesyringe, and the 5mL and 10mL syringes. We would increase domestic production for the 1mL and 3mL syringes toavoid a disruption in supply.  As of December 31,2009, approximately 67.5% of our production was provided by Double Dove.  11.6% of our sales in 2009 wereinternational.

 

Fluctuationsin Supplies of Inventory Could Temporarily Increase Costs

 

Fluctuations in the cost and availability of rawmaterials and inventory and the ability to maintain favorable supplierarrangements and relationships could result in the need to manufacture all (asopposed to 32.0%) of the products in the U.S. This could temporarily increase unit costs as we ramp up domesticproduction.

 

WeAre Controlled by One Shareholder

 

ThomasJ. Shaw, our President and Chairman of the Board, and Ms. Suzanne August own36.5% and 11.8%, respectively, of the outstanding Common Stock as of March 1,2010.  The shares held by Ms. August arecontrolled by Mr. Shaw pursuant to a Voting Agreement, which terminatesupon sale of all the shares for value or if terminated by both parties inwriting.  Mr. Shaw will, therefore,have the ability to direct our operations and financial affairs and tosubstantially influence the election of members of our Board of Directors.  His interests may not always coincide withour interests or the interests of other stockholders.  This concentration of ownership, for example,may have the effect of delaying, deferring, or preventing a change in control,impeding a merger, consolidation, takeover, or other business combinationinvolving us, or discouraging a potential acquirer from making a tender offeror otherwise attempting to obtain control of us, which in turn could materiallyadversely affect the market price of our Common Stock.  Of the 23,825,149 shares of Common Stockoutstanding as of March 1, 2010, executive officers, affiliates, andDirectors own or control 11,537,000 (48.4%) of the shares of outstanding CommonStock, not including Common Stock equivalents such as preferred shares andoptions.

 

WeHave Limited Access to the Capital Markets

 

The volume of trading in our Common Stock on the NYSEAmex LLC (“NYSE Amex”) (formerly the American Stock Exchange) is low.  Accordingly, it is unclear if there is anysignificant market for our shares.  Thismay reduce our ability to raise cash through public or private offerings in thefuture.

 

OurStock Price Is Low

 

Our stock price may be deemed to have been selling“for a substantial period of time at a low price per share” which may result inour receipt of a notification from the NYSE Amex that a reverse split isnecessary.  We have received no suchnotification.  When a company receivessuch a notification, failure to effect a reverse stock split may result insuspension or removal from trading on the NYSE Amex.  The NYSE Amex may initiate delistingprocedures in its discretion.  Delistingof our shares would greatly affect the liquidity of our shares and would reduceour ability 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 NYSE Amex, we willhave the right to appeal such determination. In addition, entities that were given such notices under the AmericanStock Exchange standards were generally given up to 18 months to execute a planto bring themselves into compliance with the listing standards.

 

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CurrentEconomic Conditions May Decrease Collectability of Accounts

 

Although we believe that we have granted credit tocredit-worthy firms, current economic conditions may affect the timing and/orcollectability of some accounts.  TheProvision for doubtful accounts increased by $182,000 for 2009 which brings thebalance to $681,966.

 

WeFace Inherent Product Liability Risks

 

As a manufacturer and provider of safety needleproducts, we face an inherent business risk of exposure to product liabilityclaims in the event of product failure or claim of harm caused by productoperation.  Product failure could resultin injury to the patient and could expose healthcare workers to the risk ofblood borne pathogens.  If any of ourproducts prove to be defective, we may be required to recall thoseproducts.  We do not have recallinsurance.

 

If a product liability claim is made and damages arein excess of our product liability coverage, our competitive position could beweakened by the amount of money we could be required to pay to compensate thoseinjured by our products.  We have productliability coverage with St. Paul Insurance Company covering up to $11,000,000per occurrence, with coverage up to $11,000,000 in the aggregate.  Each claim is subject to a $25,000deductible.  We have not had any productliability claims.

 

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

 

Not applicable and none.

 

**Item 2. Properties.**

 

Our22,500 square foot headquarters is located at 511 Lobo Lane, on 35 acres, whichwe own, overlooking Lake Lewisville in Little Elm, Texas.  The headquarters are in good condition andhouse our administrative offices and manufacturing facility.  The manufacturing facility producedapproximately 32.0% of the units that were sold in 2009.  We placed a 47,250 square foot warehouse inservice in March 2005 and expanded it (by an additional 47,250 feet) in2009.  In the event of a disruption in serviceof our outside supplier, Double Dove, we believe we could produce quantitiessufficient to meet demand under current circumstances except for demand for0.5mL, 5mL, and 10mL syringes which are sold principally in the internationalmarket.  In that event, we would attemptto engage another manufacturer.  We arecurrently utilizing approximately 51% of our current U.S. productive capacity.

 

Weobtained a loan from 1st International Bank (“1st International”) for$2,500,000, secured by the land and existing buildings, which provided fundingfor the construction of the 47,250 square foot warehouse placed in service in2005.  The proceeds from the loan wereused to pay off the remaining $475,000 of the revolving credit agreement with1st International in addition to funding the warehouse and relatedinfrastructure.  The payments for thepermanent funding are based on a twenty-year amortization with a five-yearmaturity.  Interest rates are based onthe amount of funds kept on deposit with the bank.  Accordingly, interest will vary from the WallStreet Journal Prime Rate (the “WSJPR”) to the WSJPR plus 1%, with floors thatmay range from 4.25% to 6.50%. Compensating balances at 1st International affecting the interest ratewill range from $0 to $500,000.  Thisloan had a maturity date in late March 2010. We anticipate refinancing this loan.

 

On August 29,2008, we obtained a $4,210,000 interim construction loan from Lewisville StateBank, a division of 1st International Bank. The purpose of the loan was to expand the warehouse, includingadditional office space, and construct a new Controlled Environment.  The interest rate was WSJPR plus 0.25%.  The loan was renewed on December 10,2009 with a 20 year amortization and 10 year maturity.  The interest rate is 5.968%. The constructionproject has been completed.

 

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

 

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**Item 3. Legal Proceedings.**

 

On August 12, 2005, we filed a lawsuit againstAbbott Laboratories (“Abbott”) in the U.S. District Court in the EasternDistrict of Texas, Texarkana Division.  We are alleging fraud and breachof contract in connection with the National Marketing and DistributionAgreement dated as of May 4, 2000, which was terminated on October 15,2003.  We are seeking damages which we estimate to be in millions ofdollars of lost profits, out of pocket expenses, and other damages.  Inaddition, we are seeking punitive damages, pre- and post-judgment interest, andattorneys’ fees.  Following Abbott’s unsuccessful attempt to get the casedismissed and ordered to arbitration, Abbott filed an answer and counterclaimon July 15, 2008, alleging several breaches of contract, breach of impliedwarranty of merchantability, and breach of express warranty, seeking in excessof $6,000,000 in compensatory damages as well as seeking attorneys’ fees. We deny the validity of Abbott’s counterclaims.  Discovery has alreadytaken place and is substantially completed.  The District Court has issueda revised scheduling order calling for trial in May 2010.

 

In April 2008, we sued OMI in the U.S. DistrictCourt for the Eastern District of Texas, Tyler Division, alleging that OMI hadinfringed two U.S. patents (6,572,584 and 7,351,224).  We also allegedtheft of confidential information, intentional interference with contracts, andengaging in false advertising that wrongfully disparaged and mischaracterizedour syringe products.  We further alleged that OMI made false allegationsregarding the source of origin of its safety syringe products being offered inthe U.S.  On December 18, 2009, thejury delivered a verdict in our favor on our patent infringement andmisappropriation of trade secrets claims against OMI.  On March 4, 2010, the Court entered afinal judgment and ordered that we recover damages and prejudgment interestfrom OMI based on OMI’s misappropriation of trade secrets in the amount of$3,153,575.  In addition, the Courtentered a permanent injunction enjoining OMI, its manufacturers, distributorsand service providers from infringing our patent no. 6,572,584, by making,importing, selling, or using any of OMI’s syringes in the U.S. and itsterritories.  OMI has entered into anadministrative proceeding in Australia which is the equivalent of bankruptcyand has filed a similar proceeding in the Eastern District of Texas, which makethe actual recovery of the damages unlikely.

 

In June 2007, we sued BD in the U.S. DistrictCourt for the Eastern District of Texas, Marshall Division, alleginginfringement of three patents (5,578,011; 5,632,733; and 6,090,077) andviolations by BD of the federal and state antitrust laws, and of the LanhamAct.  We subsequently dropped the 5,578,011 patent allegations from thelawsuit.  In January 2008, the Court severed the patent claims fromthe other claims pending resolution of the patent dispute.  In April 2008,we and Thomas J. Shaw sued BD in the U.S. District Court for the EasternDistrict of Texas, Marshall Division, alleging infringement of another recentlyissued patent (7,351,224). BD counterclaimed for non-infringement and invalidityof the asserted patent.  The Court consolidated this case with theabove-stated case filed in June 2007. On November 9, 2009, the juryreturned a verdict finding that the patents asserted by us were valid andinfringed by BD and awarded $5,000,000 in damages.  No final judgment has been entered in thiscase.  We are seeking injunctive relief. 

 

In September 2007, BD and MDC Investment Holdings, Inc.(“MDC”) sued us in the United States District Court for the Eastern District ofTexas, Texarkana Division, initially alleging that we are infringing two U.S.patents of MDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDCseek injunctive relief and unspecified damages.  We counterclaimed fordeclarations of non-infringement, invalidity, and unenforceability of theasserted patents.  The plaintiffs subsequently dropped allegations withregard to patent no. 7,090,656 and we subsequently dropped our counterclaimsfor unenforceability of the asserted patents. The Court conducted a claims construction hearing on September 25,2008 and issued its claims construction order on November 14, 2008.  No trial date has been set.

 

In September 2008, we and Thomas J. Shaw suedSafety Medical International (“SMI”) in the United States District Court forthe Eastern District of Texas, Tyler Division, alleging infringement of U.S.patent nos. 6,572,584 and 7,351,224, and seeking injunctive relief, unspecifiedmonetary damages, and reimbursement of attorneys’ fees.  SMI hascounterclaimed, seeking declaratory judgments of non-infringement andinvalidity of the asserted patents.  SMI is not seeking monetarydamages.  SMI has filed for bankruptcy, and this lawsuit, including allclaims and counterclaims, was dismissed as a result of those proceedings, whichhave concluded.

 

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**PART II**

 

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

 

MARKET INFORMATION

 

OurCommon Stock has been listed on the NYSE Amex under the symbol “RVP” since May 4,2001.  Our closing price on March 1,2010, was $1.48 per share.  Shown beloware the high and low sales prices of our Common Stock as reported by the NYSEAmex for each quarter of the last two fiscal years:

 
| **2009**        | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| Fourth  Quarter |       | $2.13    |       | $1.35   |       |
| Third  Quarter  |       | $2.95    |       | $0.68   |       |
| Second  Quarter |       | $0.98    |       | $0.60   |       |
| First  Quarter  |       | $0.90    |       | $0.43   |       |
|            |       |     |       |    |       |
| **2008**        | ** ** | **High** | ** ** | **Low** | ** ** |
| Fourth  Quarter |       | $1.46    |       | $0.45   |       |
| Third  Quarter  |       | $1.60    |       | $1.20   |       |
| Second  Quarter |       | $1.68    |       | $1.22   |       |
| First  Quarter  |       | $2.00    |       | $1.30   |       |

 

SHAREHOLDERS

 

As of March 1,2010, there were 23,825,149 shares of Common Stock held by 262 shareholders ofrecord not including shareholders who beneficially own Common Stock held innominee or “street name.”

 

DIVIDENDS

 

Wehave not ever declared or paid any dividends on the Common Stock.  We have no current plans to pay any cashdividends 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 futuregrowth.  Dividends on Common Stock cannotbe paid so long as preferred dividends are unpaid.  As of December 31, 2009, there was an aggregateof $15.3 million in preferred dividends in arrears.

 

EQUITYCOMPENSATION PLAN INFORMATION

 

See **Item 12 Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters**for a chart describing compensation plans under which equity securities areauthorized.

 

**STOCK PERFORMANCE GRAPH**

 

The following graph compares the cumulative totalreturn for our Common Stock from December 31, 2004 to December 31,2009, to the total returns for the Russell Microcap® and Becton, Dickinson and Company (or “BDX”),a peer issuer.  The graph assumes aninvestment of $100 in the aforementioned equities as of December 31, 2004,and that all dividends are reinvested.

 

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RECENT SALES OFUNREGISTERED SECURITIES

 

None

 

PURCHASESOF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

No repurchases were made in the fourth quarter of2009.

 

# **Item 6. Selected Financial Data.**

# ** **

Thefollowing selected financial data is qualified by reference to, and should beread in conjunction with, our audited financial statements and the notes tothose statements and **Management’s Discussionand Analysis of Financial Condition and Results of Operations**appearing elsewhere herein.  The selectedStatements of Operations data presented below for the years ended December 31,2006 and 2005 and the Balance Sheet data as of December 31, 2007, 2006,and 2005 have been derived from our audited financial statements, which are notincluded herein.

 

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

 
|                      |   | **As of  and for the Years Ended December 31,** |       |
|---------------------------|--------|------------------------------------------------------|------------|
|                      |   | **2009**                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** |   |
|                      |   |                                                 |       |   |   |   |   |   |   |   |   |
| Sales,  net               |   | $                                                    | 38,982     |   | $ | 27,899 |   | $ | 26,290 |   | $ | 20,897 |   | $ | 21,157 |   |
| Reimbursed  discounts     |   | —                                               |       | — |   | — |   | 4,427 |   | 3,078 |   |
| Total  sales              |   | 38,982                                               |       | 27,899 |   | 26,290 |   | 25,324 |   | 24,235 |   |
| Cost  of sales            |   | 25,466                                               |       | 19,673 |   | 18,300 |   | 17,778 |   | 15,429 |   |
| Gross  profit             |   | 13,516                                               |       | 8,226 |   | 7,990 |   | 7,546 |   | 8,806 |   |
| Total  operating expenses |   | 26,812                                               |       | 18,671 |   | 17,936 |   | 14,261 |   | 11,683 |   |
| Loss  from operations     |   | (13,296                                              | )          | (10,445 | ) | (9,946 | ) | (6,715 | ) | (2,877 | ) |
| Interest  income          |   | 58                                                   |       | 855 |   | 1,870 |   | 1,976 |   | 1,373 |   |
|                           |        |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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|                                                |       | **As of  and for the Years Ended December 31,** |       |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
|                                                |       | **2009**                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** |   |
| Interest  expense, net                              |       | (22                                                  | )          | (54 | ) | (326 | ) | (411 | ) | (340 | ) |
| Loss  before income taxes                           |       | (13,260                                              | )          | (9,644 | ) | (8,402 | ) | (5,150 | ) | (1,844 | ) |
| Benefit  for income taxes                           |       | (3,838                                               | )          | — |   | (1,454 | ) | (1,280 | ) | (606 | ) |
| Net loss                                            |       | (9,422                                               | )          | (9,644 | ) | (6,948 | ) | (3,870 | ) | (1,238 | ) |
| Preferred  Stock dividend requirements              |       | (1,371                                               | )          | (1,373 | ) | (1,399 | ) | (1,451 | ) | (1,503 | ) |
| Earnings  (loss) applicable to common shareholders  |       | $                                                    | (10,793    | ) | $ | (11,017 | ) | $ | (8,347 | ) | $ | (5,321 | ) | $ | (2,741 | ) |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Earnings  (loss) per share — basic and diluted |       | $                                                    | (0.45      | ) | $ | (0.46 | ) | $ | (0.35 | ) | $ | (0.23 | ) | $ | (0.12 | ) |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Weighted  average shares outstanding                |       | 23,806,533                                           |       | 23,794,566 |   | 23,727,029 |   | 23,591,999 |   | 23,332,277 |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
|                                                |       |                                                 |       |   |   |   |   |   |   |   |   |
| Current  assets                                     |       | $                                                    | 39,262     |   | $ | 43,614 |   | $ | 51,916 |   | $ | 57,781 |   | $ | 61,485 |   |
| Current  liabilities                                |       | $                                                    | 13,196     |   | $ | 10,238 |   | $ | 8,786 |   | $ | 6,891 |   | $ | 5,458 |   |
| Property,  plant, and equipment, net                |       | $                                                    | 14,234     |   | $ | 14,436 |   | $ | 11,483 |   | $ | 12,212 |   | $ | 11,926 |   |
| Total  assets                                       |       | $                                                    | 53,941     |   | $ | 58,539 |   | $ | 64,330 |   | $ | 70,795 |   | $ | 73,756 |   |
| Long-term  debt, net ofcurrent maturities           |       | $                                                    | 4,825      |   | $ | 6,096 |   | $ | 3,747 |   | $ | 4,137 |   | $ | 4,351 |   |
| Stockholders’  equity                          |       | $                                                    | 35,920     |   | $ | 42,206 |   | $ | 51,761 |   | $ | 59,710 |   | $ | 63,235 |   |
| Redeemable  Preferred Stock (in shares)             |       | 2,285,266                                            |       | 2,285,266 |   | 2,329,916 |   | 2,441,166 |   | 2,498,666 |   |
| Cash  dividends per common share                    |       | $                                                    | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Gross  profit margin                                | ** ** | 34.7                                                 | %          | 29.5 | % | 30.4 | % | 29.8 | % | 36.3 | % |

 

*              Events that could affect the trends indicated aboveinclude receipt of royalties from BTMD, continued reductions in manufacturingcosts, continued increasing average sales prices, the gaining of market access,and protection of our patents.  We havebeen successful in protecting our patents, most recently against BD and OMI.(see **Item****3. LegalProceedings**).  As our productsare made from petroleum products, the changing cost of oil and transportationmay have an impact on our costs to the extent increases may not be recoverablethrough price increases of our products and reductions in oil prices may notquickly affect petroleum product prices. Sales to the DHHS comprised 52.0% and 24.4% of our revenues for thethree months and twelve months ended December 31, 2009, respectively. Thisprogram, which was estimated to run from August 2009 through March 2010,ended in December 2009.  We do notknow if there will be a similar program in 2010.

 

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

 

FORWARD-LOOKINGSTATEMENT WARNING

 

Certain statements included by reference in thisfiling containing the words “could,” “may,” “believes,” “anticipates,”“intends,” “expects,” and similar such words constitute forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act.  Any forward-looking statements involve knownand unknown risks, uncertainties, and other factors that may cause our actualresults, performance, or achievements to be materially different from anyfuture results, performance, or achievements expressed or implied by suchforward-looking statements.  Such factorsinclude, among others, our ability to maintain liquidity, our maintenance ofpatent protection, the impact of current litigation (as it affects our costs aswell as market access), our ability to maintain favorable supplier arrangementsand relationships, our ability to receive royalties from BTMD, our ability toquickly 

 

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increasecapacity in response to an increase in demand, our ability to access themarket, 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 devices to the safety market, and other factorsreferenced in **Item 1A. Risk Factors**.  Given these uncertainties, undue relianceshould not be placed on forward-looking statements.

 

OVERVIEW

 

We have been manufacturing and marketing our productsinto the marketplace since 1997.  Wecurrently provide other safety medical products in addition to safety syringeproducts.  One such product is thePatient Safe® syringe, which is uniquely designed to reducethe risk of bloodstream infections resulting from catheter hubcontamination.  Patient Safe®’s unique luer guard reduces the risk of luer tipcontact contamination and the risk of contamination of intravenous fluid.  Safety syringes comprised 98.9% of our salesin 2009.

 

Historically, unit sales have increased in the latterpart of the year due, in part, to the demand for syringes during the flu season. We expect the Swine Flu to have a longer worldwide immunization duration thanthe seasonal flu.  In the thirdquarter of 2009, we were awarded a contract by the DHHS to supply aportion of the safety engineered syringes to be used in the U.S. efforts tovaccinate the U.S. population against the Swine Flu.  The impact on us wasmaterial.  Sales to the DHHS comprised52.0% and 24.4% of our revenues for the three months and twelve months ended December 31,2009, respectively.  This program, which was estimated to run from August 2009through March 2010, ended in December 2009.  Our revenue increased 142.1% in the fourthquarter principally due to the DHHS contract. We do not know if there will be a similar program in 2010.

 

Our products have been and continue to be distributednationally through numerous distributors. However, we have been blocked from access to the market by exclusivemarketing practices engaged in by BD, which dominates the market.  We believe that its monopolistic businesspractices continue despite: (i) its paying $100 million in 2004 to settlea prior lawsuit with us for anticompetitive practices, business disparagement,and tortious interference and (ii) the fact that a jury returned a verdictin November 2009 finding that all three patents asserted by us against BDare valid and infringed by BD (with regard to its IntegraTM product).  Although we have made limited progress insome areas, such as the alternate care and international markets, our volumesare not as high as they should be given the nature and quality of our productsand the federal and state legislation requiring the use of safe needle devices.

 

Wecontinue to pursue various strategies to have better access to the hospitalmarket, as well as other markets, including attempting to gain access to themarket through our sales efforts, our innovative technology, introduction ofnew products, and, when necessary, litigation. We are also marketing more products internationally.

 

Wesued OMI in April 2008 and separately sued BD in June 2007 for claimsof patent infringement (see **Item 3. Legal Proceedings**),and in December 2009 and November 2009, respectively, such companieswere found to infringe our patents. These judgments could increase demand for our product.  However, there is no assurance when or ifsuch increase will occur.

 

Beginningin 2004, we were given an award (from PATH) to supply syringes to variousAfrican countries under the President’s Emergency Plan for AIDS relief(PEPFAR).  Awards increased significantlyfrom 2004 to 2007.  The continuation ofPEPFAR has been reauthorized by Congress through 2013.  However, funding for the procurement ofsafety syringes in this program has not occurred to date.

 

As aresult of the introduction of VanishPoint® syringes through the PEPFAR initiative,African countries have begun to procure products outside of the U.S.-fundedprogram.  In 2007, the Director Generalof Nigeria’s National Agency for Food and Drug Administration and Control (NAFDAC),endorsed automated retraction syringes for use throughout Nigeria.  We are currently selling syringes to aNigerian distributor for use in that country. At the end of 2008, the Deputy Prime Minister of Namibia also publicallyendorsed automated retraction syringes as a public intervention that would“protect health workers and save their patient’s lives”.  

 

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The number ofinternational distributors continues to increase.

 

In the event we continue to have only limited marketaccess, the cash provided by the litigation settlements and generated fromoperations becomes insufficient, and royalties from BTMD are notforthcoming,  we would take additionalcost cutting measures to reduce cash requirements.  Such measures could result in the reductionof units being produced, the reduction of workforce, the reduction of salariesof officers and other nonhourly employees, and the deferral of royalty payments.  We took such actions at the end of the secondquarter of 2009.

 

At the end of the second quarter of 2009, we announcedthat in the interest of the long-term survival of the Company we wouldreorganize some of the Company’s functions and implement staff reductions, allin order to minimize our cash expenditures and conserve our resources.  Our workforce was reduced by 16% on July 1,2009.  However, due to the expectedincrease in production from sales to DHHS, we increased the workforce at theLittle Elm facility beginning in the latter part of the third quarter of 2009.  The rehiring only slightly affected our priorestimate that annual compensation costs and related expenses would be reducedby $2.1 million annually due to the layoffs. An anticipated reduction of inventory was estimated (at the time of theannouncement) to result in a minimum of $1.0 million reduction in cash outlaysover the subsequent twelve months. However, due to the orders from the DHHS, that particular initiative ison hold.  Our President and CEO, ThomasJ. Shaw, waived future royalty payments beginning July 1, 2009, for anaggregate savings of $1.0 million which affected royalty payments (notexpenses) in the third and fourth quarter of 2009.  Salaries for all personnel above a certainsalary level were cut by 10% in 2009 (subject to contract rights).  Such reduction, along with discontinuing the 401(k)matching, was estimated to save $600,000. We expect to save an additional $1.6 million by the following actions:moving most, if not all, of the molding of piece parts back to Little Elm;reducing professional fees; and various other cost cutting measures.  Professional fees have been reduced and wehave begun additional molding in Little Elm. These measures will remain in place as long as Management deems themnecessary.

 

We recorded a $200,000 charge in the second quarter of2009 for severance pay offered to the terminated employees.  All severance payments were paid in the thirdquarter of 2009. We incurred a noncash expense of $2.1 million related to theissuance of stock options, most of which will be fully amortized by the thirdquarter of 2010.** **Wewrote off approximately $2.6 million in development costs related to thecatheters.

 

We are focusing on methods of upgrading ourmanufacturing capability and efficiency in order to reduce costs.  We believe our current capitalizationprovides the resources necessary to implement some of these changes and improveour manufacturing capacity and efficiency, thereby reducing our unit cost.

 

Product purchases from Double Dove, a Chinesemanufacturer, have enabled us to increase manufacturing capacity with littlecapital outlay and have provided a competitive manufacturing cost.  In 2009, Double Dove manufacturedapproximately 67.5% of the units we produced. The cost of production per unit has generally declined as volumesincreased.  We believe we could make upany long-term disruption in these supplies by utilizing more of the capacity atthe Little Elm facility, except for the 0.5mL insulin syringe, the 5mL and 10mLsyringes, and the autodisable syringe which altogether comprised about 3.8% ofour 2009 revenues.

 

We previously entered into a License Agreement withBTMD as of May 13, 2005.  Thatlicense expired on May 13, 2008 (prior to the manufacture and delivery ofany products).  Nevertheless, BTMDcontinued to work toward completing the facility and gaining the necessaryapprovals in order to manufacture and sell products.  The facility has been completed and BTMD hasmet Chinese Government requirements. BTMD received a Registration Certificate for Medical Device on August 24,2009.  Production efforts are currentlyunderway and are being tested.  Weentered into a new agreement (effective as of July 1, 2009) with BTMDalong similar terms as the prior agreement. This agreement expires on July 1, 2010 which may automaticallyextend under certain conditions.  Suchterms include granting to BTMD a limited exclusive license to manufacture and alimited exclusive right to sell syringes in the PRC having retractable needlesthat incorporate our technology.  ThisLicense Agreement is subject to the Technology License Agreement dated June 23,1995 between Mr. Thomas J. Shaw, our founder and CEO, as licensor, and theCompany, as licensee (as amended). Accordingly, Mr. Shaw will receive 5% of the licensing proceeds wereceive.  BTMD has agreed to manufactureand sell these products in the PRC and to pay us a quarterly royalty of two andone-half cents per unit on 3mL and 5mL syringes and a royalty of three andone-half cents per unit on 0.5mL, 1mL, and 10mL syringes.  The obligation to pay the royalties continueseven if

 

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anyand all of our patent rights in the PRC are found to be invalid orunenforceable for any reason.  We stillcontinue to expect royalty payments although we are unable to predict the datewe will begin to receive such royalties.

 

With increased volumes, our manufacturing unit costshave generally tended to decline. Factors that could affect our unit costs include increases in costs bythird party manufacturers, changing production volumes, costs of petroleumproducts, and transportation costs. Increases in such costs may not be recoverable through price increasesof our products.

 

We completed the expansion of an existing warehouse inthe first quarter of 2009.  Thisexpansion increased our warehouse area, provided for additional office space,and added a second Controlled Environment. The additional Controlled Environment will enable us to do more moldingin-house.

 

**LIQUIDITY**

 

At the present time, Management does not intend toraise equity capital.  Due to the fundsreceived from prior 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 theproceeds from revenues, private placements, loans, and litigation settlements.

 

InternalSources of Liquidity

 

*Margins and Market Access*

 

To achieve break even quarters, we need minimal accessto hospital markets which has been difficult to obtain due to the monopolisticmarketplace which was the subject of our initial lawsuit and now also includedin our second anti-trust lawsuit against BD. ** **We will continue to attempt to gainaccess to the market through our sales efforts, innovative technology, the introductionof new products, and, when necessary, litigation.

 

We are focusing on methods of upgrading ourmanufacturing capability and efficiency in order to reduce costs. ** **Webelieve our current capitalization provides the resources necessary to implementsome of these changes and improve our manufacturing capacity and efficiency,thereby reducing our unit cost.

 

In the third quarter of2009, we were awardeda contract by the DHHS to supply a portion of the safety engineered syringes tobe used in the U.S. efforts to vaccinate the U.S. population against the SwineFlu.  The impact on us was material. Sales to the DHHS comprised 52.0% and 24.4% of our revenues for thethree months and twelve months ended December 31, 2009,respectively.  This program, which was estimated to run from August 2009through March 2010, ended in December 2009.  Our revenue increased 142.1% in the fourthquarter principally due to the DHHS contract. We do not know if there will be a similar program in 2010.

 

Beginning in early 2004, we began to receive shipmentof product from Double Dove which enabled us to lower our unit costs.  Fluctuations in the cost and availability ofraw materials and inventory and our ability to maintain favorable supplierarrangements and relationships could result in the need to manufacture all (asopposed to 32.0%) of our products in the U.S. This could temporarily increase unit costs as we ramp up domesticproduction.

 

The mix of domestic and international sales affectsthe average sales price of our products. Generally, the higher the ratio of domestic sales to internationalsales, the higher the average sales price will be.  Typically international sales are shippeddirectly from China to the customer. Purchases of product manufactured in China, if available, usuallydecrease the average cost of manufacture for all units as domestic costs, suchas indirect labor and overhead, remain relatively constant.  The number of units produced by the Companyversus manufactured in China can have a significant effect on the carryingcosts of inventory as well as Cost of sales. We will continue to evaluate the appropriate mix of productsmanufactured domestically and those manufactured in China to achieve economic 

 

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benefitsas well as to maintain our domestic manufacturing capability.  Currently, approximately 32.0%****of our products are produced domestically.

 

Fluctuations in the cost of oil (since our productsare petroleum based) and transportation and the volume of units purchased fromDouble Dove may have an impact on the unit costs of our product.  Increases in such costs may not berecoverable through price increases of our products.  Reductions in oil prices may not quicklyaffect petroleum product prices.

 

*Seasonality*

 

Historically, unit sales have increased in the latterpart of the year due, in part, to the demand for syringes during the fluseason.  We expect the Swine Flu to have a longer worldwide immunizationduration than the seasonal flu.

 

*Licensing Agreement*

 

Wepreviously entered into a License Agreement with BTMD as of May 13,2005.  That license expired on May 13,2008 (prior to the manufacture and delivery of any products).  Nevertheless, BTMD continued to work towardcompleting the facility and gaining the necessary approvals in order tomanufacture and sell products.  The facilityhas been completed and BTMD has met Chinese government requirements.  BTMD received a Registration Certificate forMedical Device on August 24, 2009. Production efforts are currently underway and are being tested.  We entered into a new agreement (effective asof July 1, 2009) with BTMD along similar terms as the prior agreement.  This agreement expires on July 1, 2010which may automatically extend under certain conditions. Such terms includegranting to BTMD a limited exclusive license to manufacture and a limitedexclusive right to sell syringes in the PRC having retractable needles thatincorporate our technology.  This LicenseAgreement is subject to the Technology License Agreement dated June 23,1995 between Mr. Thomas J. Shaw, our founder and CEO, as licensor, and theCompany, as licensee (as amended). Accordingly, Mr. Shaw will receive 5% of the licensing proceeds wereceive.  BTMD has agreed to manufactureand sell these products in the PRC and to pay us a quarterly royalty of two andone-half cents per unit on 3mL and 5mL syringes and a royalty of three andone-half cents per unit on 0.5mL, 1mL, and 10mL syringes.  The obligation to pay the royalties continueseven if any and all of our patent rights in the PRC are found to be invalid orunenforceable for any reason.  We stillcontinue to expect royalty payments although we are unable to predict the datewe will begin to receive such royalties.

 

*Cash Requirements*

 

Due to funds received from prior litigationsettlements, we have sufficient cash reserves and intend to rely on operations,cash reserves, and debt financing as the primary ongoing sources of cash.  In the event we continue to have only limitedmarket access and cash generated from operations becomes insufficient tosupport operations, we would take additional cost cutting measures to reducecash requirements.  Such measures couldresult in the reduction of units being produced, the reduction of workforce,the reduction of salaries of officers and other nonhourly employees, and thedeferral of royalty payments.

 

ExternalSources of Liquidity

 

We have obtained several loans from our inception,which have, together with the proceeds from the sales of equities andlitigation efforts, enabled us to pursue development and production of ourproducts.  Given the current economicconditions, our ability to obtain additional funds through loans isuncertain.  Furthermore, the shareholderspreviously authorized an additional 5,000,000 shares of a Class CPreferred Stock that could, if necessary, be designated and used to raise fundsthrough the sale of equity.  Due to thecurrent market price of our Common Stock, it is unlikely we would choose toraise funds by the sale of equity.  Weobtained a loan from 1st International for $2,500,000, secured by the land andexisting buildings, which provided funding for the construction of the 47,250square foot warehouse placed in service in 2005.  This loan had a maturity date in late March2010.  We anticipate refinancing thisloan.

 

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**CAPITALRESOURCES**

 

MaterialCommitments for Expenditures

 

On August 29, 2008, we obtained a $4,210,000interim construction loan from Lewisville State Bank, a division of 1stInternational Bank.  The purpose of theloan was to expand the warehouse, including additional office space, andconstruct a new Controlled Environment. The interest rate was WSJPR plus 0.25%. The loan was renewed on December 10, 2009 with a 20 yearamortization and 10 year maturity.  The interestrate is 5.968%. The construction project has been completed.

 

Trendsin Capital Resources

 

Interest expense will increase due to the recent loan****of approximately $4.2 million, but will besomewhat mitigated by lower borrowing rates if current conditions in the creditmarkets continue.  Interest income may benegatively affected by lower interest rates and our prior movement of cash toU.S. Treasury bills and other U.S. government backed securities.** **Althoughwe believe that we have granted credit to credit-worthy firms, current economicconditions may affect the timing and/or collectability of some accounts.

 

**RESULTSOF OPERATIONS**

 

Thefollowing discussion contains trend information and other forward-lookingstatements that involve a number of risks and uncertainties.  Our actual future results could differmaterially from our historical results of operations and those discussed in theforward-looking statements.  All periodreferences are to our fiscal years ended December 2009, 2008, or2007.  Dollar amounts have been roundedfor ease of reading.

 

*Comparisonof Year Ended*

*December 31,2009, and Year Ended December 31, 2008*

 

Revenuesincreased 39.7%, due principally to sales under the DHHS contract.  Domestic sales were 88.4% of revenues withinternational sales comprising the remainder. Without the DHHS contract, our revenues would have increased 5.6%, withdomestic revenues increasing 7.3% and international revenues declining3.0%.  Unit sales of the 1mL syringeincreased 17.1% and 3mL unit sales increased 54.3%.  Unit sales of all products increased 27.3%.  Domestic unit sales as well as average salesprices increased.  International unitsales decreased slightly and average selling prices increased.  Sales to two customers accounted for 38.4% ofour revenues in 2009.  Only one of thesetwo customers was a customer in 2008, and such customer accounted for 17.1% ofour revenues in 2008.

 

Costof sales increased due to greater volumes. Royalty expenses were higher due to higher gross sales.

 

As aresult, gross profit margins increased from 29.5% in 2008 to 34.7% in 2009.

 

Operatingexpenses increased from the prior year due to litigation costs and stock optionexpense mitigated by the cost cutting measures beginning in the third quarterof 2009.

 

Salesand marketing expenses decreased due primarily to lower compensation due tostaff reduction and reduction in pay, lower advertising expenses and reduced travelcosts.  Stock option expense andconsulting costs increased.

 

Researchand development costs were lower.  We haddecreases in engineering costs due principally to reduction in staff and pay aswell as lower consulting cost.  Stockoption expense increased.

 

Generaland administrative costs increased due principally to litigation costs andstock option expense. Compensation costs decreased due to staff reductions andreductions in pay.

 

PreferredStock dividend requirements decreased slightly due to conversion of preferredstock in the first quarter of 2008.  Thedividend arrearage at December 31, 2009, on all classes of Preferred Stockwas approximately $15.3 million.

 

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Interestincome decreased due to lower interest rates and lower cash balances.  Interest expense decreased due to capitalizedinterest.  Interest expense is expectedto increase in 2010 due to completion of significant capital projects in 2009for which interest was being capitalized.

 

Cashflow from operations was a negative $12.3 million for 2009 due principally tooperating losses and increases in receivables. Most of the increase in receivables was related to billings in December2009 to DHHS and collected in January 2010. The increase in income taxes receivable is related to a refund forcarryback of our 2009 net operating loss. We will file for this refund early in the second quarter of 2010.  The effect of non-cash expenses and thechange in working capital was a negative $2.9 million.  Investing activities utilized $2.4 million incash.

 

*Comparisonof Year Ended*

*December 31,2008, and Year Ended December 31, 2007*

 

Revenuesincreased 6.1%, due principally to higher average sales prices and greatervolumes.  Domestic sales were 83.3% of revenueswith international sales comprising the remainder.  Unit sales of the 1mL syringe increased 22.7%and 3mL unit sales decreased 4.0%.  Unitsales of all products increased 3.1%. Domestic unit sales as well as average sales prices increased.  International unit sales and average sellingprices declined.  Sales to onedistributor accounted for 17.1% and 13.7% of our revenues in 2008 and 2007,respectively.

 

Costof sales increased due to higher manufacturing costs and higher volumes.  Royalty expenses were higher due to anincrease in gross revenues.

 

As aresult, gross profit margins declined from 30.4% in 2007 to 29.5% in 2008.

 

Operatingexpenses increased from the prior year due to higher general and administrativeexpenses mitigated by lower Sales and marketing and Research and developmentcosts.

 

Salesand marketing expenses decreased due primarily to reduced travel andentertainment, trade shows and market expense, compensation and officesupplies.  Consulting expense alsodecreased.

 

Researchand development costs were flat.  We haddecreases in engineering costs due principally to higher costs of validationand engineering samples offset by higher compensation costs.

 

Generaland administrative costs increased due principally to increased legal costs(including a settlement of litigation whereby we obtained a patentlicense/assignment), office expenses, compensation, property taxes and freightcosts.  Travel and entertainment costsand fees to distributors decreased.

 

PreferredStock dividend requirements decreased due to conversion of Preferred Stock toCommon Stock.  The dividend arrearage at December 31,2008, on all classes of Preferred Stock was approximately $13.9 million.

 

Interestincome decreased due to lower interest rates and cash balances.  Interest expense decreased due to lowerinterest rates mitigated by higher debt balances and capitalized interest,principally due to the construction of the warehouse.

 

Otheraccrued liabilities increased due to prepayments from international customers.

 

Cashflow from operations was a negative $5.7 million for 2008 due principally toour losses.  The effect of non-cashexpenses and the change in working capital was a positive $4.0 million.  Investing activities utilized $2.2 million incash.

 

OFF-BALANCE SHEETARRANGEMENTS

 

None.

 

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CONTRACTUAL OBLIGATIONS

 

ContractualObligations and Commercial Commitments

 

Thefollowing chart summarizes our material obligations and commitments to makefuture payments under contracts for long-term debt as of December 31,2009:

 
| ** **                                    | ** ** | **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 |       | $                           | 7,505,789  |   | $ | 2,659,573 |   | $ | 988,749 |   | $ | 273,366 |   | $ | 3,584,101 |   |
|                                               |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

These amounts do not reflectthe effect of the beneficial conversion feature and therefore will be greaterthan the amounts in the financial statements.

 

SIGNIFICANTACCOUNTING POLICIES

 

We consider the following to be our most significantaccounting policies.  Carefulconsideration and review is given to these and all accounting policies on aroutine basis to ensure that they are accurately and consistently applied.

 

**AccountsReceivable**

 

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

 

**RevenueRecognition**

 

Revenueis recognized for sales to distributors when title and risk of ownership passesto the distributor, generally upon shipment. Revenue is recorded on the basis of sales price to distributors, lesscontractual pricing allowances. Contractual pricing allowances consist of (i) rebates granted todistributors who provide tracking reports which show, among other things, thefacility that purchased the products, and (ii) a provision for estimatedcontractual pricing allowances for products that we have not received trackingreports.  Rebates are recorded whenissued and are applied against the customer’s receivable balance.  The provision for contractual pricingallowances is reviewed at the end of each quarter and adjusted for changes inlevels of products for which there is no tracking report.  Additionally, if it becomes clear thattracking reports will not be provided by individual distributors, the provisionis further adjusted.  The estimatedcontractual allowance is netted against individual distributors’ accountsreceivable balances for financial reporting purposes.  The resulting net balance is reflected inaccounts receivable or accounts payable, as appropriate.  The terms and conditions of contractualpricing allowances are governed by contracts between us and ourdistributors.  Revenue for shipmentsdirectly to end-users is recognized when title and risk of ownership passesfrom us.  Any product shipped ordistributed for evaluation purposes is expensed.

 

Ourdomestic return policy is set forth in our standard DistributionAgreement.  This policy provides that acustomer may return incorrect shipments within 10 days following arrival at thedistributor’s facility.  In all such casesthe distributor must obtain an authorization code from us and affix the code tothe returned product.  We will not acceptreturned goods without a returned goods authorization number.  We may refund the customer’s money or replacethe product minus a 10% restocking fee and all applicable freight charges.

 

Ourreturn policy also provides that a customer may return product that isoverstocked.  Overstocking returns arelimited to two times in each 12 month period up to 1% of distributor’s totalpurchase of products for the prior 12 month period.  All product overstocks and returns aresubject to inspection and acceptance by manufacturer.

 

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Ourinternational Distribution Agreements do not provide for any returns.

 

Werecord an allowance for estimated returns as a reduction to accounts receivableand gross sales.  Historically, returnshave been less than 0.5% of net sales.

 

**Inventories**

 

Inventoriesare valued at the lower of cost or market, with cost being determined usingactual average cost.  A reserve isestablished for any excess or obsolete inventories.

 

**MarketingFees**

 

Undera sales and marketing agreement with Abbott, we paid marketing fees until weterminated the contract for breach.  Thecontracted services were to include participation in promotional activities,development of educational and promotional materials, representation at tradeshows, clinical demonstrations, inservicing and training, and tracking reportsdetailing the placement of our products to end-users.  Marketing fees were accrued at the time ofthe sale of product to Abbott.  Thesefees were paid after Abbott provided us a tracking report of product sales toend-users.  These costs were included inSales and marketing expense in the Statements of Operations.  No marketing fees have been accrued since October 15,2003, the date the National Marketing and Distribution Agreement with Abbottwas terminated.  We filed suit againstAbbott in August 2005 for breach of contract and trial is scheduled for May 2010.  We do not expect the eventual liability formarketing fees, if any, to exceed the amount accrued.

 

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

 

Webelieve that our market risk exposures regarding our cash and cash equivalentsare immaterial as we do not have instruments for trading purposes.  Weshifted the bulk of our funds into U.S. Treasury bills and other U.S.government backed securities in April 2008.  Additionally, reasonable, possible near-termchanges in market rates or prices will not result in material changes innear-term losses in earnings.

 

24

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# **Table of Contents**

 

# **Item 8. Financial Statements and SupplementaryData.**

# ** **

**RETRACTABLE TECHNOLOGIES, INC.**

 

**FINANCIAL STATEMENTS AND**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**DECEMBER 31, 2009 AND 2008**

 

F-1

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Table ofContents

 

**RETRACTABLETECHNOLOGIES, INC.**

I**NDEX TO FINANCIAL STATEMENTS**

 
| ** **                                                                                                              | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent  Registered Public Accounting Firm                                                                |       | F-3      |
|                                                                                                                    |       |     |
| Financial  Statements:                                                                                                  |       |     |
|                                                                                                                    |       |     |
| Balance Sheets as of  December 31, 2009 and 2008                                                                   |       | F-4      |
|                                                                                                                    |       |     |
| Statements  of Operations for the years ended

December 31, 2009, 2008 and 2007                                    |       | F-5      |
|                                                                                                                    |       |     |
| Statements of Changes in Stockholders’ Equity

for the years ended December 31, 2009, 2008 and  2007          |       | F-6      |
|                                                                                                                    |       |     |
| Statements of Cash  Flows for the years ended

December 31, 2009,  2008 and 2007                                   |       | F-8      |
|                                                                                                                    |       |     |
| Notes to Financial Statements                                                                                           |       | F-9      |
|                                                                                                                    |       |     |
| Selected Quarterly Financial Data - Unaudited                                                                           |       | F-24     |
|                                                                                                                    |       |     |
| Financial  Statement Schedule:                                                                                          |       |     |
|                                                                                                                    |       |     |
| Schedule II: Schedule of Valuation and Qualifying  Accounts

for the years ended December 31, 2009, 2008 and  2007 |       | 48       |

 

F-2

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Table of Contents

 

**Report of Independent RegisteredPublic Accounting Firm**

 

To the Board of Directorsand Stockholders

of RetractableTechnologies, Inc.

 

Wehave audited the accompanying balance sheets of Retractable Technologies, Inc.as of December 31, 2009 and 2008, and the related statements ofoperations, changes in stockholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2009.  Our audits also included the financialstatement schedule of Retractable Technologies, Inc., listed in Item15(a).  These financial statements andfinancial statement schedule are the responsibility of the Company’smanagement.  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 we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide 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, 2009 and 2008, and the results of its operations andits cash flows for each of the three years in the period ended December 31,2009 in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financialstatement schedule when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

Wewere not engaged to examine management’s assertion about the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2009 included in Item 9A of the Company’s December 31, 2009 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,  2010 |                           |

 

F-3

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Table of Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**BALANCE SHEETS**

 
| ** **                                                                                                                                                                            | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
|                                                                                                                                                                                  | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                                                                                                            |       |                  |       |   |   |
| Current assets:                                                                                                                                                                       |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                             |       | $                     | 18,126,084 |   | $ | 33,283,740 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $681,966 and $499,966, respectively                                                                                   |       | 9,948,210             |       | 3,288,942 |   |
| Inventories, net                                                                                                                                                                      |       | 6,907,369             |       | 6,641,532 |   |
| Income taxes receivable                                                                                                                                                               |       | 3,655,637             |       | — |   |
| Other current assets                                                                                                                                                                  |       | 624,393               |       | 400,113 |   |
| Total current assets                                                                                                                                                                  |       | 39,261,693            |       | 43,614,327 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Property, plant, and equipment, net                                                                                                                                                   |       | 14,234,181            |       | 14,435,667 |   |
| Intangible assets, net                                                                                                                                                                |       | 426,675               |       | 470,115 |   |
| Other assets                                                                                                                                                                          |       | 18,750                |       | 18,750 |   |
| Total assets                                                                                                                                                                          |       | $                     | 53,941,299 |   | $ | 58,538,859 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                         |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                                  |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                      |       | $                     | 6,997,310  |   | $ | 6,144,435 |   |
| Current portion of long-term debt                                                                                                                                                     |       | 2,628,652             |       | 451,865 |   |
| Accrued compensation                                                                                                                                                                  |       | 561,484               |       | 650,704 |   |
| Marketing fees payable                                                                                                                                                                |       | 1,419,760             |       | 1,419,760 |   |
| Accrued royalties to shareholders                                                                                                                                                     |       | 843,327               |       | 620,987 |   |
| Other accrued liabilities                                                                                                                                                             |       | 745,460               |       | 949,770 |   |
| Total current liabilities                                                                                                                                                             |       | 13,195,993            |       | 10,237,521 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| Long-term debt, net of current maturities                                                                                                                                             |       | 4,824,833             |       | 6,095,535 |   |
| Total liabilities                                                                                                                                                                     |       | 18,020,826            |       | 16,333,056 |   |
|                                                                                                                                                                                  |       |                  |       |   |   |
| 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 144,000 shares, respectively (liquidation  preference of $900,000 and $900,000 respectively)         |       | 144,000               |       | 144,000 |   |
| Series II, Class B; issued: 1,000,000  shares; outstanding: 219,700 and 219,700, respectively (liquidation  preference of $2,746,250 and $2,746,250, respectively)          |       | 219,700               |       | 219,700 |   |
| Series III, Class B; issued: 1,160,445  shares; outstanding: 130,245 and 130,245 shares, respectively (liquidation  preference of $1,628,063 and $1,628,063, respectively)  |       | 130,245               |       | 130,245 |   |
| Series IV, Class B; issued: 1,133,800  shares; outstanding: 552,500 and 552,500 shares (liquidation preference of  $6,077,500 and $6,077,500, respectively)                 |       | 552,500               |       | 552,500 |   |
| Series V, Class B; issued 2,416,221 shares;  outstanding: 1,238,821 and 1,238,821 shares, respectively (liquidation  preference of $5,450,812 and $5,450,812, respectively) |       | 1,238,821             |       | 1,238,821 |   |
| Common Stock, no par value; authorized: 100,000,000  shares; issued and outstanding: 23,825,149 and 23,800,064 shares,  respectively                                                  |       | —                |       | — |   |
| Additional paid-in capital                                                                                                                                                            |       | 57,089,153            |       | 53,952,183 |   |
| Retained deficit                                                                                                                                                                      |       | (23,453,946           |  )    | (14,031,646 |  ) |
| Total stockholders’ equity                                                                                                                                                       |       | 35,920,473            |       | 42,205,803 |   |
| Total liabilities and stockholders’ equity                                                                                                                                       |       | $                     | 53,941,299 |   | $ | 58,538,859 |   |

 

 

See accompanying notes to financial statements

 

F-4

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Table ofContents

 

**RETRACTABLETECHNOLOGIES, INC.**

**STATEMENTS OF OPERATIONS**

 
|                                       | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------|------------|-----------------------------------|-------------|
|                                       | ** ** | **2009**                          | ** **  | **2008** | ** ** | **2007** | ** ** |
| Sales, net                                 |       | $                                 | 38,981,837  |   | $ | 27,899,318 |   | $ | 26,289,720 |   |
| Cost of Sales                              |       |                              |        |   |   |   |   |
| Costs of manufactured product              |       | 22,659,437                        |        | 17,504,842 |   | 16,212,609 |   |
| Royalty expense to shareholders            |       | 2,806,223                         |        | 2,168,268 |   | 2,087,596 |   |
| Total cost of sales                        |       | 25,465,660                        |        | 19,673,110 |   | 18,300,205 |   |
| Gross profit                               |       | 13,516,177                        |        | 8,226,208 |   | 7,989,515 |   |
|                                       |       |                              |        |   |   |   |   |
| Operating expenses:                        |       |                              |        |   |   |   |   |
| Sales and marketing                        |       | 4,372,163                         |        | 4,835,272 |   | 5,299,157 |   |
| Research and development                   |       | 1,030,622                         |        | 1,066,068 |   | 1,071,143 |   |
| General and administrative                 |       | 18,814,392                        |        | 12,769,774 |   | 11,565,144 |   |
| Impairment of assets                       |       | 2,594,602                         |        | — |   | — |   |
| Total operating expenses                   |       | 26,811,779                        |        | 18,671,114 |   | 17,935,444 |   |
| Loss from operations                       |       | (13,295,602                       |  )     | (10,444,906 |  ) | (9,945,929 |  ) |
|                                       |       |                              |        |   |   |   |   |
| Interest and other income                  |       | 57,604                            |        | 855,685 |   | 1,870,512 |   |
| Interest expense, net                      |       | (21,892                           |  )     | (54,359 |  ) | (326,304 |  ) |
| Loss before income taxes                   |       | (13,259,890                       |  )     | (9,643,580 |  ) | (8,401,721 |  ) |
| Benefit for income taxes                   |       | (3,837,590                        |  )     | — |   | (1,453,617 |  ) |
| Net loss                                   |       | (9,422,300                        |  )     | (9,643,580 |  ) | (6,948,104 |  ) |
| Preferred Stock dividend requirements      |       | (1,370,868                        |  )     | (1,373,019 |  ) | (1,399,062 |  ) |
| Net loss applicable to common shareholders |       | $                                 | (10,793,168 |  ) | $ | (11,016,599 |  ) | $ | (8,347,166 |  ) |
|                                       |       |                              |        |   |   |   |   |
| Loss per share                             |       | $                                 | (0.45       |  ) | $ | (0.46 |  ) | $ | (0.35 |  ) |
|                                       |       |                              |        |   |   |   |   |
| Weighted average common shares outstanding |       | 23,806,533                        |        | 23,794,566 |   | 23,727,029 |   |

 

 

See accompanying notes to financial statements

 

F-5

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Table of Contents

 

**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, 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 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion of Preferred Stock into Common Stock                             |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | (1,000 | ) | (1,000 | ) | (43,650 | ) | (43,650 | ) | 44,650 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock option compensation                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2008                                             |       | 144,000                              |       | 144,000                         |       | 219,700                          |       | 219,700                         |       | 130,245                              |       | 130,245          |       | 552,500 |   | 552,500 |   | 1,238,821 |   | 1,238,821 |   | 23,800,064 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock option exercise                                        |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | 25,085 |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Royalty waiver                                                              |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition of stock option compensation                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                    |       | —                               |       | —                          |       | —                           |       | —                          |       | —                               |       | —           |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                        |       |                                 |       |                            |       |                             |       |                            |       |                                 |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2009                                             |       | 144,000                              |       | $144,000                        |       | 219,700                          |       | $219,700                        |       | 130,245                              |       | $130,245         |       | 552,500 |   | $552,500 |   | 1,238,821 |   | $ 1,238,821 |   | 23,825,149 |   | $          — |   |

 

See accompanying notes to financial statements

 

F-6

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Table of Contents

 

**RETRACTABLETECHNOLOGIES, INC.**

**STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY**

 
|                                                                        | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|-------------|------------|
|                                                                        |       |                             |       |                              |       |        |       |
| 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  |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Conversion of Preferred Stock into Common Stock                             |       | 44,650                           |       | —                            |       | —      |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Recognition of stock option compensation                                    |       | 88,546                           |       | —                            |       | 88,546      |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Net loss                                                                    |       | —                           |       | (9,643,580                        |  )    | (9,643,580  |  )    |
|                                                                        |       |                             |       |                              |       |        |       |
| Balance as of December 31, 2008                                        |       | 53,952,183                       |       | (14,031,646                       |  )    | 42,205,803  |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Recognition of stock option exercise                                        |       | 25,610                           |       | —                            |       | 25,610      |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Royalty waiver                                                              |       | 1,000,000                        |       | —                            |       | 1,000,000   |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Recognition of stock option compensation                                    |       | 2,111,360                        |       | —                            |       | 2,111,360   |       |
|                                                                        |       |                             |       |                              |       |        |       |
| Net loss                                                                    |       | —                           |       | (9,422,300                        |  )    | (9,422,300  |  )    |
|                                                                        |       |                             |       |                              |       |        |       |
| Balance as of December 31, 2009                                        |       | $                                | 57,089,153 |                              | $          | (23,453,946 |  )    | $ | 35,920,473 |   |

 

 

See accompanying notes to financial statements

 

F-7

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Table ofContents

 

**RETRACTABLETECHNOLOGIES, INC.**

**STATEMENTS OF CASH FLOWS**

** **
| ** **                                                                   | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
|                                                                         | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** |   |
| **Cash flows from operating  activities:**                                   |       |                              |       |   |   |   |   |
| Net loss                                                                     |       | $                                 | (9,422,300 |  ) | $ | (9,643,580 |  ) | $ | (6,948,104 |  ) |
| Adjustments to reconcile net loss to net cash used  by operating activities: |       |                              |       |   |   |   |   |
| Depreciation and amortization                                                |       | 1,396,793                         |       | 1,397,333 |   | 1,430,072 |   |
| Stock option compensation                                                    |       | 2,111,360                         |       | 32,629 |   | 6,478 |   |
| Provision for inventory valuation                                            |       | —                            |       | — |   | 155,600 |   |
| Provision for doubtful accounts                                              |       | 182,000                           |       | 224,633 |   | 169,223 |   |
| Impairment of assets                                                         |       | 2,594,602                         |       | — |   | — |   |
| Accreted interest                                                            |       | 43,151                            |       | 54,387 |   | 120,486 |   |
| (Increase) decrease in assets:                                               |       |                              |       |   |   |   |   |
| Inventories                                                                  |       | (265,837                          |  )    | 395,597 |   | (806,949 |  ) |
| Accounts receivable                                                          |       | (6,841,268                        |  )    | (1,845,939 |  ) | 119,897 |   |
| Income taxes receivable                                                      |       | (3,655,637                        |  )    | 2,345,041 |   | 10,691 |   |
| Other current assets                                                         |       | (224,280                          |  )    | (41,306 |  ) | (91,100 |  ) |
| Other assets                                                                 |       | —                            |       | (12,725 |  ) | — |   |
| Increase (decrease) in liabilities:                                          |       |                              |       |   |   |   |   |
| Accounts payable                                                             |       | 852,875                           |       | 609,070 |   | 1,287,735 |   |
| Other accrued liabilities                                                    |       | 1,015,505                         |       | 798,578 |   | 506,386 |   |
| Increase (decrease) in income taxes payable                                  |       | (86,695                           |  )    | — |   | — |   |
|                                                                         |       |                              |       |   |   |   |   |
| Net cash used by operating activities                                        |       | (12,299,731                       |  )    | (5,686,282 |  ) | (4,039,585 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| **Cash flows from investing  activities:**                                   |       |                              |       |   |   |   |   |
| Purchase of property, plant, and equipment                                   |       | (2,383,867                        |  )    | (2,580,516 |  ) | (641,501 |  ) |
| Investment in LLC                                                            |       | —                            |       | 497,690 |   | — |   |
| Acquisitions of patents, trademarks, licenses, and  intangibles              |       | —                            |       | (89,152 |  ) | (188,168 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| Net cash used by investing activities                                        |       | (2,383,867                        |  )    | (2,171,978 |  ) | (829,669 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| **Cash flows from financing  activities:**                                   |       |                              |       |   |   |   |   |
| Repayments of long-term debt and notes payable                               |       | (499,668                          |  )    | (489,160 |  ) | (384,460 |  ) |
| Proceeds from long-term debt                                                 |       | —                            |       | 1,123,729 |   | — |   |
| Proceeds from the exercise of stock options                                  |       | 25,610                            |       | — |   | — |   |
| Payment of Preferred Stock dividends                                         |       | —                            |       | — |   | (1,053,544 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| Net cash provided (used) by financing activities                             |       | (474,058                          | )          | 634,569 |   | (1,438,004 |  ) |
|                                                                         |       |                              |       |   |   |   |   |
| Net decrease in cash and cash equivalents                                    |       | (15,157,656                       |  )    | (7,223,691 |  ) | (6,307,258 |  ) |
| Cash and cash equivalents at:                                                |       |                              |       |   |   |   |   |
| Beginning of period                                                          |       | 33,283,740                        |       | 40,507,431 |   | 46,814,689 |   |
| End of period                                                                |       | $                                 | 18,126,084 |   | $ | 33,283,740 |   | $ | 40,507,431 |   |
|                                                                         |       |                                   |       |   |   |   |   |
| Supplemental schedule of cash flow information:                              |       |                              |       |   |   |   |   |
| Interest paid                                                                |       | $                                 | 184,018    |   | $ | 236,932 |   | $ | 382,901 |   |
| Income taxes paid                                                            |       | $                                 | —     |   | $ | — |   | $ | — |   |
| Supplemental schedule of noncash investing and  financing activities:        |       |                              |       |   |   |   |   |
| Debt assumed to construct a warehouse                                        |       | $                                 | 1,362,602  |   | $ | 1,723,277 |   | $ | — |   |
| Forgiveness of royalties by shareholder                                      |       | $                                 | 1,000,000  |   | $ | — |   | $ | — |   |

See accompanying notes to financial statements

 

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**NOTES TO FINANCIAL STATEMENTS**

 

**1.**                **BUSINESS OF THE COMPANYAND BASIS OF PRESENTATION**

 

**Business of the Company**

 

RetractableTechnologies, Inc. (the “Company”) was incorporated in Texas on May 9,1994, and designs, develops, manufactures, and markets safety syringes andother safety medical products for the healthcare profession.  The Company began to develop itsmanufacturing operations in 1995.  TheCompany’s manufacturing and administrative facilities are located in LittleElm, Texas.  The Company’s primaryproducts with Notice of Substantial Equivalence to the FDA are the VanishPoint® 0.5mL insulinsyringe; 1mL tuberculin, insulin, and allergy antigen syringes; the 0.5mL, 3mL,5mL, and 10mL syringes; the small diameter tube adapter; the blood collectiontube holder; the allergy tray; the IV safety catheter; and the Patient Safe® syringe.

 

**2.**                **SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**Accounting estimates**

 

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles (“GAAP”) requires Management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer significantly from those estimates.

 

**Cash and cash equivalents**

 

Forpurposes of reporting cash flows, cash and cash equivalents includeunrestricted cash, money market accounts, and investments with originalmaturities of three months or less.

 

**Accounts receivable**

 

TheCompany records trade receivables when revenue is recognized.  No product has been consigned tocustomers.  The Company’s allowance fordoubtful accounts is primarily determined by review of specific tradereceivables.  Those accounts that aredoubtful 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**

 

Inventoriesare valued at the lower of cost or market, with cost being determined usingactual average cost.  A reserve isestablished for any excess or obsolete inventories.

 

**Property, plant, and equipment**

 

Property,plant, and equipment are stated at cost. Expenditures for maintenance and repairs are charged to operations asincurred.  Cost includes majorexpenditures for improvements and replacements which extend useful lives orincrease capacity and interest cost associated with significant capitaladditions.  For the years ended December 31,2009, 2008, and 2007, the Company capitalized interest of approximately$205,000; $237,000; and $177,000.  Gainsor losses from property disposals are included in income.

 

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

 

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

 

**Long-lived assets**

 

TheCompany assesses the recoverability of long-lived assets using an assessment ofthe estimated undiscounted future cash flows related to such assets.  In the event that assets are found to becarried at amounts which are in excess of estimated gross future cash flows,the assets will be adjusted for impairment to a level commensurate with adiscounted cash flow analysis of the underlying assets.

 

**Reclassifications**

 

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

 

**Intangible assets**

 

Intangibleassets are stated at cost and consist primarily of patents, a license agreementgranting exclusive rights to use patented technology, and trademarks which areamortized using the straight-line method over 17 years.

 

**Financial instruments**

 

The Company estimates thefair market value of financial instruments through the use of public marketprices, quotes from financial institutions, and other availableinformation.  Judgment is required ininterpreting data to develop estimates of market value and, accordingly,amounts are not necessarily indicative of the amounts that could be realized ina current market exchange.  Short-termfinancial instruments, including cash and cash equivalents, accountsreceivable, accounts payable and other liabilities, consist primarily ofinstruments without extended maturities, the fair value of which, based onManagement’s estimates, equals their recorded values.

 

**Concentration risks**

 

TheCompany’s financial instruments exposed to concentrations of credit riskconsist primarily of cash, cash equivalents, and accounts receivable.  Cash balances, some of which exceed federallyinsured limits, are maintained in financial institutions; however, Managementbelieves the institutions are of high credit quality.  The majority of accounts receivable are duefrom companies which are well-established entities.  As a consequence, Management considers anyexposure from concentrations of credit risks to be limited.  Two customers, DHHS and Cardinal Health,comprised 68.4% of the Company’s accounts receivable at December 31, 2009.  The Company had a high concentration of saleswith two significant customers.  For theyear ended December 31, 2009, the aforementioned customers accounted for$15.0 million, or 38.4% of net sales.** **Sales to the DHHS comprised 52.0%and 24.4% of the Company’s revenues for the three months and twelve monthsended December 31, 2009, respectively. This program, which was estimatedto run from August 2009 through March 2010, ended in December 2009.  The Company does not know if there will be asimilar program in 2010.

 

Consideringthe current economic climate, the Company increased its Provision for doubtfulaccounts by approximately $182,000 this year.

 

TheCompany manufactures syringes in Little Elm, Texas as well as utilizingmanufacturers in China.  The Companypurchases most of its product components from single suppliers, includingneedle adhesives and packaging materials. There are multiple sources of these materials.  The Company obtained roughly 67.5% of itsfinished products in 2009 through Double Dove, a Chinese manufacturer.  In the event that the Company becomes unableto purchase such product from Double Dove, the Company would need to find an alternate

 

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supplierfor its 0.5mL insulin syringe, its 5mL and 10mL syringes, and its autodisablesyringe and increase domestic production for 1mL and 3mL syringes to avoid adisruption in supply.

 

**Revenue recognition**

 

Revenueis recognized for sales to distributors when title and risk of ownership passesto the distributor, generally upon shipment. Revenue is recorded on the basis of sales price to distributors, lesscontractual pricing allowances. Contractual pricing allowances consist of: (i) rebates granted todistributors who provide tracking reports which show, among other things, thefacility that purchased the products, and (ii) a provision for estimatedcontractual pricing allowances for products that the Company has not receivedtracking reports.  Rebates are recordedwhen issued and are applied against the customer’s receivable balance.  The provision for contractual pricingallowances is reviewed at the end of each quarter and adjusted for changes inlevels of products for which there is no tracking report.  Additionally, if it becomes clear thattracking reports will not be provided by individual distributors, the provisionis further adjusted.  The estimatedcontractual allowance is netted against individual distributor’s accountsreceivable balances for financial reporting purposes.  The resulting net balance is reflected inaccounts receivable or accounts payable, as appropriate.  The terms and conditions of contractualpricing allowances are governed by contracts between the Company and itsdistributors.  Revenue for shipmentsdirectly to end-users is recognized when title and risk of ownership pass fromthe Company.  Any product shipped ordistributed for evaluation purposes is expensed.

 

TheCompany’s domestic return policy is set forth in its standard DistributionAgreement.  This policy provides that acustomer may return incorrect shipments within 10 days following arrival at thedistributor’s facility.  In all suchcases the distributor must obtain an authorization code from the Company andaffix the code to the returned product. The Company will not accept returned goods without a returned goodsauthorization number.  The Company mayrefund the customer’s money or replace the product.

 

TheCompany’s return policy also provides that a customer may return product thatis overstocked.  Overstocking returns arelimited to two times in each 12-month period up to 1% of distributor’s total purchaseof products for the prior 12-month period. All product overstocks and returns are subject to inspection andacceptance by manufacturer.

 

TheCompany’s international distribution agreements do not provide for any returns.

 

TheCompany records an allowance for estimated returns as a reduction to Accountsreceivable and Gross sales. Historically, returns have been less than 0.5% of net sales.

 

**Marketing fees**

 

Undera sales and marketing agreement with Abbott Laboratories (“Abbott”), theCompany paid marketing fees until the Company terminated the contract forbreach.  The contracted services were toinclude participation in promotional activities, development of educational andpromotional materials, representation at trade shows, clinical demonstrations,inservicing and training, and tracking reports detailing the placement of theCompany’s products to end-users. Marketing fees were accrued at the time of the sale of product toAbbott.  These fees were paid afterAbbott provided the Company a tracking report of product sales toend-users.  These costs were included inSales and marketing expense in the Statements of Operations.  No marketing fees have been accrued since October 15,2003, the date the National Marketing and Distribution Agreement with Abbottwas terminated.  The Company filed suitagainst Abbott in August 2005 for breach of contract.  The District Court has issued a schedulingorder calling for trial in May 2010. See Note 8 **COMMITMENTS ANDCONTINGENCIES** for further discussion.

 

**Litigation Proceeds**

 

Proceeds from litigation, if any, are recognizedwhen realizable. Generally, realization is not reasonably assured and expecteduntil proceeds are collected.

 

**Income taxes**

 

TheCompany evaluates tax positions taken or expected to be taken in a tax returnfor recognition in the financial statements based on whether it is“more-likely-than-not” that a tax position will be sustained based upon thetechnical merits of the position. Measurement of the tax position is based upon the largest amount ofbenefit that is greater than 50% likely of being realized upon ultimatesettlement.

 

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TheCompany provides for deferred income taxes through utilizing an asset andliability approach for financial accounting and reporting based on the taxeffects of differences between the financial statement and tax bases of assetsand liabilities, based on enacted rates expected to be in effect when suchdifferences reverse in future periods. Deferred tax assets are periodically reviewed for realizability.  The Company had sufficient taxable incomefrom prior carryback years to realize all of its taxable losses through December 31,2006.  Taxable losses for 2007 andthereafter are subject to loss carryforwards. The Company has established a valuation allowance for its net deferredtax asset as future taxable income cannot be reasonably assured.  Penalties and interest on uncertain taxpositions are classified as income taxes in the Statements of Operations.  Under recent tax law changes, companies areallowed to carry back taxable losses from either 2008 or 2009.  The Company will file for a tax refundutilizing its 2009 taxable losses which will result in a minimum of a $3.7million refund.

 

**Earnings per share**

 

TheCompany computes basic earnings per share by dividing net earnings for theperiod (adjusted for any cumulative dividends for the period) by the weightedaverage number of common shares outstanding during the period.  The Company’s potentially dilutive CommonStock equivalents, consisting of options, convertible debt, and convertiblePreferred Stock, are all antidilutive for all periods presented.  Accordingly, basic loss per share is equal todiluted earnings per share.  Annualcumulative preferred dividends have been added to net losses for the yearsended December 31, 2009, 2008 and 2007 to 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.

 

**Research and development costs**

 

Researchand development costs are expensed as incurred.

 

**Share-based compensation**

 

On September 26,2008, the Company’s shareholders approved the 2008 Stock Option Plan and alsoapproved an Offer to Exchange Stock Options (the “Exchange Offer”) wherebyemployees, including executive officers, and Directors exchanged certainoutstanding underwater options for options issued under the 2008 Stock OptionPlan.** **Pursuantto the****Exchange Offer, eligible participants(totaling 103) tendered, and the Company accepted for cancellation, eligibleoptions to purchase an aggregate of 1,925,365 shares of the Company’s CommonStock representing 99.4% of the total shares of Common Stock underlying optionseligible to exchange in the Exchange Offer. The Company issued new options under the 2008 Stock Option Plan topurchase an aggregate of 962,683 shares of Common Stock in exchange for thecancellation of the tendered options. Options issued to employees vested after one year.  Options issued to non-employee Directorsvested immediately.

 

Priorto 2008, the Company had issued options under three stock-based Director,independent contractor and employee compensation plans as well as severalindividual option agreements.  Two ofthese plans and one individual option agreement have terminated and theunissued and unsold stock under these terminated plans has been deregisteredpursuant to Post-Effective Amendment No. 1 to Form S-8 RegistrationStatement, filed December 2, 2008. As earlier mentioned, in 2008, the 2008 Stock Option Plan was approvedand options have been issued under it pursuant to the Exchange Offer.  In July 2009, the Company issued optionsfor the purchase of a total of 1,886,425 shares to Directors, ExecutiveOfficers, employees, and consultants under the 2008 Stock Option Plan.  Of this amount, incentive stock options forthe purchase of 269,956 shares of Common Stock and Non Qualified Stock Optionsfor the purchase of 229,494 shares of Common Stock were issued to ExecutiveOfficers and Directors.  Additionally, in2009, an option to purchase Three Million (3,000,000) shares issued to ThomasJ. Shaw outside these plans was approved by shareholders.

 

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TheCompany’s share-based payments are accounted for using the fair valuemethod.  The Company records share-basedcompensation expense on a straight-line basis over the requisite serviceperiod.  The Company incurred thefollowing share-based compensation costs:

 
|                        | ** ** | **Years  Ended December 31,** |       |
|-----------------------------|------------|------------------------------------|------------|
|                        | ** ** | **2009**                           | ** ** | **2008** |   | **2007** |   |
|                        |       |                               |       |   |   |   |   |
| Cost  of sales              | $          | 317,644                            | $          | (1,797 | ) | $ | 6,648 |   |
|                        |       |                               |       |   |   |   |   |
| Sales  and marketing        |       | 242,509                            |       | (2,156 | ) | 3,086 |   |
|                        |       |                               |       |   |   |   |   |
| Research  and Development   |       | 47,168                             |       | (281 | ) | (7,863 | ) |
|                        |       |                               |       |   |   |   |   |
| General  and administrative |       | 1,504,039                          |       | 36,863 |   | 4,607 |   |
|                        |       |                               |       |   |   |   |   |
|                        | $          | 2,111,360                          | $          | 32,629 | $ | 6,478 |   |
|                             |            |                                    |            |  |  |  |  |  |

 

Optionsawarded to employees in 2009 and 2008 were amortized over twelve months.  The Company amortized one month’s expense foroptions granted in 2008 in the fourth quarter of 2008.  The Company expensed five months of expensefor options issued in 2009.  Non-employeeDirectors’ option expense was all expensed in the third quarter of 2009.

 

**Recent****Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 168, *The FASB AccountingStandards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162* (“SFAS 168”) (FASB ASC 105-10).  SFAS 168 replaces all previously issuedaccounting standards and establishes the *FASB Accounting StandardsCodification**TM** *(“FASB ASC” or the “Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements in conformitywith U.S. GAAP.  SFAS 168 is effectivefor all interim and annual periods ending after September 15, 2009.  The FASB ASC is not intended to changeexisting U.S. GAAP.  The adoption of thispronouncement only resulted in changes to the Company’s financial statementdisclosure references.  As such, theadoption of this pronouncement had no effect on the Company’s financialposition, results of operations, or cash flows.

 

In order to facilitatethe transition to the FASB ASC, the Company has elected to show all referencesto FASB ASC within this report on Form 10-K along with a parentheticalreference to the previous accounting standard.

 

In April 2008,the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “*Determination of the Useful Life of Intangible Assets*”included in the Codification under FASB ASC 350.  This FSP amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,“*Goodwill and Other Intangible Assets*”(“SFAS 142”).  The intent of this FSP isto improve the consistency between the useful life of a recognized intangibleasset under SFAS 142 and the period of expected cash flows used to measure thefair value of the asset under the Business Combinations Topic of theCodification and other GAAP.  FSP FAS142-3 was effective for the Company beginning January 1, 2009.  The adoption of FSP FAS 142-3 did not have amaterial impact on the Company’s financial position, results of operations, orcash flows.

 

In May 2009,the FASB issued SFAS No. 165, *Subsequent Events*,included in the Codification under FASB ASC 855, which establishes generalstandards of accounting for and disclosure of events occurring after the 

 

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balancesheet date, but before the financial statements are issued or available to beissued.  In February 2010, FSAB ASC855 was amended, removing certain disclosure requirements for public companiesthat conflicted with certain SEC disclosure requirements.  Adoption of this standard and its amendmentdid not have a material impact on the Company’s financial position, results ofoperations, or cash flows.

 

**3.**                **INVENTORIES**

 

Inventoriesconsist of the following:

 
| ** **         | ** ** | **Year  Ended December 31,** | ** ** |
|--------------------|------------|-----------------------------------|------------|
|               | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Raw  materials     |       | $                                 | 2,424,818  |   | $ | 1,885,158 |   |
| Finished  goods    |       | 4,688,151                         |       | 4,961,974 |   |
|               |       | 7,112,969                         |       | 6,847,132 |   |
| Inventory  reserve |       | (205,600                          | )          | (205,600 | ) |
|               |       | $                                 | 6,907,369  |   | $ | 6,641,532 |   |

** **

**4.**                **PROPERTY, PLANT, ANDEQUIPMENT**

 

Property, plant, andequipment consist of the following**:**
| ** **                           | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                                 |       |                  |       |   |   |
| Land                                 |       | $                     | 261,893    |   | $ | 261,893 |   |
| Buildings  and building improvements |       | 11,079,905            |       | 5,319,732 |   |
| Production  equipment                |       | 14,428,077            |       | 14,270,577 |   |
| Office  furniture and equipment      |       | 2,148,622             |       | 1,825,781 |   |
| Construction  in progress            |       | 1,198,856             |       | 6,287,503 |   |
| Automobiles                          |       | 102,321               |       | 102,321 |   |
|                                 |       | 29,219,674            |       | 28,067,807 |   |
| Accumulated  depreciation            |       | (14,985,493           | )          | (13,632,140 | ) |
|                                 |       | $                     | 14,234,181 |   | $ | 14,435,667 |   |

 

Depreciation expense forthe years ended December 31, 2009, 2008, and 2007 was $1,353,353;$1,351,547; and $1,370,228, respectively.

 

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

 

Intangible assets consistof the following:
| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                      |       |                  |       |   |   |
| License  agreement        |       | $                     | 500,000    |   | $ | 500,000 |   |
| Trademarks  and patents   |       | 508,743               |       | 508,743 |   |
|                      |       | 1,008,743             |       | 1,008,743 |   |
| Accumulated  amortization |       | (582,068              | )          | (538,628 | ) |
|                      |       | $                     | 426,675    |   | $ | 470,115 |   |

 

In1995, the Company entered into a license agreement with the Chief ExecutiveOfficer of the Company for the exclusive right to manufacture, market, anddistribute products utilizing automated retraction technology.  This license agreement was amended July 3,2008 to include certain additional patent applications owned by such officer inthe definition of “Patent Properties” so that such additional patentapplications would be covered by the license. This technology is the subject of various patents and patentapplications owned by 

 

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suchofficer of the Company.  The initiallicensing fee of $500,000 is being amortized over 17 years.  The license agreement also provides forquarterly payments of a 5% royalty fee on gross sales.  The royalty fee expense is recognized in theperiod in which it is earned.  Royaltyfees of $2,806,223; $2,168,268; and $2,087,596 are included in Cost of salesfor the years ended December 31, 2009, 2008, and 2007, respectively.  Royalties payable under this agreementaggregated $843,327 and $620,987 at December 31, 2009 and 2008,respectively.  Gross sales upon whichroyalties are based were $56,124,453; $43,365,361; and $41,751,897 for 2009,2008, and 2007, respectively.

 

In the third quarter of 2009, the Company announcedseveral cost cutting and cash saving initiatives to conserve its cash.  As a part of those initiatives, the ChiefExecutive Officer waived payment to him of $1,000,000 in royalty fees.  Therefore, the royalty fees of $2,806,223 for2009 resulted in a cash outlay of $1,806,223.

 

Amortization expense forthe years ended December 31, 2009, 2008, and 2007, was $43,440; $43,597;and $43,454, respectively.  Futureamortization expense for the years 2010 through 2014 is estimated to be $43,000per year.

 

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

 

In2006, the Company invested $500,000 in a limited liability company.  The Company exercised its option to have thatinvestment returned.  The investment wasreturned in April 2008.

 

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

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **December 31,** | ** **      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **2009**              | ** **      | **2008** | ** ** |
| Long-term  debt consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |                  |            |   |   |
| Note  payable to Katie Petroleum.  Interest  accrues at prime plus 1%, which was 4.25% and 5.0%, at December 31, 2009  and 2008, 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 has  been 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.                              |       | $                     |  1,097,112 |   | $ |  1,437,977 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                  |            |   |   |
| 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, 2009 and 2008 was 4.25% and  4.25%, 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. |       | 2,141,998             |            | 2,241,145 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                  |            |   |   |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 1,005                 |            | 12,711 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                  |            |   |   |
| Note  payable to GMAC.  Sixty (60) monthly  payments at $427.  Interest is zero  percent.  Collateralized by a 2005  Chevrolet van.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 3,762                 |            | 8,561 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |            |                       |                 |  |  |  |  |

 

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **2009**   | ** ** | **2008**  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|-----------|--------|
| Interim construction loan from Lewisville State  Bank, a division of 1st International Bank, for a maximum of $4,210,000,  which provided funding for the expansion of the warehouse, additional office  space, and a new Controlled Environment.   The note bore interest at WSJPR plus 0.25%.  The loan was renewed on December 10,  2009 with a 20 year amortization and 10 year maturity.  The loan is secured by the Company’s land  and buildings.  The interest rate is 5.968%. |   | 4,209,608  |       | 2,847,006 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 7,453,485  |       | 6,547,400 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |       |       |      |   |
| Less:  current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | (2,628,652 | )          | (451,865  | )      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $          | 4,824,833  |      | $      | 6,095,535 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |        |            |            |           |        |  |  |

 

The aggregate maturities of long-term debt as of December 31,2009, are as follows:

 

|       |   |      |      |
|------------|--------|-----------|-----------|
| 2010       | $      | 2,628,652 |      |
| 2011       |   | 519,611   |      |
| 2012       |   | 447,755   |      |
| 2013       |   | 132,504   |      |
| 2014       |   | 140,862   |      |
| Thereafter |   | 3,584,101 |      |
|       | $      |      | 7,453,485 |   |
|            |        |           |           |  |

 

**8.**  **COMMITMENTS ANDCONTINGENCIES**

 

On August 12, 2005,the Company filed a lawsuit against Abbott in the U.S. District Court in theEastern District of Texas, Texarkana Division. The Company is alleging fraud and breach of contract in connection withthe National Marketing and Distribution Agreement dated as of May 4, 2000,which was terminated on October 15, 2003. It is seeking damages which it estimates to be in millions of dollars oflost profits, out of pocket expenses, and other damages.  In addition, it is seeking punitive damages,pre- and post-judgment interest, and attorneys’ fees.  Following Abbott’s unsuccessful attempt toget the case dismissed and ordered to arbitration, Abbott filed an answer andcounterclaim on July 15, 2008, alleging several breaches of contract,breach of implied warranty of merchantability, and breach of express warranty,seeking in excess of $6,000,000 in compensatory damages as well as seekingattorneys’ fees.  The Company denies thevalidity of Abbott’s counterclaims. Discovery has already taken place and is substantially completed.  The District Court has issued a revisedscheduling order calling for trial in May 2010.

 

In April 2008, theCompany sued Occupational and Medical Innovations Limited (“OMI”) in the U.S.District Court for the Eastern District of Texas, Tyler Division, alleging thatOMI had infringed two U.S. patents (6,572,584 and 7,351,224).  The Company also alleged theft ofconfidential information, intentional interference with contracts, and engagingin false advertising that wrongfully disparaged and mischaracterized thesyringe products.  The Company furtheralleged that OMI made false allegations regarding the source of origin of itssafety syringe products being offered in the U.S. On December 18, 2009,the jury delivered a verdict in the Company’s favor on the patent infringementand misappropriation of trade secrets claims against OMI. On March 4,2010, the Court entered a final judgment and ordered that the Company recoverdamages and prejudgment interest from OMI based on OMI’s misappropriation oftrade secrets in the amount of $3,153,575. In addition, the Court entered a permanent injunction enjoining OMI, itsmanufacturers, distributors and service providers from infringing patent no.6,572,584, by making, importing, selling or using any of OMI’s syringes in theU.S. and its territories.  OMI has enteredinto an administrative proceeding in Australia which is the equivalent ofbankruptcy and has filed a similar proceeding in the Eastern District of Texas,which make the actual recovery of the damages unlikely.

 

In June 2007, theCompany sued Becton Dickinson and Company (“BD”) in the U.S. District Court forthe Eastern District of Texas, Marshall Division, alleging infringement ofthree patents (5,578,011; 5,632,733; and 6,090,077) and violations by BD of thefederal and state antitrust laws, and of the Lanham Act.  The Company subsequently dropped the5,578,011 patent allegations from the lawsuit. In January 2008, the Court 

 

F-16

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severed the patent claimsfrom the other claims pending resolution of the patent dispute.  In April 2008, the Company and theofficer sued BD in the U.S. District Court for the Eastern District of Texas,Marshall Division, alleging infringement of another recently issued patent(7,351,224).  BD counterclaimed fornon-infringement and invalidity of the asserted patent.  The Court consolidated this case with theabove-stated case filed in June 2007. On November 9, 2009, the jury returned a verdict finding that thepatents asserted by the Company were valid and infringed by BD and awarded $5,000,000in damages.  No final judgment has beenentered in this case.  The Company isseeking injunctive relief.

 

In September 2007,BD and MDC Investment Holdings, Inc. (“MDC”) sued the Company in theUnited States District Court for the Eastern District of Texas, TexarkanaDivision, initially alleging that the Company is infringing two U.S. patents ofMDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seekinjunctive relief and unspecified damages. The Company counterclaimed for declarations of non-infringement,invalidity, and unenforceability of the asserted patents.  The plaintiffs subsequently droppedallegations with regard to patent no. 7,090,656 and the Company subsequentlydropped its counterclaims for unenforceability of the asserted patents.  The Court conducted a claims constructionhearing on September 25, 2008 and issued its claims construction order on November 14,2008.  No trial date has been set.

 

In September 2008,the Company and an officer sued Safety Medical International (“SMI”) in theUnited States District Court for the Eastern District of Texas, Tyler Division,alleging infringement of U.S. patent nos. 6,572,584 and 7,351,224, and seekinginjunctive relief, unspecified monetary damages, and reimbursement ofattorneys’ fees.  SMI has counterclaimed,seeking declaratory judgments of non-infringement and invalidity of theasserted patents.  SMI is not seekingmonetary damages.  SMI has filed forbankruptcy, and this lawsuit, including all claims and counterclaims, wasdismissed as a result of those proceedings, which have concluded.

 
| **9.** | **INCOME TAXES** |
|--------|------------------|

 

The provision for incometaxes consists of the following:
| ** **                              | ** ** | **For  the Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current  tax provision (benefit)        |       |                                       |       |   |   |   |   |
| Federal                                 |       | $                                          | (3,655,637 | ) | $ | — |   | $ | (143,459 | ) |
| State                                   |       |                                       | (181,953   | ) | — |   | (1,310,158 | ) |
| Total  current provision (benefit)      |       | (3,837,590                                 | )          | — |   | (1,453,617 | ) |
|                                    |       |                                       |       |   |   |   |   |
| Deferred  tax provision (benefit)       |       |                                       |       |   |   |   |   |
| Federal                                 |       | —                                     |       | — |   | — |   |
| State                                   |       | —                                     |       | — |   | — |   |
| Total  deferred tax provision (benefit) |       | —                                     |       | — |   | — |   |
| Total  income tax provision (benefit)   |       | $                                          | (3,837,590 | ) | $ | — |   | $ | (1,453,617 | ) |

 

The Company recognized atax benefit in 2007 primarily due to the net effect of a state tax refund forprior years that had not been previously recognized.

 

The Company recognized atax benefit in 2009 primarily due to a federal tax carryback related to 2009.

 

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

 

The Company has $14,277,070in tax benefits attributable to carryback losses for federal tax purposes.  The loss carryforwards will begin to expirein 2027 for federal tax purposes and will begin to expire for state taxpurposes in 2012.

 

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|                                  |   | **December 31,** |       |
|---------------------------------------|--------|-----------------------|------------|
|                                  |   | **2009**              | ** ** | **2008** |   |
| Deferred tax assets                   |   |                  |       |   |   |   |
| Net operating loss  carryforwards     | $      | 5,414,579             | $          |   | 5,285,164 |   |   |
| Accrued expenses and reserves         |   | 1,045,120             |       | 1,240,050 |   |   |
| Employee stock option expense         |   | 422,476               |       | 31,669 |   |   |
| Inventory                             |   | 242,807               |       | 435,578 |   |   |
| Non-employee stock option expense     |   | 183,570               |       | 198,425 |   |   |
| Charitable contribution carryforwards |   | 26,164                |       | 21,118 |   |   |
| Deferred tax assets                   |   | 7,334,716             |       | 7,212,004 |   |   |
| Deferred tax liabilities              |   |                  |       |   |   |   |
| Property and equipment                |   | (687,512              | )          | (1,178,618 | ) |   |
| Deferred tax liabilities              |   | (687,512              | )          | (1,178,618 | ) |   |
| Net deferred assets                   |   | 6,647,204             |       | 6,033,386 |   |   |
| Valuation allowance                   |   | (6,647,204            | )          | (6,033,386 | ) |   |
| Net deferred tax liabilities          | $      | —                | $          |   | — |   |   |

 

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

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2009**              | ** ** | **2008** | ** ** | **2007** | ** ** |
| 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         |       | 4.6                   |       | 32.1 |   | 27.2 |   |
| Permanent differences                              |       | 3.0                   |       | 0.4 |   | 1.0 |   |
| Cancellation of options under Exchange Offer       |       | —                |       | 5.4 |   | — |   |
| State tax refund and accruals                      |       | (0.8                  | )          | — |   | (12.0 |  ) |
| Return to accrual adjustments                      |       | 0.5                   |       | — |   | 3.2 |   |
| Other                                              |       | 1.6                   |       | — |   | 1.2 |   |
| Effective tax (benefit) rate                       |       | (29.0                 | )          | — | % | (17.3 |  )% |

 

TheCompany files income tax returns in the U.S. federal jurisdiction and invarious state and local jurisdictions. The Company’s federal income tax returns for all tax years ended on orafter December 31, 2006, remain subject to examination by the InternalRevenue Service.  The Company’s state andlocal income tax returns are subject to examination by the respective state andlocal authorities over various statutes of limitations, most ranging from threeto five years from the date of filing.

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

 

**PreferredStock**

 

TheCompany has one class of Preferred Stock outstanding:  Class B Convertible Preferred Stock (“Class BStock”).  The Class B Stock has fiveseries:  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; 552,500; and 1,238,821 shares,respectively.  The remaining 2,714,734authorized shares have not been assigned a series.

 

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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 144,000outstanding at December 31, 2009 and 2008. Holders of Series I Class B Stock are entitled to receive acumulative annual dividend of $.50 per share, payable quarterly if declared bythe Board of Directors.  In 2004, theCompany paid $2,550,000 in dividends.  In2007, the Company paid $262,819 in dividends. At December 31, 2009 and 2008 approximately $180,000 and $108,000,respectively, of dividends which had not been 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 IClass B Stock may, at the option of the stockholder, be converted to oneshare of Common Stock after three years from the date of issuance or in theevent the Company files an initial registration statement under the SecuritiesAct of 1933.  Pursuant to these terms, noshares of Series I Class B Stock were converted into Common Stock in 2009.  In the event of voluntary or involuntarydissolution, liquidation, or winding up of the Company, holders of Series IClass B Stock then outstanding are entitled to $6.25 per share, plus allaccrued and unpaid dividends prior to any distributions to holders of Series IIClass B Convertible Preferred Stock (“Series II Class B Stock”),Series III Class B Convertible Preferred Stock (“Series III Class BStock”), Series IV Class B Convertible Preferred Stock (“Series IVClass B Stock”), Series V Class B Convertible Preferred Stock (“Series VClass B Stock”), or Common Stock.

 

Series IIClass B

 

Therewere 1,000,000 shares of $1 par value Series II Class B Stock issuedand there were 219,700****sharesoutstanding at December 31, 2009 and 2008. Holders of Series II Class B Stock are entitled to receive acumulative annual dividend of $1.00 per share, payable quarterly if declared bythe Board of Directors.  Holders of Series IIClass B Stock generally have no voting rights until dividends are inarrears and unpaid for twelve consecutive 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 $4.6million in dividends.  In 2007, theCompany paid $790,725 in dividends.** **At December 31, 2009 and2008, approximately $551,000 and $331,000 respectively, of dividends which hadnot 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 IIClass B Stock may, at the option of the stockholder, be converted to oneshare of Common Stock after three years from the date of issuance or in the eventthe Company files an initial registration statement under the Securities Act of1933.  Pursuant to these terms, no sharesof Series II Class B Stock were converted into Common Stock in2009.  In the event of voluntary orinvoluntary dissolution, 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 IIIClass B

 

Therewere 1,160,445 shares of $1 par value Series III Class B Stock issuedand 130,245 shares outstanding at December 31, 2009 and 2008.  Holders of Series III Class B Stockare entitled to receive a cumulative annual dividend of $1.00 per share,payable quarterly if declared by the Board of Directors.  At December 31, 2009 and 2008,approximately $3,246,000 and $3,117,000, 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 IIIClass B Stock may, at the option of the stockholder, be converted to oneshare of Common Stock after three years from the date of issuance or in theevent the Company files an initial registration statement under the SecuritiesAct of 1933.  Pursuant to these terms, no****shares of Series III Class B Stock were convertedinto Common Stock in

 

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2009.  In the event of voluntary or involuntary dissolution,liquidation, or winding up of the Company, holders of Series III Class BStock then outstanding are entitled to $12.50 per share, plus all accrued andunpaid dividends, after distribution obligations to Series I Class BStock and Series II Class B Stock have been satisfied and prior toany distributions to holders of Series IV Class B Stock, Series VClass B Stock, or Common Stock.

 

Series IVClass B

 

Therewere 1,133,800 shares issued and 552,500 shares outstanding at December 31,2009 and 2008. Holders of Series IV Class B Stock are entitled toreceive a cumulative annual dividend of $1.00 per share, payable quarterly, ifdeclared by the Board of Directors. Holders of Series IV Class B Stock generally have no votingrights.  At December 31, 2009 and2008, approximately $7,583,000 and $7,030,000, respectively, of dividends whichhave not been declared were in arrears.

 

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 IVClass B Stock may, at the option of the stockholder any time subsequent tothree years from date of issuance, be converted into one share of Common Stock,or in the event the Company files an initial registration statement under theSecurities Act of 1933.  Pursuant tothese terms, no****shares of Series IV Class BStock were converted into Common Stock in 2009.  In the event of voluntary or involuntaryliquidation, dissolution, or winding up of the Company, holders of Series IVClass B Stock then outstanding are entitled to receive liquidatingdistributions of $11.00 per share, plus accrued and unpaid dividends afterdistribution obligations to Series I Class B Stock, Series II Class 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 VClass B

 

Therewere 2,416,221 shares issued and 1,238,821 outstanding at December 31,2009 and 2008.  Holders of Series V Class BStock are entitled to receive a cumulative annual dividend of $0.32 per share,payable quarterly, if declared by the Board of Directors.  Holders of Series V Class B Stockgenerally have no voting rights.  At December 31,2009 and 2008, approximately $3,693,000 and $3,297,000, respectively, ofdividends which have not 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 VClass B Stock may, at the option of the stockholder any time subsequent tothe date of issuance, be converted into Common Stock.  Pursuant to the terms of the certificate ofdesignation, no shares of Series V Class B Stock were converted intoCommon Stock in 2009.  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, andSeries IV Class B Stock have been satisfied and prior to anydistribution to the holders of the Common Stock.

 

**Common stock**

 

TheCompany is authorized to issue 100,000,000 shares of no par value Common Stock,of which 23,825,149 and 23,800,064 shares were issued and outstanding at December 31,2009 and 2008, respectively.

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

 

TheCompany had a lease with Mill Street Enterprises (“Mill Street”), a soleproprietorship owned by a person, who ceased to be a 10% shareholder in 2008,for offices and storage in Lewisville, Texas. During the year ended December 31, 2007, the Company paid $14,500under this lease.  This lease termexpired in June 2007.

 

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TheCompany paid MediTrade International Corporation, a company controlled by aperson, who ceased to be a 10% shareholder in 2008 on a month-to-monthconsulting agreement whereby MediTrade is paid $7,500 per month plus expenses.** **Total amounts paidto MediTrade for the years ending December 31, 2009, 2008, and 2007totaled $111,883.57; $98,401; and $129,618, respectively.

 

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

 

Duringthe years ended December 31, 2009, 2008, and 2007, the Company paid$50,793; $40,191; and $30,397, respectively, to family members of its ChiefExecutive Officer for various consulting services.

 
| **12.** | **STOCK OPTIONS** |
|---------|-------------------|

 

**Stock options**

 

Prior to 2008, the Company had three stock optionplans that provided for the granting of stock options to officers, employees,and other individuals.  Two of thoseplans have terminated.  A 2008 StockOption Plan was approved for the granting of stock options to employees,Directors, and consultants.  During 1999,the Company approved the 1999 Stock Option Plan.  Options for the purchase of 131,880 shares ofCommon Stock granted under the 1999 Stock Option Plan are outstanding.  The 1999 Stock Option Plan terminatedpursuant to its terms in 2009.  The 2008Plan is the only plan with stock options currently being awarded.  The Company has reserved an aggregate 3,000,000shares of Common Stock for issuance upon the exercise of options under the 2008Stock Option Plan.

 

On September 26, 2008, the Company’s shareholdersapproved an Exchange Offer whereby employees, including executive officers, andDirectors could exchange certain outstanding underwater options for optionsissued under the 2008 Stock Option Plan.** **Pursuant to the****Exchange Offer, eligible participants (totaling 103)tendered, and the Company accepted for cancellation, eligible options topurchase an aggregate of 1,925,365 shares of the Company’s Common Stockrepresenting 99.4% of the total shares of Common Stock underlying optionseligible to exchange in the Exchange Offer. The Company issued new options under the 2008 Stock Option Plan topurchase an aggregate of 962,683 shares of Common Stock in exchange for thecancellation of the tendered options. Options issued to employees vest in mid 2010.  Options issued to non-employee Directorsvested in 2009.

 

In July 2009, the Company issued options for thepurchase of a total of 1,886,425 shares to Directors, Executive Officers,employees, and consultants under the 2008 Stock Option Plan.  Of this amount, incentive stock options forthe purchase of 269,956 shares of Common Stock and Non Qualified Stock Optionsfor the purchase of 229,494 shares of Common Stock were issued to Executive Officersand Directors.  Additionally, in 2009, anoption to purchase Three Million (3,000,000) shares issued to Thomas J. Shawoutside these plans was approved by shareholders.

 

The Company also had**** options for common shares outstanding underthe 1996 Incentive Stock Option Plan and the 1996 Stock Option Plan forDirectors and Other Individuals through November 2008.  The two 1996 plans and all options issuedthereunder have terminated or have been exchanged for options granted under the2008 Plan.

 

The Compensationand Benefits Committee administers all plans and determines and/or recommendsto the Board exercise prices at which options are granted.  All executive compensation, including thegranting of stock options, is determined by the Compensation and BenefitsCommittee.  Shares issued upon exerciseof options come from the Company’s authorized but 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.  Unvested options issued under the2008 Stock Option Plan expire immediately after termination of employment.

 

**Employee options**

 

A summary of Director, officer, and employee optionsgranted and outstanding under the Plans is presented below:

 

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|                                                          | ** ** | **Years Ended December 31,** |       |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
|                                                          | ** ** | ** **                        |       |
|                                                          | ** ** | **2009**                          |       | **2008** |   | **2007** |   |
|                                                          | ** ** | **Shares**                        | ** ** | **Weighted****Average****Exercise****Price** |   | **Shares** |   | **Weighted****Average****Exercise****Price** |   | **Shares** | ** ** | **Weighted****Average****Exercise****Price** |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of period                            |       | 1,057,263                         |       | $ | 1.99 |   | 2,187,455 |   | $ | 8.80 |   | 2,417,295 |   | $ | 8.58 |   |
| Granted                                                       |       | 4,796,425                         |       | 0.81 |   | 962,683 |   | 1.30 |   | — |   | — |   |
| Exercised                                                     |       | (5,085                            | )          | (1.30 | ) | — |   | — |   | — |   | — |   |
| Forfeited                                                     |       | (127,075                          | )          | (4.99 | ) | (2,092,875 | ) | (8.79 | ) | (229,840 | ) | (6.50) |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of period                                  |       | 5,721,528                         |       | $ | 0.94 |   | 1,057,263 |   | $ | 1.99 |   | 2,187,455 |   | $ | 8.80 |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of period                                  |       | 1,137,403                         |       | $ | 1.44 |   | 147,580 |   | $ | 6.25 |   | 2,187,455 |   | $ | 8.80 |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options granted  during period |       | —                            |       | $ | 0.59 |   | — |   | $ | 0.76 |   | — |   | $ | — |   |

 

Thefair value of each 2008 option grant is estimated on the date of grant usingthe binomial option pricing model with the following weighted average assumptionsused for grants in 2008:  no dividendyield; expected volatility of 67.53%; risk free interest rate of 2.83%; and anexpected life of 8.61 to 8.69 years.  Theoptions were issued under the 2008 Stock Option Plan.  No options were issued in 2007. 

 

Thefair value of each 2009 grant is estimated on the date of the grant using theBlack-Scholes pricing model with the following weighted average assumptionsused for grants in 2009: expected volatility of 67.53%, risk free interest rateof 3.35%, and an expected life of 8.61 to 8.69 years. Other than the optionsissued to the Chief Executive Officer, the options were issued under the 2008Stock Option Plan. 

 

Thefollowing table summarizes information about Director, officer, and employeeoptions outstanding under the aforementioned plans at December 31, 2009:

** **

|         | ** **  | ** **      | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|-------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** **  | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** **  | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** **  | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** **  | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
|  $      |  10.00 |            | 17,100     |            | 0.84       |            | 17,100     |   |
|  $      |  6.90  |            | 15,080     |            | 2.75       |            | 15,080     |   |
|  $      |  8.65  |            | 2,400      |            | 3.48       |            | 2,400      |   |
|  $      |  8.87  |            | 700        |            | 4.36       |            | 700        |   |
|  $      |  1.30  |            | 902,123    |            | 8.89       |            | 902,123    |   |
|  $      |  0.81  |            | 4,784,125  |            | 9.54       |            | 200,000    |   |

 

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**Non-employeeoptions**

 

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

 
| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                    | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                    | ** ** | ** **                        | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                    | ** ** | ** **                        | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | ** **                        | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                    | ** ** | **Shares**                        | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of period                            |       | 454,700                           |       | $ | 8.41 |   | 549,700 |   | $ | 8.69 |   | 579,700 |   | $ | 8.50 |   |
| Granted                                                       |       | 90,000                            |       | 0.84 |   | — |   | — |   | — |   | — |   |
| Exercised                                                     |       | (20,000                           |  )    | (0.95 |  ) | — |   | — |   | — |   | — |   |
| Forfeited                                                     |       | (133,100                          |  )    | (10.00 |  ) | (95,000 |  ) | (10.00 |  ) | (30,000 |  ) | (5.00 |  ) |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of period                                  |       | 391,600                           |       | $ | 6.52 |   | 454,700 |   | $ | 8.41 |   | 549,700 |   | $ | 8.69 |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of period                                  |       | 391,600                           |       | $ | 6.52 |   | 454,700 |   | $ | 8.41 |   | 549,700 |   | $ | 8.69 |   |
|                                                          |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options granted  during period |       | —                            |       | $ | 0.61 |   | — |   | $ | — |   | — |   | $ | — |   |

 

The fair value of each 2009 grant is estimated on thedate of the grant using the Black Scholes pricing model with the followingassumptions: expected volatility of 67.53%, risk free interest rate of 3.35%,and an expected life of 8.61 years. These options were issued under the 2008Stock Option Plan. No options were issued in 2008 or  2007.

 

Thefollowing table summarizes information about non-employee options outstandingunder the aforementioned plans at December 31, 2009:

 

|         | ** **       |                 | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|------------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** **       | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** **       | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** **       | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** **       | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
|  $      |  10.00      |            | 89,100     |            | 0.58       |            | 89,100     |   |
|  $      | 6.90             |            | 232,500    |            | 2.75       |            | 232,500    |   |
|  $      |   0.81 |            | 70,000     |            | 9.55       |            | 70,000     |   |

 

TheCompany recorded $2,111,360;  $98,473(offset by a credit of $65,844 for surrendered stock options); and $6,478 asstock-based compensation expense in 2009, 2008, and 2007, respectively.  The total intrinsic value of optionsexercised was $16,388; $0; and $0 in 2009, 2008, and 2007, respectively.  The aggregate intrinsic value of optionsoutstanding and of options exercisable at December 31, 2009 wasapproximately $4.3 million and $531,000, respectively.  The total compensation cost related tonon-vested stock options to be recognized in the future was $1,346,587 at December 31,2009.

 
| **13.** | **401(k) PLAN** |
|---------|----------------------|

 

TheCompany implemented an employee savings and retirement plan (the “401(k) Plan”)in 2005 that is intended to be a tax-qualified plan covering substantially allemployees.  Under the terms of the 401(k) Plan,employees may elect to contribute up to 88% of their compensation, or thestatutory prescribed limit, if less.  TheCompany may, at its discretion, match employee contributions.  The Company made matching

 

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contributionsof approximately $76,643, $122,000, and $111,000 in 2009, 2008 and 2007,respectively.   In the third quarter of2009, the Company discontinued contributions until further notice.

 
| **14.** | **BUSINESS SEGMENTS** |
|---------|-----------------------|

** **
|                | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|---------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic sales      |       | $         | 34,466,797 |      | $          | 23,244,370 |       | $ | 21,461,717 |   |
| International sales |       | 4,515,040 |       | 4,654,948 |       | 4,828,003  |       |
| Total sales         |       | $         | 38,981,837 |      | $          | 27,899,318 |       | $ | 26,289,720 |   |
|                |       |      |       |      |       |       |       |
| Long-lived assets   |       |      |       |      |       |       |       |
| Domestic            |       | $         | 13,961,445 |      | $          | 14,435,667 |       | $ | 11,483,423 |   |
| Foreign             |       | $         | 272,736    |      | $          | —     |       | $ | — |   |

 

TheCompany does not operate in separate reportable segments.  The Company has no long-lived assets inforeign countries.  Shipments tointernational customers generally require a prepayment either by wire transferor an irrevocable confirmed letter of credit. The Company does extend credit to international customers on someoccasions depending upon certain criteria, including, but not limited to, thecredit worthiness of the customer, the stability of the country, bankingrestrictions, and the size of the order. All transactions are in U.S. currency.

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

 

The selected quarterly financial data for the periodsended December 31, 2009 and 2008, have been derived from the Company’sunaudited financial statements and include all adjustments, consisting only ofnormal recurring adjustments, necessary for a fair presentation of the resultsof the interim periods.

 
|                                                   |       | **(In thousands, except for per share  and outstanding stock amounts)** |       |
|--------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                                   |       | **2009**                                                                |       |
|                                                   | ** ** | **Quarter  1**                                                          | ** ** | **Quarter 2** | ** ** | **Quarter 3** | ** ** | **Quarter 4** |   |
| Sales, net                                             |       | $                                                                       | 5,258      |   | $ | 5,753 |   | $ | 10,752 |   | $ | 17,219 |   |
| Cost of sales                                          |       | 4,029                                                                   |       | 3,413 |   | 7,817 |   | 10,207 |   |
| Gross profit                                           |       | 1,229                                                                   |       | 2,340 |   | 2,935 |   | 7,012 |   |
| Total operating expenses                               |       | 5,271                                                                   |       | 5,121 |   | 6,484 |   | 9,936 |   |
| Loss from operations                                   |       | (4,042                                                                  |  )    | (2,781 |  ) | (3,549 |  ) | (2,924 |  ) |
| Interest and other income                              |       | 29                                                                      |       | 11 |   | 14 |   | 4 |   |
| Interest expense, net                                  |       | —                                                                  |       | — |   | — |   | (22 |  ) |
| Benefit for income taxes                               |       | 105                                                                     |       | — |   | 100 |   | 3,633 |   |
| Net income (loss)                                      |       | (3,908                                                                  |  )    | (2,770 |  ) | (3,435 |  ) | 691 |   |
| Preferred stock dividend requirements                  |       | (343                                                                    |  )    | (343 |  ) | (343 |  ) | (342 |  ) |
| Earnings (loss) applicable to common shareholders      |       | $                                                                       | (4,251     |  ) | $ | (3,113 |  ) | $ | (3,778 |  ) | $ | 349 |   |
| Net earnings (loss) per share – basic and diluted |       | $                                                                       | (0.18      |  ) | $ | (0.13 |  ) | $ | (0.16 |  ) | $ | 0.01 |   |
| Weighted average shares outstanding                    |       | 23,800,064                                                              |       | 23,800,064 |   | 23,803,397 |   | 23,822,607 |   |
| Profit margin                                          |       | 23.4%                                                                   |       | 40.7% |   | 27.3% |   | 40.7% |   |

 

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|                                        |       | **(In thousands, except for per share  and outstanding stock amounts)** |       |
|---------------------------------------------|------------|-------------------------------------------------------------------------|------------|
|                                        |       | **2008**                                                                |       |
|                                        | ** ** | **Quarter  1**                                                          | ** ** | **Quarter 2** | ** ** | **Quarter 3** | ** ** | **Quarter 4** |   |
| Sales, net                                  |       | $                                                                       | 5,315      |   | $ | 6,474 |   | $ | 8,997 |   | $ | 7,113 |   |
| Cost of sales                               |       | 4,029                                                                   |       | 3,498 |   | 6,871 |   | 5,275 |   |
| Gross profit                                |       | 1,286                                                                   |       | 2,976 |   | 2,126 |   | 1,838 |   |
| Total operating expenses                    |       | 4,362                                                                   |       | 4,028 |   | 4,306 |   | 5,975 |   |
| Loss from operations                        |       | (3,076                                                                  |  )    | (1,052 |  ) | (2,180 |  ) | (4,137 |  ) |
| Interest and other income                   |       | 254                                                                     |       | 241 |   | 159 |   | 202 |   |
| Interest expense, net                       |       | (41                                                                     |  )    | (22 |  ) | (14 |  ) | 23 |   |
| Net loss                                    |       | (2,863                                                                  |  )    | (833 |  ) | (2,035 |  ) | (3,912 |  ) |
| Preferred stock dividend requirements       |       | (345                                                                    |  )    | (343 |  ) | (343 |  ) | (342 |  ) |
| Loss applicable to common shareholders      |       | $                                                                       | (3,208     |  ) | $ | (1,176 |  ) | $ | (2,378 |  ) | $ | (4,254 |  ) |
| Net loss per share – basic and diluted |       | $                                                                       | (0.13      |  ) | $ | (0.05 |  ) | $ | (0.10 |  ) | $ | (0.18 |  ) |
| Weighted average shares outstanding         |       | 23,778,072                                                              |       | 23,800,064 |   | 23,800,064 |   | 23,800,064 |   |
| Profit margin                               |       | 24.2%                                                                   |       | 46.0% |   | 23.6% |   | 25.8% |   |

 

Major variances in the third quarter results for2009 compared to 2008 are due to higher revenues due to the DHHS contract andhigher litigation costs in 2009.

 

Fourth quarter results for 2009, when compared to2008, were affected by a dramatic increase in revenues due to the DHHS contract.  Operating expenses increased primarily due tothe recognition of an impairment cost of $2.6 million and additional litigationcosts of $2.1 million.  Net income waspositively affected in 2009 for a tax benefit of $3.6 million related to thecarryback of the 2009 net operating loss for federal taxes.

 

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# **Item 9. Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

# ** **

None

 

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

 

DisclosureControls and Procedures

 

Pursuant to Rule 13a-15(b) under theSecurities Exchange Act of 1934 (the “Exchange Act”), 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) under theExchange Act.  The term disclosurecontrols and procedures means controls and other procedures that are designedto ensure that information required to be disclosed by us in our periodicreports is: i) recorded, processed, summarized, and reported within the timeperiods specified in the Securities and Exchange Commission’s (the “SEC”) rules andforms; and ii) accumulated and communicated to our Management, including ourprincipal executive and principal financial officers, as appropriate to allowtimely decisions regarding required disclosure. Based upon this evaluation, the CEO and CFO concluded that, as of December 31,2009, our disclosure controls and procedures were effective.

 

**Management’sAnnual Report on Internal Control over Financial Reporting**

 

Management is responsible for establishing andmaintaining adequate internal control over our financial reporting as definedin Rule 13a-15(f) under the Exchange Act. The term internal controlover financial reporting means a process designed by, or under the supervisionof, our principal executive and principal financial officers and effected byour Board of Directors, Management and other personnel, to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles and includes those policies and procedures that:(i) pertain to the maintenance of records that in reasonable detailaccurately and fairly reflect our transactions and dispositions of assets; (ii) providereasonable assurance that our transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being made onlyin accordance with authorizations of Management and Directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton our financial statements.  Managementused the *Internal Control - IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission to evaluate the effectiveness of our internal control overfinancial reporting as required by paragraph (c) of Rule 13a-15 underthe Exchange Act.  Management, with theparticipation of our CEO and CFO, concluded that our internal control overfinancial reporting as of December 31, 2009, was effective.  No material weaknesses in our internalcontrol over financial reporting were identified by Management.

 

This annual report does not include an attestationreport of our registered public accounting firm regarding internal control overfinancial reporting.  Management’s reportwas not subject to attestation by our registered public accounting firmpursuant to temporary rules of the SEC that permit us to provide onlyManagement’s report in this annual report.

 

Our management, including the CEO and CFO, does notexpect that our disclosure controls and procedures or our internal control overfinancial reporting will prevent or detect all errors and all instances offraud.  A control system, no matter howwell designed and operated, can provide only reasonable, not absolute,assurance that the control system’s objectives will be met.

 

**Changesin Internal Control Over Financial Reporting**

 

There have been no changes during the fourth quarterof 2009 or subsequent to December 31, 2009 in our internal control overfinancial reporting or in any other factor that has materially affected or isreasonably likely to materially affect our internal control over financialreporting.

 

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**Item 9B. Other Information.**

 

Effective December 20,2009, the Board of Directors approved changes to the Charters for the AuditCommittee, Compensation and Benefits Committee, and Nominating Committee aswell as changes to our Code of Business Conduct and Ethics, all of which areposted on our website at www.vanishpoint.com. A summary of the material changes is set forth below.

 

The Audit Committee Charterwas amended primarily to reflect the new name change for the NYSE Amex LLC aswell as to change reference to various accounting standards as required bychanging rules.  It was also amended todisclose our current process for receipt, retention, and treatment ofcomplaints regarding accounting, internal accounting controls, or auditingmatters and the confidential submission by employees of such concerns.  A copy of the charter is attached hereto as Exhibit No. 99.1.

 

The Compensation andBenefits Committee Charter was amended primarily to reflect the new name forthe NYSE Amex LLC and also to clarify that the CEO’s compensation is set solelyby the Committee. A copy of the charter is attached hereto as Exhibit No. 99.2.

 

The Nominating CommitteeCharter was amended to reflect the new name change for the NYSE Amex LLC. Acopy of the charter is attached hereto as Exhibit No. 99.3.

 

The Code of Business Conductand Ethics was amended to reflect the new name change for the NYSE Amex LLC andalso primarily to add our Insider Trading Policy as it currently stands.  Other minor changes were also made.  A copy of the amended code is incorporatedherein as Exhibit No. 14.

 

OnJanuary 22, 2010, we held the rescheduled meeting of preferredshareholders for those series that did not obtain quorum at the initial SpecialMeeting (Series I — IV Class B Convertible Preferred Stock).  The Series II and III Class BConvertible Preferred Shareholders obtained quorum at this rescheduledmeeting.  The proposals submitted for their approval were thoserelating to an amendment of the applicable certificates of designation.  Previously, the various certificates ofdesignation provided that, if dividends were in arrears on the preferred stock,there were certain prohibitions on acquisitions for consideration by theCompany of stock ranking junior to such stock except on certain terms. One of the limitations was that no acquisitions for consideration could be madeunless the acquisition involved the acquisition of all of the preferred stock(upon a 50% vote) or unless the preferred stock was converted into or exchangedinto stock of the Company ranking junior to the preferred stock as to dividendsand upon liquidation. The proposed amendments deleted these requirements andspecifically provided that the Company can purchase any of its shares rankingjunior to the preferred stock  (includingCommon shares) on any terms it fixes, even where a dividend upon shares of thepreferred stock  is in arrears, so longas:  (A) the cash assets of the Company as of its latest reportingperiod equal or exceed $40,000,000 or (B) if the cash assets of theCompany as of its latest reporting period were less than $40,000,000, theamount of funds utilized to purchase such shares within the next quarter do notexceed 25% of the value of the cash assets as of the previous reporting period.  The Series II Class B ConvertiblePreferred Shareholders rejected this proposal. The Series III Class B Convertible Preferred Shareholdersapproved this proposal.  The Series VClass B Convertible Preferred Shareholders approved a similar proposal atthe prior Special Meeting.  The meetingof the Series I Class B Convertible Preferred Shareholders has beenpermanently adjourned.  The meeting ofthe Series IV Class B Convertible Preferred Shareholders has beenadjourned until June 11, 2010 at 10:00 a.m. Central time.

 

Articles of Amendment werefiled on October 16, 2009 with the Texas Secretary of State amending theArticles of Incorporation to reflect the prior approval of the proposal by the Series VClass B Convertible Preferred Stock.

 

**PART III**

 

**Item 10. Directors, ExecutiveOfficers and Corporate Governance.**

 

The following table sets forth information concerningour Directors, executives, and certain of our significant employees as of thedate of this report.  Our Board ofDirectors consists of a total of seven (7) members, two (2) membersof which are Class 1 Directors and five (5) of which are Class 2Directors which serve for two-year

 

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terms.  At our 2010 Annual Meeting, we will besoliciting the election of four Class 2 Directors and one Class 1Director so that the Board will be more evenly split with four Class 2Directors and three Class 1 Directors.

 
| **Name**                  | ** ** | **Age** | ** ** | **Position**                                                                           | ** ** | **Term as  Director  Expires** |
|---------------------------|------------|---------|------------|----------------------------------------------------------------------------------------|------------|--------------------------------|
| **EXECUTIVES**            |       |    |       |                                                                                   |       |                           |
| Thomas J. Shaw            |       | 59      |       | Chairman,  President, Chief Executive Officer, and Class 2 Director               |       | 2010                           |
| Douglas W. Cowan          |       | 66      |       | Vice President,  Chief Financial Officer, Treasurer, and Class 2 Director         |       | 2010                           |
| Kathryn M. Duesman        |       | 47      |       | Executive  Director, Global Health                                                     |       | N/A                            |
| Russell B.  Kuhlman       |       | 56      |       | Vice President,  Sales                                                                 |       | N/A                            |
| Michele M.  Larios        |       | 43      |       | Vice President,  General Counsel, and Secretary                                        |       | N/A                            |
| Lawrence G.  Salerno      |       | 49      |       | Director of  Operations                                                                |       | N/A                            |
| Steven R. Wisner          |       | 52      |       | Executive Vice  President, Engineering & Production and Class 2 Director |       | 2010                           |
|                      |       |    |       |                                                                                   |       |                           |
| **INDEPENDENT DIRECTORS** |       |    |
| Marco Laterza             |       | 62      |       | Class 1  Director                                                                 |       | 2011                           |
| Amy Mack                  |       | 42      |       | Class 1  Director                                                                 |       | 2011                           |
| Marwan Saker              |       | 54      |       | Class 2  Director                                                                 |       | 2010                           |
| Clarence Zierhut          |       | 81      |       | Class 2  Director                                                                 |       | 2010                           |
|                      |       |    |       |                                                                                   |       |                           |
| **SIGNIFICANT EMPLOYEES** |       |    |
| Shayne Blythe             |       | 41      |       | Director of  Sales and Marketing Logistics                                             |       | N/A                            |
| John W. Fort III          |       | 41      |       | Director of  Accounting                                                                |       | N/A                            |
| James A. Hoover           |       | 62      |       | Director of  Quality Assurance                                                         |       | N/A                            |
| R. John Maday             |       | 49      |       | Production  Manager                                                                    |       | N/A                            |
| Judy Ni Zhu               |       | 51      |       | Research and  Development Manager                                                      |       | N/A                            |

 

**Executives**

 

Thomas J. Shaw, our Founder, has served as Chairman ofthe Board, President, Chief Executive Officer, and Director since ourinception.  We believe it is appropriatefor Mr. Shaw to continue to serve as a Director and as the Chairman of theBoard because of his deep knowledge of the strengths and weaknesses of ourproducts (as their primary inventor) and of the Company (as its Founder).  Further, his strategic knowledge of theCompany and its competitive environment arising from his ongoing services asits CEO is vital to the successful supervision of the Company by the Board ofDirectors.  Finally, Mr. Shaw’seducational background in both Engineering and Accounting is helpful to Boarddeliberations.  In addition to his dutiesoverseeing our Management, he continues to lead our design team in productdevelopment of other medical safety devices that utilize, among other things,his unique patented friction ring technology. Mr. Shaw has over 25 years of experience in industrial productdesign and has developed several solutions to complicated mechanicalengineering challenges.  He has beengranted multiple patents and has additional patents pending.  Mr. Shaw received a Bachelor of Sciencein Civil Engineering from the University of Arizona and a Master of Science inAccounting from the University of North Texas.

 

Douglas W. Cowan is a Vice President and our ChiefFinancial Officer, Treasurer, and a Director. Mr. Cowan joined us as Chief Financial Officer and was elected tothe Board of Directors in 1999.  Webelieve it is appropriate Mr. Cowan continue to serve as a Director due tohis level of involvement in the financial state of the Company (as its CFO) aswell as his lead role in supervising all internal control and disclosurecontrol procedures and statements.  Healso serves as the primary contact for investors which enables him to bringtheir concerns to the Board on appropriate topics as they arise.  His expertise as a CPA and experience as theCompany’s CFO allow him to guide the Board, upon request. with regard tofinancial matters.  He is responsible forour financial, accounting, risk management, and forecasting functions.  Mr. Cowan also serves as a Director of CowanTechnologies, Inc., a private computer consulting company.  Mr. Cowan has a Bachelor of BusinessAdministration from Texas Technological College.  He is a CPA licensed in Texas.

 

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Kathryn M. Duesman, RN, joined us in 1996 andcurrently serves as the Executive Director, Global Health.  She provides clinical expertise on existingproducts as well as those in development. She has been instrumental in developing training and marketing materialsand has spoken and been published on safety issues.  Ms. Duesman works with internationalagencies to promote the use of safe technologies in developing countries.  Ms. Duesman is a 1985 graduate of TexasWoman’s University with a Bachelor of Science in Nursing.  Ms. Duesman’s clinical background as aregistered nurse includes diagnostic, acute, and home healthcare nursing.

 

Russell B. Kuhlman joined us in February 1997 andis our Vice President, Sales.  Mr. Kuhlmanis responsible for management of the sales force and liaison with GPOs andproduct training for our sales organization, as well as distribution.  Mr. Kuhlman’s efforts with us haveresulted in bringing onboard Specialty Distributors, influencing legislation,and educating influential healthcare representatives about the benefits of ourproduct line.  Mr. Kuhlman isrespected throughout the industry and is a main contributor to the safetyeffort in this country.  Mr. Kuhlmanis also Vice President of Kuhlman & Kuhlman, Inc., a private realestate management company.  He has asales background in the medical service industry that includes his most recentwork for ICU Medical (formerly Bio-Plexus), a medical device manufacturingcompany, from 1994 to 1997, where he developed strategic marketing plans fornew safety products.  Prior to his workthere, Mr. Kuhlman worked as Director of Sales and Marketing for RyanWinfield Medical, Inc., a medical device manufacturing company, from 1989to 1994, where he launched several new products, developed strategic salesterritories, and was the trainer for Sales and Regional Managers.  Mr. Kuhlman also worked for BDVacutainer® Systems, a medical products company, inseveral territories from 1980 to 1989, where he was recognized as the NationalSales Representative for the year 1987.  Mr. Kuhlmanholds a Bachelor of Science in Finance from the University of Tennessee.

 

Michele M. Larios joined us in February 1998 andcurrently serves as our Vice President, General Counsel, and Secretary.  Ms. Larios is responsible for our legaland legislative, quality assurance, human resource, and regulatoryfunctions.  In addition to working onlegal matters and with outside counsel, Ms. Larios works with legislatorson pertinent issues and relevant legislation. Ms. Larios received a Bachelor of Arts in Political Science fromSaint Mary’s College in Moraga, California, and a Juris Doctorate fromPepperdine University School of Law in Malibu, California.

 

Lawrence G. Salerno has been employed with us since1995 and has served as Director of Operations for us since 1998.  He is responsible for the manufacture of allour products, as well as all product development and process developmentprojects.  In addition, he supervises allaspects of the construction and expansion of our facilities in Little Elm,Texas.  Mr. Salerno is the brotherof a 5% shareholder (and consultant to the Company) who ceased to be a 10%shareholder in 2008. ** **Mr. Salerno received hisBachelor of Science in Economics from the University of North Texas.

 

Steven R. Wisner joined us in October 1999 asExecutive Vice President, Engineering and Production and as a Director.  We believe it is appropriate that Mr. Wisnercontinue to serve as a Director due to his extensive experience in operationalmanagement and his comprehensive overview of all of the Company’soperations.  His role in overseeing allengineering, production, and foreign sales allows him to provide timely andinsightful guidance regarding the effect of Board decisions on the Company’sabilities to meet its goals. Mr. Wisner’s responsibilities include themanagement of engineering, production, Chinese operations, and internationalsales.  Mr. Wisner has over 30 yearsof experience in product design, development, and manufacturing.  Mr. Wisner holds a Bachelor of Sciencein Computer Engineering from Iowa State University.

 

**IndependentDirectors**

 

Marco Laterza joined us as a Director effective as of March 22,2005.  We believe it is appropriate Mr. Laterzacontinue to serve as a Director because of his skills as a CPA in activepractice as well as his decades of experience in advising individuals andentities with regard to corporate planning and financial issues.  Such skills and experience provide a valuablecontribution in his role as the designated financial expert on the AuditCommittee as well as provide valuable independent accounting advice to theBoard.  Since 1988, Mr. Laterza hasowned and operated a public accounting practice.  His practice includes corporate, partnershipand individual taxation, compilation/review of financial statements, financialplanning, business consulting, and trusts and estates.  From 2004 to the present Mr. Laterza hasalso served as the Treasurer for EZ Blue Software Corporation, a private

 

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developmentstage, software company.  Formerly, Mr. Laterzawas employed in a number of positions from 1977 to 1985 with El Paso NaturalGas Company eventually serving as its Director of Accounting.  Mr. Laterza received his Bachelors ofBusiness Administration in Accounting from Pace University in 1972.  He is a CPA and has received a Certificate ofEducational Achievement in Personal Financial Planning from the AmericanInstitute of CPAs.

 

Amy Mack joined us as a Director on November 19,2007.  We believe it is appropriate that Ms. Mackcontinue as a Board member due both to her over ten years of experience as anurse (the primary retail user of our products) as well as her experience inrunning her own company.  Further, shecontributes to the diversity of experience on our Board.  Since 2003, she has owned and operated SPA02, a medical spa.  Since April of2000, she has owned and operated (and served as Chief Nursing Officer for)EmergiStaff & Associates, a nursing staffing company, in Dallas,Texas.  She served as a registered nursefrom August 1997 to the date she began EmergiStaff &Associates.  She obtained her Bachelor ofScience degree from Texas A&M University in College Station, Texas in 1991and an Associate degree in Nursing from El Centro College in Dallas, Texas in1994.  She is a registered nurse in Texas.

 

Marwan Saker joined our Board of Directors in June 2000.  We believe it is appropriate that Mr. Sakercontinue to serve as a Director due to over a decade of experience ininternational business as well as his specific expertise in issues relating tointernational distribution.  Mr. Saker’sexperience as a business owner competing internationally provides additionalnecessary insight to our Board.  Since1983, Mr. Saker has served as Chief Executive Officer of Sovana, Inc.,a private export management company that supplies agricultural equipment andsupplies to overseas markets.  Since2000, he has served as Director of Consolidated Food Concepts Inc., a privatecompany. Since 1986, he has served as President of International Exports &Consulting Inc., a private export management, consulting, and distributioncompany.  Since 2000, he has served asVice President of Hanneke Corp., a private overseas sourcing company.  From 1998 to 2001, he served as a Member ofMy Investments, LLC, a private equity investment company.  Since 1999, he has served as President ofSaker Investments Inc., a private company that manages an investmentportfolio.  Since 1998, he has served asa General Partner of Maya Investments, Ltd., a private investment managementlimited partnership.  He also serves as aMember of MMDA, LLC, a private real estate development company.  He is also involved with Fig LandDevelopment, a private company.  Mr. Sakerhas acted as a representative for U.S. companies seeking distribution,licensing, and franchising in the Middle East, Europe, and North Africa.  Mr. Saker was instrumental in developingsuccessful partnerships in more than 15 countries.  He offices in Irving, Texas.

 

Clarence Zierhut has served on our Board of Directorssince April 1996.  We believe it isappropriate for Mr. Zierhut to continue to serve as a Director primarilydue to his lifetime of experience in conception and development of innovativeproducts as well as his experience in adapting such products to address massproduction issues.  Finally, Mr. Zierhuthas valuable experience and insight arising out of the successful running ofhis own small company. Mr. Zierhut founded an industrial design firm in1955, Zierhut Design, now Origin Design, that develops new products from conceptthrough final prototypes.  He ceasedmanagement of the company for a period of time but has since resumed hisexecutive duties.  During hisprofessional career, Mr. Zierhut has created over 3,000 product designsfor more than 350 companies worldwide, in virtually every field ofmanufacturing, and has won many international awards for designexcellence.  His clients have includedJohnson & Johnson, Abbott, Gould, and McDonnell Douglas.  He received a Bachelor of Arts from ArtCenter College of Design in Los Angeles, California.

 

**SignificantEmployees**

 

Shayne Blythe has been with us for over ten years andis our Director of Sales and Marketing Logistics.  She is responsible for developing andimplementing strategic directions, objectives, comprehensive sales andmarketing plans, and programs.  Inaddition, she directs and oversees all aspects of the distribution process andcustomer service policies in order to monitor and maintain customersatisfaction.  Prior to joining us, Ms. Blytheassisted Mr. Shaw with the original 3mL syringe and other SBIR grantprojects.  Ms. Blythe has aBachelors of Business Administration in management from the AmericanIntercontinental University.

 

John W. Fort III is our Director of Accounting.  Mr. Fort joined us in March of 2000as a Financial Analyst and has served as our Director of Accounting since October of2002.  His primary responsibilitiesinclude managing the day-to-day operations of the Accounting and FinanceDepartment and coordination of the annual audits, and

 

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interimreviews by our independent accountants, as well as our cost accounting andforecasting functions.  Prior to joiningus, he served as the Manager of Financial Planning for the product-marketingdepartment of Excel Communications.  Mr. Fortalso served as the Manager of Budgeting and Projections for Snelling andSnelling, Inc., an international personnel services firm.  Mr. Fort holds a Bachelor of BusinessAdministration in Accounting from Tarleton State University.

 

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

 

R. John Maday joined us in July 1999 and is ourProduction Manager.  He is responsiblefor supervision of the production of our products.  Prior to becoming Production Manager on January 1,2005, he served as our Production General Supervisor.  Mr. Maday has over 27 years ofmanufacturing experience in both class II and III medical devices.  He spent three years with Mentor Corp.supervising two production departments and 13 years with Sherwood in which hegained hands-on experience in all aspects of medical device manufacturingincluding managing the Kit and Packaging department with over 225 employees.  Mr. Maday’s formal training includes FDAand Total Quality Management Systems and he is certified as a Black Belt of SixSigma Methodology.

 

Judy Ni Zhu joined us in 1995 and is our Research andDevelopment Manager.  Her primary focusis on new product development and improvement of current products.  Prior to joining us, Ms. Zhu worked as adesign engineer with Mr. Shaw on the original 3mL syringe and other SBIRgrant projects.  Ms. Zhu receivedher Bachelor of Science from Northwest Polytechnic University in Xian, China,and her Master of Engineering from the University of Texas at Arlington.  Ms. Zhu has assisted in designmodifications for the 3mL syringe, which have maximized both productreliability and production efficiency. She also designed and developed a manual needle assembly machine and anautomatic lubricating and capping system for the 3mL syringe and developed andassisted in the design of automated blood collection tube holder assemblyequipment.  Ms. Zhu has collaboratedwith Ms. Duesman and Mr. Shaw in the filing of several patentapplications.

 

FAMILYRELATIONSHIPS

 

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

 

DIRECTORSHIPSIN OTHER COMPANIES

 

No Directors hold directorships in reportingcompanies.

 

INVOLVEMENTIN CERTAIN LEGAL PROCEEDINGS

 

None of the above persons or any business in whichsuch person was an executive officer have been involved in a bankruptcypetition, been subject to a criminal proceeding (excluding traffic violationsand other minor offenses), been subject to any order enjoining or suspendingtheir involvement in any type of business, or been party to an allegedviolation of a securities law, commodities law, law or regulation respectingfinancial institutions or insurance companies, law or regulation prohibitingmail or wire fraud, or rules of any organization that has disciplinaryauthority over its members.

 

SECTION 16(a) BENEFICIALOWNERSHIP REPORTING COMPLIANCE

 

Section 16 of the Exchange Act requires ourDirectors, executive officers, and persons who own more than 10% of aregistered class of our equity securities to file with the SEC initial reportsof beneficial ownership (Form 3)

 

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andreports of changes in beneficial ownership (Forms 4 and 5) of our Common Stockand our other equity securities. Officers, Directors, and greater than 10% shareholders are required bythe SEC’s regulations to furnish us with copies of all Section 16 (a) reports they file. All of our Directors, executive officers, and 10% shareholders filed allreports timely.

 

CODEOF ETHICS

 

Effective as of March 9, 2004, we adopted a codeof ethics that applies to all employees, including, but not limited to, ourprincipal executive and financial officers. Our Code of Business Conduct and Ethics is designed to deter wrongdoingand to promote:

 
| 1.     | Honest and  ethical conduct, including the ethical handling of actual or apparent conflicts  of interests between personal and professional relationships;              |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                    |
| 2.     | Full, fair,  accurate, timely, and understandable disclosure in reports and documents that  we file with, or submit to, the SEC and in our other public communications; |
|   |                                                                                                                                                                    |
| 3.     | Compliance with  applicable governmental laws, rules, and regulations;                                                                                                  |
|   |                                                                                                                                                                    |
| 4.     | The prompt,  internal reporting of violations of the code to an appropriate person or  persons identified in the code; and                                              |
|   |                                                                                                                                                                    |
| 5.     | Accountability  for adherence to the code.                                                                                                                              |

 

The Code of Business Conductand Ethics was amended in 2009 to reflect the new name change for the NYSE Amexand also primarily to add our Insider Trading Policy as it currentlystands.  Other minor changes were alsomade.  A copy of the amended code isincorporated herein as Exhibit No. 14.  We have posted a copy of the code on our website atwww.vanishpoint.com/investor.asp.  Pleasefollow the link to “Governance” then follow the link to “Charters,” then clickon “RVP Corporate Code of Conduct.”  Anyamendment to this code or waiver of its application to the principal executiveofficer, principal financial officer, principal accounting officer, orcontroller or similar person shall be disclosed to investors by means of a Form 8-Kfiling with the SEC.  We will provide toany person without charge, upon request, a copy of such code of ethics.  Such requests should be submitted in writingto Mr. Douglas W. Cowan at 511 Lobo Lane, P.O. Box 9, Little Elm,Texas 75068-0009.

 

AUDITCOMMITTEE

 

We have a separately-designated standing AuditCommittee established in accordance with Section 3(a)(58)(A) of theExchange Act consisting of Messrs.  Clarence Zierhut, Marco Laterza, andMarwan Saker.  Each of the members of theAudit Committee is independent as determined by the NYSE Amex rules.

 

AuditCommittee Financial Expert

 

The Board of Directors has determined that we have atleast one financial expert serving on the Audit Committee.  Mr. Marco Laterza serves as ourdesignated Audit Committee Financial Expert. Mr. Laterza is independent as it is defined for Audit Committeemembers by the listing standards of the NYSE Amex.

 

**Item 11. Executive Compensation.**

 

COMPENSATIONDISCUSSION AND ANALYSIS

 

**TheObjectives of Our Compensation Plan**

 

Our executive officer compensation program (the “CompensationProgram”) is based on the belief that competitive compensation is essential toattract, retain, motivate, and reward highly qualified and industriousexecutive officers.  Our CompensationProgram is intended to accomplish the following:

 

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attractand retain highly talented and productive executive officers;

 

provide incentives and rewards for superior performanceby the executive officers; and

 

align the interests of executive officers with theinterests of our stockholders.

 

**Whatthe Compensation Program Is Designed to Award**

 

Our Compensation Program is designed to award bothsuperior long-term performance by our executive officers and their loyalty.

 

**Summaryof Each Element of Compensation**

 

To achieve these objectives, the Compensation andBenefits Committee has approved an executive officer compensation program thatconsists of three basic components:

 

base salary;

 

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).

 

**WhyWe Choose to Pay Each Element of Our Compensation Program**

 

*BaseSalary*

 

We choose to pay a significant component of ourcompensation in base salary due to the fact that our financial performance isconstrained by the monopolistic activities of BD.  We have been blocked from access to themarket by exclusive marketing practices engaged in by BD who dominates themarket.  We believe that its monopolisticbusiness practices continue despite: (i) its paying $100 million to settlea prior lawsuit with us in 2004 for anticompetitive practices, businessdisparagement, and tortious interference and (ii) the fact that a juryreturned a verdict in November 2009 finding that all three patentsasserted by us against BD are valid and infringed by BD.  Until such time as we believe that we haveaccess to the market, we believe that it is appropriate to weigh ourCompensation Program heavily in favor of base salaries rather than in incentivecompensation.

 

*Long-TermIncentives: Stock Options*

 

Long-term incentives are provided through grants ofstock options.  The grants are designedto align the interests of executive officers with those of stockholders and toprovide each executive officer with a significant incentive to manage from theperspective of an owner with an equity stake in the Company.

 

**HowWe Determine the Amount or Formula for Payment in Light of Our Objectives**

 

Executive compensation remains the same until there isa review of such compensation by the Compensation and Benefits Committee.  Compensation, other than that of the ChiefExecutive Officer, has generally not been reviewed annually.  Under the terms of Mr. Shaw’s employmentagreement, his compensation is reviewed annually.  In the past, when there is a review ofexecutive compensation, we have retained an outside consulting firm, TrinityExecutive Recruiters, Inc., to provide benchmarks for similar compensationgiven the multiple and varied positions each executive fulfills as well as oursize and the hostile environment in which we operate.

 

*BaseSalary*

 

The base salary for each of our executive officers issubjectively determined primarily on the basis of the following factors:experience, individual performance, contribution to our performance, level ofresponsibility, duties and functions, salary levels in effect for comparablepositions within and without our industry, and internal base salarycomparability considerations.  However,salaries can also be affected by our long-term needs.

 

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Thesebase salaries are reviewed periodically and may be adjusted based upon thefactors discussed in the previous sentence, as well as upon individualperformance during the previous fiscal year, changes in the duties,responsibilities and functions of the executive officer, and general changes inthe compensation peer group in which we compete for executive talent.  The relative weight given to each of thesefactors in the Compensation and Benefits Committee’s recommendation differsfrom individual to individual, as the Compensation and Benefits Committee deemsappropriate.

 

BeginningAugust 1, 2009, all employees above a certain salary level had theirsalaries reduced by 10%.  This includedall Executive Officers.  However, Mr. Shaw’sEmployment Agreement provides salary is automatically increased by thepercentage increase in the consumer price index (“CPI”) from the previousyear.  The Compensation and Benefits Committeedecided to increase Mr. Shaw’s salary (which had also been previously cutby 10%) by $11,254.04 for 2010.

 

*Long-TermIncentive: Stock Options*

 

Wehave issued stock options to our employees from time to time and may do so inthe future.  We did not issue any stockoptions in 2007.  We issued new optionsunder the 2008 Stock Option Plan to purchase an aggregate of 962,683 shares ofCommon Stock in exchange for the cancellation of tendered options pursuant to anExchange Offer in 2008.  We issued incentivestock options (“ISOs”) for the purchase of 269,956 shares of Common Stock andNon Qualified Stock Options (“NQSOs”) for the purchase of 229,494 shares ofCommon Stock to Executive Officers and Directors under the 2008 Stock OptionPlan in July 2009.  Options aregenerally granted to regular full-time employees and officers except to ourCEO.

 

In 2009, the Compensation and Benefits Committeegranted the first option to Thomas J. Shaw, our CEO, which option grant wasapproved by the shareholders later that year. The option was granted outside of any plan and was for the purchase of3,000,000 shares of Common Stock.  Thecommittee took into consideration, among other things, the following benefitsreceived and to be received by the Company in consideration for the grant ofthe option:

 

Mr. Shaw has beenthe primary developer of all of the Company’s products and is crucial to therecent development of a number of new products that are capable of expandingthe Company’s product line both inside and (eventually) outside of the syringemarket;

 

Mr. Shaw’s activeparticipation and continuation with the Company is crucial for the success ofthe Company in breaking into the market through its several ongoinglawsuits.  Mr. Shaw’s participation was crucial in obtaining theCompany’s prior litigation settlements for tens of millions of dollars;

 

Mr. Shaw had hissalary reduced by 10% beginning on August 1, 2009;

 

Mr. Shaw only had asubstantive pay raise three times since the Company’s incorporation in 1994;

 

Mr. Shaw has neverbefore been granted options despite the fact it is a standard compensationpractice for a person in his position; and

 

Mr. Shaw has neverbefore been granted a bonus despite the fact it is a standard compensationpractice for a person in his position.

 

Ifstock options are to be issued, Management prepares a proposal to theCompensation and Benefits Committee. Considerations by Management in its initial proposal in determining asuitable aggregate fair market value of options to be granted include ourfinancial condition, the number of options already outstanding, and the benefitto the non-executive officer employees. The proposal includes information relating to the expected expense ofsuch grants to be recognized by us, the approximate number of options to beissued, the number of options

 

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currently outstanding,the employees to be included, the amount of stock currently outstanding, andthe method under which the options would be awarded.

 

Oncethe dollar amount of options to be granted is approved by the Compensation andBenefits Committee, Management begins determining the aggregate number ofshares underlying options that can be granted under such approval (based on thefair value of an option for the purchase 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 freerate.  We may retain an independentoutside consultant to determine such value. In the past we have utilized the Black-Scholes model as well as thebinomial model, but we may use other methods in the future as more appropriatemethods are developed.

 

Managementprovides the Compensation and Benefits Committee with a proposal regardingoption grants to executive officers.  Ifthe recommendation is acceptable, the committee grants the options.  If the committee feels changes are merited,it grants options on its own terms.

 

Withregard to many past grants, after the aggregate number of shares underlying theoptions to be granted was determined, we allocated the options to our variousdepartments using a factor based on their annual compensation times theirperformance rating.  The individualemployee’s allocation factor was the numerator of a fraction.  The denominator was the department’s sum ofall factors (annual compensation times performance ratings of all the eligibleemployees).  The resulting fraction wasmultiplied by the stock options to be awarded to determine the employee’sindividual portion of the aggregate approved options.  Future grants may be based on the value ofcontributions to the Company and not necessarily pursuant to any formula.

 

Theallocation was, from time to time, further reviewed by each department’smanagement if they believed certain employees were not awarded an appropriatenumber of options, which Management would consider.

 

Eachstock option grant to employees allows the employee to acquire shares of CommonStock at a fixed price per share (never less than the closing stock price ofthe Common Stock on the date of grant) for a fixed period (usually tenyears).  With regard to grants prior to2009, each option generally became exercisable after three years, contingentupon the employee’s continued employment with us.  The exceptions include options issued toOfficers and Directors pursuant to the Exchange Offer, which vested immediatelyfor non-employee Directors and after one year for employees (including employeeDirectors) and options granted in 2009 which vested in one year for executiveofficers and immediately for non-employee Directors.  Accordingly, generally stock option grantswill provide a return to the employee only if the employee remains employed byus during the vesting period, and then only if the market price of theunderlying Common Stock appreciates. Future grants may vest over a shorter or longer period.

 

**HowEach Compensation Element and Decision Fits Into Overall CompensationObjectives**

 

OurCompensation Program is intended to accomplish the following objectives: 1)attract and retain highly talented and productive executive officers; 2)provide incentives and rewards for superior performance by the executiveofficers; and 3) align the interests of executive officers with the interestsof our stockholders.

 

We ensure, through periodic retention ofcompensation consulting experts to provide a benchmark analysis of industrycompensation, that overall compensation is sufficient to attract and retainhighly talented and productive executive officers.  We pay the bulk of our compensation in theform of cash compensation due to the fact that competing in an anti-competitiveenvironment means that results will not always be commensurate withperformance.  We believe that theperformance of our executives has been outstanding.  We believe this is especially true given theanti-competitive environment in which we operate.  Bonuses are granted from time to time (thelast time in 2003) to recognize extraordinary performance and/or extraordinaryjob requirements.  We believe thisapproach and weighting of compensation elements is necessary to retain ourexecutive talent due to the environment in which we operate.

 

Periodically, we grant stock options with the intentto provide both an incentive and reward to executive officers for long-termperformance and to align the interests of our employees with that of theshareholders.

 

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**AllocationBetween Long-Term/Current and Between Cash/Non-Cash Compensation**

 

All ofour long-term compensation consists of non-cash compensation in the form ofstock options.  We believe that thegranting of stock options incentivizes executives to maximize our long-termstrengths as well as our stock price. However, because we are operating in a monopolistic environment and ourstock price has little relationship with our performance, the most significantcomponent of compensation is base salary and not stock options.  Management is incented to maximizeshareholder value and will be rewarded if they do so.  However, a significant base salary enables usto retain this competent Management despite the current inability to providevaluable equity incentives.

 

**HowDeterminations Are Made as to When Awards Are Granted**

 

Generally,option awards to executive officers are granted by the Compensation andBenefits Committee and for others are granted at the discretion of the Boardafter recommendation of the Compensation and Benefits Committee or on thecommittee’s own initiative.  No awardsare granted if the Compensation and Benefits Committee does not support arecommendation.

 

Unfortunately,our stock price does not always react as expected to our achievements.  Accordingly, at times options have beengranted to aid in retaining competent and experienced executives without regardto the then current stock price. However, such options always have exercise prices that are at or abovefair market value on the date of grant.

 

Inaddition, there is no relationship between the date of grant of options and ourpossession of material non-public information (i.e. we grant options withoutregard to whether or not we are in possession of material non-publicinformation as we usually are in possession of such information).  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 minimalrisk of the executive profiting from such material nonpublic information.

 

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

 

Cashreserves as well as trends in sales and costs are taken into account whenconsidering the advisability of increasing base salaries or granting cashbonuses.  However, no specific items ofcorporate performance are taken into account in setting executive compensationdue to the fact that we compete in a monopolistic environment and, therefore,significant achievement or performance is not always correlated with corporateresults.  At such times that any of thesefactors make it inadvisable to increase salaries or grant bonuses as advisable,then consideration is given to increasing option awards taking into account thevalue of prior option awards.

 

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

 

**HowCompensation Reflects Individual Performance**

 

Executive compensation is not based on theindividual’s contribution to specific, quantitative corporate objectives due tothe fact that we compete in a monopolistic environment.  However, individual’s contribution to theCompany’s performance is determined pursuant to qualitative factors asdiscussed above under “**How We Determine theAmount or Formula for Payment in Light of Our Objectives.”**

 

**FactorsWe Consider in Determining to Change Compensation Materially**

 

Weconsider our cash position, current liquidity trends, and the short-term andlong-term needs for cash reserves (especially in light of the hostileenvironment in which we operate) when evaluating whether we can changecompensation materially at a given time.

 

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On anindividual-by-individual basis, we also consider the value of past optioncompensation, the competitiveness of that individual’s base salary, and thatindividual’s contribution to our goals.

 

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

 

Stockoptions granted to executives and other employees are expensed for accountingpurposes under the Stock Compensation Topic of the Codification.  We expense all of our option costs as we dothe costs of salaries and any periodic bonuses. Accordingly, the impact of tax treatment of various compensation formsdoes not impact our compensation decisions. Stock option expense is not recognized for tax purposes, except in thecase of non-qualified stock options.  Fornon-qualified stock options, the intrinsic value of the option is recognizedwhen the option is exercised.

 

**OurPolicy Regarding Stock Ownership and Hedging**

 

We donot have a policy regarding stock ownership by executive officers.  We prohibit certain stock transactions byemployees and Directors, including:

 

1.             Purchases and sales of stock withina six month period;

 

2.             Short sales; and

 

3.             Transactions in puts, calls, orother derivative securities.

 

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

 

**Benchmarkingof Our Compensation Program**

 

In2003, we hired Trinity Executive Recruiters, Inc. to assist us inproviding benchmarks for the salary component of executive compensation bysimilarly sized companies in similar industries for persons that hold positionswhich are currently fulfilled by various members of our executive team.  These benchmarks support existing executivecompensation.

 

**TheRole of Our Executives and Directors in Determining Compensation**

 

Managementestablishes the initial recommendations regarding compensation for allemployees, including themselves.  Suchproposal is then submitted to the Compensation and Benefits Committee for itsapproval.

 

**CompensationPursuant to Employment Agreement**

 

Wehave an Employment Agreement with Mr. Thomas J. Shaw which was modifiedeffective January 1, 2008 to avoid adverse tax consequences to Mr. Shawcreated by the passage of the American Jobs Creation Act of 2004.  No other executives or Directors arecompensated pursuant to employment agreements.

 

OurEmployment Agreement with Mr. Shaw (the “Employment Agreement”) providesfor an initial period of three years which ends December 31, 2010 thatautomatically and continuously renews for consecutive two-year periods.  The Employment Agreement is terminable eitherby us or Mr. Shaw upon 30 days’ written notice or upon Mr. Shaw’s death.

 

TheEmployment Agreement provides for an annual salary of at least $416,399.88 withan annual salary increase equal to no less than the percentage increase in theCPI over the prior year.  The EmploymentAgreement requires that Mr. Shaw’s salary be reviewed by the Compensationand Benefits Committee annually, which shall make such increases as itconsiders appropriate.  Mr. Shawtook a 10% salary cut in August of 2009, along with all other executiveofficers and other employees earning over a certain salary.  In 2010, the Compensation and BenefitsCommittee increased his salary by $11,254.04.

 

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Underthe Employment Agreement, we are obligated to provide certain benefits,including, but not limited to, participation in qualified pension plan andprofit-sharing plans, participation in the Company’s Cafeteria Plan and othersuch insurance benefits provided to other executives, paid vacation, and sickleave.  We are also obligated to furnishhim with a cellular telephone and suitable office space as well as reimbursehim for any reasonable and necessary out of pocket travel and entertainmentexpenses incurred by him in carrying out his duties and responsibilities,membership dues to professional organizations, and any business-relatedseminars and conferences.

 

Pursuantto the Employment Agreement, we are obligated to indemnify Mr. Shaw forall legal expenses, court costs, and all liabilities incurred in connectionwith any proceeding involving him by reason of his being an officer, employee,or agent of the Company.  We are furtherobligated to pay reasonable attorney fees and expenses and court and othercosts associated with his defense in the event that, in Mr. Shaw’s solejudgment, he needs to retain counsel or otherwise expend his personal funds forhis defense.

 

Uponhis death, Mr. Shaw’s estate shall be entitled to his salary through thedate of death, applicable benefits, and reimbursement of expenses.

 

Wehave the right to terminate the Employment Agreement if Mr. Shaw incurs apermanent disability during the term of his employment.  A permanent disability means that Mr. Shawis unable to engage in any substantial gainful activity by reason of anymedically determinable physical or mental impairment which can be expected toresult in death or can be expected to last for a continuous period of not lessthan 12 months or is, by reason of any medically determinable physical ormental impairment which can be expected to result in death or can be expectedto last for 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 bedisabled if he is determined to be totally disabled by the Social SecurityAdministration.  In such event, Mr. Shawis entitled to his salary through the date of termination, reimbursement ofexpenses, and salary for a period of 24 months as well as applicable benefits.

 

Mr. Shaw’semployment may be terminated for cause which is defined to be conviction of afelony which is materially detrimental to the Company, proof, as determinedfinally by a court of competent jurisdiction of the gross negligence or willfulmisconduct which is materially detrimental to the company or proof, asdetermined finally by a court of competent jurisdiction, of a breach of afiduciary duty which is materially detrimental to the Company.  In such event, he shall be entitled to hissalary through the date of termination plus reimbursement of expenses.

 

If Mr. Shawis terminated without cause and not at his implicit request, Mr. Shawshall be entitled to his salary through the date of termination, reimbursementof expenses, his salary for 24 months, as well as applicable benefits.

 

If Mr. Shawresigns (other than because of a change in control), he is entitled to hissalary through the date of termination, reimbursement of expenses, salary for90 days, and applicable benefits.

 

Mr. Shawhas the right under this agreement to resign in the event that there is achange in control.  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 30% or more of the total possible voting powerof the stock of the Company (assuming the immediate conversion of all thenoutstanding convertible preferred stock) or (ii) the date a majority ofmembers of the Board of Directors is replaced during any 12-month period byDirectors whose appointment or election is not endorsed by a majority of themembers of the Company’s Board of Directors before the date of the appointmentor election.  Mr. Shaw further hasthe right to resign if there is a change in ownership.  A change in ownership is defined to haveoccurred on the date that any one person (other than Mr. Shaw) or morethan one person acting as a group acquires ownership of the Company’s stockthat, together with the stock previously held by such person or groupconstitutes more than 50% of the total fair market value or total voting power(assuming the immediate conversion of all then outstanding convertiblepreferred stock) of the Company.  In suchevent Mr. Shaw is entitled to salary through the date of termination,salary for 24 months, reimbursement of expenses and applicable benefits.

 

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Mr. Shaw’scommitment to the Company may not be construed as preventing him fromparticipating in other businesses or from investing his personal assets as mayrequire occasional or incidental time in the management, conservation, andprotection of such investments provided such investments or businesses cannotbe construed as being competitive or in conflict with the business of theCompany.

 

Mr. Shawhas agreed to a one-year non-compete, not to hire or attempt to hire employeesfor one year, and to not make known our customers or accounts or to call on orsolicit our accounts or customers in the event of termination of his employmentfor one year unless the termination is without cause or pursuant to a change ofcontrol or ownership.

 

Compensation Committee Report

 

TheCompensation and Benefits Committee has reviewed and discussed the COMPENSATIONDISCUSSION AND ANALYSIS required by Item 402(b) with Management, and,based on the review and discussions referred to in paragraph (e)(5)(i)(A) ofItem 407, has recommended to the Board of Directors that the COMPENSATIONDISCUSSION AND ANALYSIS be included in this report on Form 10-K.

 

CLARENCE ZIERHUT

MARCO LATERZA

AMY MACK

 

SUMMARY OF TOTALCOMPENSATION

 

Thefollowing Summary Compensation Table sets forth the total compensation paid oraccrued by us over the prior three years to or for the account of the principalexecutive officer, the principal financial officer, and the three highest paidadditional executive officers:

 

**SUMMARYCOMPENSATION TABLE FOR 2007-2009**
| **Name and Principal Position** | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Option  Awards****(1)****($)** | ** ** | **All  Other  Compensation  ($)** |   | **Total  ($)** |   |
|---------------------------------|------------|----------|------------|-----------------|------------|----------------------------------|------------|-----------------------------------|--------|----------------|--------|
| Thomas  J. Shaw                 |       | 2007     |       | 400,000         |       | —                           |       | 4,200                             | (2)    | 404,200        |   |
| President  and CEO              |       | 2008     |       | 416,548         |       | —                           |       | 4,600                             | (2)    | 421,148        |   |
| (principal  executive officer)  |       | 2009     |       | 399,887         |       | 1,762,500                        |       | 4,808                             | (2)    | 2,167,195      |   |
|                            |       |     |       |            |       |                             |       |                              |   |           |   |
| Douglas  W. Cowan               |       | 2007     |       | 290,109         |       | 778                              |       | 4,200                             | (2)    | 295,087        |   |
| Vice  President, CFO            |       | 2008     |       | 290,000         |       | 6,460                            |       | 4,600                             | (2)    | 301,060        |   |
| (principal  financial officer)  |       | 2009     |       | 278,289         |       | 57,575                           |       | 3,346                             | (2)    | 339,210        |   |
|                            |       |     |       |            |       |                             |       |                              |   |           |   |
| Steven  R. Wisner               |       | 2007     |       | 290,000         |       | 758                              |       | 4,200                             | (2)    | 294,958        |   |
| Executive  Vice President,      |       | 2008     |       | 290,020         |       | 6,694                            |       | 4,600                             | (2)    | 301,314        |   |
| Engineering  and Production     |       | 2009     |       | 278,289         |       | 13,806                           |       | 3,123                             | (2)    | 295,218        |   |
|                            |       |     |       |            |       |                             |       |                              |   |           |   |
| Michele  M. Larios              |       | 2007     |       | 350,000         |       | 797                              |       | 4,200                             | (2)    | 354,997        |   |
| Vice  President,                |       | 2008     |       | 350,540         |       | 6,843                            |       | 4,600                             | (2)    | 361,983        |   |
| General  Counsel                |       | 2009     |       | 336,676         |       | 89,858                           |       | 4,047                             | (2)    | 430,581        |   |
|                            |       |     |       |            |       |                             |       |                              |   |           |   |
| Russell  B. Kuhlman             |       | 2007     |       | 134,779         |       | 369                              |       | 2,695                             | (2)    | 137,843        |   |
| Vice  President, Sales          |       | 2008     |       | 140,000         |       | 4,019                            |       | 2,800                             | (2)    | 146,819        |   |
|                            |       | 2009     |       | 133,769         |       | 14,688                           |       | 1,606                             | (2)    | 150,063        |   |

 

(1) Except for theoption granted to Mr. Shaw, all options issued during or after 2008 weregranted under the 2008 Stock Option Plan, a copy of which is incorporatedherein as 

 

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Exhibit No. 10.9.  Options issued prior to 2008 were issuedunder either the 1996 Incentive Stock Option Plan, the 1996 Stock Option Planfor Directors and Other Individuals, or under the 1999 Stock Option Plan. Theemployees who had such options were permitted to exchange them for optionsgranted under the 2008 Stock Option Plan pursuant to an Exchange Offer in 2008.

 

Thefair value of each option grant prior to 2008 was estimated on the date ofgrant using the Black-Scholes option pricing model with the following weightedaverage assumptions used for grants in 2004: no dividend yield; expectedvolatility of 37%; risk free interest rate of 4.89%; and an expected life of9.0 years.  No options were issued in2006 or 2007.** **Optionsgranted before 2008 were issued under the 1999 Stock Option Plan, a copy ofwhich Plan and amendment were filed as exhibits to our Form 10-SB filed onJune 23, 2000 and our Form 10-KSB filed on March 31, 2003,respectively.  Option award expense forgrants issued before 2008 were fully amortized by the first quarter of 2007.

 

Optionaward expense for 2008 is that portion of the fair value of the options issuedunder the Exchange Offer in 2008.  Theexpense for the options issued under the Exchange Offer was fully amortized in2009.  The fair value of each 2008 optiongrant was estimated on the date of grant using the binomial option pricingmodel with the following weighted average assumptions used for grants in 2008:no dividend yield; expected volatility of 67.53%; risk free interest rate of2.83%; and an expected life of 8.61 to 8.69 years.  The options were issued under the 2008 StockOption Plan, a copy of which Plan was filed as Appendix B to our definitiveSchedule 14A filed on August 19, 2008.

 

Thefair value of each 2009 grant is estimated on the date of the grant using theBlack-Scholes pricing model with the following weighted average assumptionsused for grants in 2009: expected volatility of 67.53%, risk free interest rateof 3.35%, and an expected life of 8.61 to 8.69 years. Other than the optionsissued to Mr. Shaw, the options were issued under the 2008 Stock Option Plan.

 

(2)          This amount was compensation pursuantto our matching contributions to the 401(k) plan.

 

GRANTS OF PLAN-BASEDAWARDS

 

Thefollowing Grants of Plan-Based Awards for 2009 Table sets forth informationregarding grants of awards made under any plan to each named executive officerin the last completed fiscal year.

 

**Grants ofPlan-Based Awards for 2009**

** **
| **Name**                       | ** ** | **Grant  Date** | ** ** | **Estimated  Future  Payouts  Under Equity  Incentive  Plan Awards****Target  #** | ** ** | **All Other  Option  Awards:  Number of  Shares of  Stocks or  Units  #** | ** ** | **Exercise  or base  price of  option  awards****$/share** | ** ** | **Grant  date  fair value  of stock  and option  awards** | ** ** |
|--------------------------------|------------|-----------------|------------|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Thomas  J. Shaw                |       | 7/15/09         |       | —                                                                            |       | 3,000,000                                                                 |       | $0.81                                                      |       | $ 1,762,500                                          |       |
| President  and CEO             |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
| (principal  executive officer) |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
|                           |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
| Douglas  W. Cowan              |       | 7/15/09         |       | 98,000                                                                            |       | —                                                                    |       | $0.81                                                      |       | $ 57,575                                             |       |
| Vice  President, CFO           |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
| (principal  financial officer) |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
|                           |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
| Steven  R. Wisner              |       | 7/15/09         |       | 23,500                                                                            |       | —                                                                    |       | $0.81                                                      |       | $ 13,806                                             |       |
| Executive  Vice President,     |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
| Engineering  and Production    |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
|                           |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
| Michele  M. Larios             |       | 7/15/09         |       | 123,456                                                                           |       | 29,494                                                                    |       | $0.81                                                      |       | $ 89,858                                             |       |
| Vice  President,               |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |
| General  Counsel               |       |            |       |                                                                              |       |                                                                      |       |                                                       |       |                                                      |       |

 

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| **Name**               | ** ** | **Grant  Date** | ** ** | **Estimated  Future  Payouts  Under Equity  Incentive  Plan Awards****Target  #** | ** ** | **All  Other  Option  Awards:  Number of  Shares of  Stocks or  Units  #** | ** ** | **Exercise  or base  price of  option  awards****$/share** | ** ** | **Grant  date  fair value  of stock  and option  awards** | ** ** |
|------------------------|------------|-----------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                   |       |            |       |                                                                              |       |                                                                       |       |                                                       |       |                                                      |       |
| Russell  B. Kuhlman    |       | 7/15/09         |       | 25,000                                                                            |       | —                                                                     |       | $0.81                                                      |       | $ 14,688                                             |       |
| Vice  President, Sales |       |            |       |                                                                              |       |                                                                       |       |                                                       |       |                                                      |       |
|                   |       |            |       |                                                                              |       |                                                                       |       |                                                       |       |                                                      |       |

 

**NarrativeDisclosure to Summary Compensation Table and Grants of Plan-Based Awards Table**

 

Pleasesee **Compensation Pursuant to Employment Agreement**and POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL below for terms ofour only employment agreement in effect.

 

Thematerial terms of awards reported in the Grants of Plan-Based Awards Tableinclude that such options vest on July 15, 2010 (assuming the recipient isstill employed by us) and expire on July 15, 2019.  All options granted to Named ExecutiveOfficers in 2009 have an exercise price per share equal to the close ofbusiness stock price on July 15, 2009 ($0.81).  The Compensation and Benefits Committeeapproved the grant of these stock options on July 15, 2009.  All options (except to Mr. Shaw) weregranted under the 2008 Stock Option Plan, a copy of which Plan was filed asAppendix B to our definitive Schedule 14A filed on August 19, 2008.  Mr. Shaw’s stock option was grantedoutside of any plan under similar terms and conditions as those set forth underthe 2008 Stock Option Plan, with the exception that Mr. Shaw’s optionterminates after 10 years and not five years from the date of grant.(See Exhibit No. 10.10)****Mr. Shaw’s stock option was approved by shareholdersat the annual meeting in 2009.

 

Theratios of salary and bonus to total compensation for 2009, for each NamedExecutive Officer is as follows:

 
| Thomas J. Shaw    |   | 18.5 | % |
|-------------------|--------|------|---|
| Steven R. Wisner  |   | 94.3 | % |
| Douglas W. Cowan  |   | 82.0 | % |
| Michele M. Larios |   | 78.2 | % |
| Russell Kuhlman   |   | 89.1 | % |

 

OUTSTANDING EQUITY AWARDSAT FISCAL YEAR-END

 

Thefollowing Outstanding Equity Awards at Fiscal Year-End Table sets forthinformation regarding unexercised options held by the principal executiveofficer, the principal financial officer, and the three highest paid additionalexecutive officers as of December 31, 2009.

 

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**OutstandingEquity Awards at 2009 Fiscal Year End**
|                           |       |                                                                      | **Option  Awards** |                                                                               |
|--------------------------------|------------|---------------------------------------------------------------------------|--------------------|------------------------------------------------------------------------------------|
| **Name**                       | ** ** | **Number  of  Securities  Underlying  Unexercised  Options  Exercisable** | ** **         | **Number  of  Securities  Underlying  Unexercised  Options  Unexercisable****(1)** |   | **Equity  Incentive  Plan Awards:  Number of  Securities  Underlying  Unexercised  Unearned Options  (#)****(2)** |   | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** |   |
|                           |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
| Thomas  J. Shaw                |       | —                                                                    |               | 3,000,000                                                                          |   | — |   | 0.81 |   | 7-15-19 |   |
| President,  CEO                |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
| (principal  executive officer) |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
|                           |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
| Douglas  W. Cowan              |       | 102,000                                                                   |               | —                                                                             |   | — |   | 1.30 |   | 11-18-18 |   |
| Vice  President, CFO           |       | —                                                                    |               | —                                                                             |   | 98,000 |   | 0.81 |   | 7-15-19 |   |
| (principal  financial officer) |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
|                           |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
| Steven  R. Wisner              |       | 100,700                                                                   |               | —                                                                             |   | — |   | 1.30 |   | 11-18-18 |   |
| Executive  Vice President,     |       | —                                                                    |               | —                                                                             |   | 23,500 |   | 0.81 |   | 7-15-19 |   |
| Engineering  and Production    |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
|                           |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
| Michele  M. Larios             |       | 97,050                                                                    |               | —                                                                             |   | — |   | 1.30 |   | 11-18-18 |   |
| Vice  President,               |       | —                                                                    |               | —                                                                             |   | 123,456 |   | 0.81 |   | 7-15-19 |   |
| General  Counsel               |       | —                                                                    |               | 29,494                                                                             |   | — |   | 0.81 |   | 7-15-19 |   |
|                           |       |                                                                      |               |                                                                               |   |   |   |   |   |   |   |
| Russell  B. Kuhlman            |       | 63,450                                                                    |               | —                                                                             |   | — |   | 1.30 |   | 11-18-18 |   |
| Vice  President, Sales         |       | —                                                                    |               | —                                                                             |   | 25,000 |   | 0.81 |   | 7-15-19 |   |
|                                |            |                                                                           |                    |                                                                                    |  |  |  |  |  |  |  |  |

 

(1)          These options will vest on July 15, 2010,assuming the recipient is still employed by us.

(2)          These options will vest on July 15, 2010,assuming the recipient is still employed by us.

 

PENSION BENEFITS

 

We donot have a pension plan other than the 401(k) plan which is available toall employees the first of the month after 90 days of service.

 

**401(k) Plan**

 

Weimplemented an employee savings and retirement plan (the “401(k) Plan”) in2005 that is intended to be a tax-qualified plan covering substantially allemployees.  Under the terms of the 401(k) Plan,employees may elect to contribute up to 88% of their compensation, or thestatutory prescribed limit, if less.  Wemay, at our discretion, match employee contributions.  We made matching contributions ofapproximately $76,643 and $122,000 in 2009 and 2008, respectively.  $16,930 and $21,095 of these matchingcontributions were to executive officers in 2009 and 2008, respectively.  We suspended matching contributions beginningAugust 1, 2009 until further notice.

 

POTENTIAL PAYMENTS UPONTERMINATION OR CHANGE IN CONTROL

 

Thefollowing table identifies the types and amounts of payments that shall be madeto Mr. Thomas Shaw, our CEO, in the event of a termination of hisemployment or a change in control per his Employment Agreement.  Such payments shall be made by us and shallbe one-time, lump sum payments except as indicated below.

 

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**SUMMARYOF PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL**

**ASSUMINGOCCURRENCE AS OF DECEMBER 31, 2009****(1)**

 
| **Payment  Triggering Event**                      | ** ** | **Salary  Through  Trigger  Event  Date** | ** ** | **Amounts  Owed  Under  Benefit  Plans****(2)** | ** ** | **Reimbursement  of Expenses** | ** ** | **Undiscounted  Salary  For a Period of 24  Months** | ** ** | **Payment  Equal to  90 Days’  Salary** | ** ** | **Value  of  Payments****(3)** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------|------------|
| Death                                              |       | x                                         |       | x                                               |       | x                              |       | —                                               |       | —                                       |       | —                         |       |
|                                               |       |                                      |       |                                            |       |                           |       |                                                 |       |                                         |       |                           |       |
| Disability                                         |       | x                                         |       | x                                               |       | x                              |       | 750,270                                              |       | —                                       |       | 750,270                        |       |
|                                               |       |                                      |       |                                            |       |                           |       |                                                 |       |                                         |       |                           |       |
| Termination With Cause                             |       | x                                         |       | —                                          |       | x                              |       | —                                               |       | —                                       |       | —                         |       |
|                                               |       |                                      |       |                                            |       |                           |       |                                                 |       |                                         |       |                           |       |
| Termination Without Cause                          |       | x                                         |       | x                                               |       | x                              |       | 750,270                                              |       | —                                       |       | 750,270                        |       |
|                                               |       |                                      |       |                                            |       |                           |       |                                                 |       |                                         |       |                           |       |
| Resignation (Other Than After a Change in Control) |       | x                                         |       | x                                               |       | x                              |       | —                                               |       | 92,499                                       |       | 92,499                         |       |
|                                               |       |                                      |       |                                            |       |                           |       |                                                 |       |                                         |       |                           |       |
| Resignation (After a Change in Control)            |       | x                                         |       | x                                               |       | x                              |       | 750,270                                              |       | —                                       |       | 750,270                        |       |

 

(1)                                  The above payments would be paid under Mr. Shaw’sagreement at certain times.  Any paymentsarising as a result of disability or resignation would be paid not sooner thansix months and one day from the termination date but not later than sevenmonths from the termination date.  Anypayments arising as a result of death would be paid no later than the 90th day followingthe death.  Payments arising as a resultof termination with cause or termination without cause would be paid not laterthan the 30th day following the date of termination exceptthat any amount due in excess of an amount equal to the lesser of two timesannual compensation or two times the limit on compensation under section401(17) of the Internal Revenue Code of 1986 such amount in excess shall bepaid no earlier than six months and one day after the date of termination butin no event later than seven months after the date of termination.  Under Mr. Shaw’s agreement, Mr. Shawhas agreed to a one-year non-compete, not to hire or attempt to hire employeesfor one year, and to not make known our customers or accounts or to call on orsolicit our accounts or customers in the event of termination of his employmentfor one year unless the termination is without cause or pursuant to a change ofcontrol.  However, it is not clear thatthe above payments are conditioned on the performance of these contractualobligations.

 

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

 

(3)                                  This value does not include paymentsunder our benefit plans for reasons set forth in footnote 2 above.  In addition, this value assumes that thetriggering event occurred on December 31, 2009.  Authorized payments under the EmploymentAgreement are also capped to one dollar less than the amount that would cause Mr. Shawto be the recipient of a parachute payment under Section 280G(b) ofthe Internal Revenue Code.

 

COMPENSATION OF DIRECTORS

 

Thefollowing table identifies the types and amounts of compensation earned by ourDirectors (with the exception of those that are named Executive Officers asdescribed in footnote 1 to the table) in the last Fiscal Year:

 

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**DIRECTORCOMPENSATION TABLE FOR 2009**

 
| **Name****(1)**   | ** ** | **Fees  Earned****or  Paid in****Cash  ($)** | ** ** | **Option  Awards****($)****(2)** | ** ** | **All  Other  Compensation  ($)** | ** ** | **Total****($)** | ** ** |
|-------------------|------------|----------------------------------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------|------------|
| Marco  Laterza    |       | $                                            | 3,000      |                             | $          | 29,280                            |       | $                | —     |   | $ | 32,280 |   |
| Amy  Mack         |       | $                                            | 2,500      |                             | $          | 29,280                            |       | $                | 9,940      | (3) | $ | 41,720 |   |
| Marwan  Saker     |       | $                                            | 3,000      |                             | $          | 29,280                            |       | $                | —     |   | $ | 32,280 |   |
| Clarence  Zierhut |       | $                                            | 3,000      |                             | $          | 29,280                            |       | $                | —     |   | $ | 32,280 |   |

 

(1)                                  Messrs. Thomas J. Shaw, Douglas W.Cowan, and Steven Wisner are Named Executive Officers who are alsoDirectors.  Their compensation isreflected in the Summary Compensation and other tables presented earlier.

 

(2)                                  Aggregate shares underlying optionsgranted to each Director are as follows:

 
| Thomas J. Shaw   |   | 3,000,000 |
|------------------|--------|-----------|
| Steven R. Wisner |   | 124,200   |
| Douglas W. Cowan |   | 200,000   |
| Marco Laterza    |   | 50,000    |
| Clarence Zierhut |   | 62,500    |
| Marwan Saker     |   | 90,500    |
| Amy Mack         |   | 50,000    |

 

The fair value of each 2009 grant is estimated onthe date of the grant using the Black Scholes pricing model with the followingassumptions: expected volatility of 67.53%, risk free interest rate of 3.35%,and an expected life of 8.61 years. These options were issued under the 2008 StockOption Plan.

 

(3)                               Ms. Mack’s company was paid thesefunds for participating in clinical trials in 2009.

 

**NarrativeExplanation of Director Compensation Table for 2009**

 

In2009 we paid each non-employee Director a fee of $500 per meeting andreimbursed travel expenses.  We havegranted to each Director stock options for Common Stock.  We do not pay any additional amounts forcommittee participation or special assignment.

 

Generally,employee Directors are compensated on an at-will basis as discussed in theCOMPENSATION DISCUSSION AND ANALYSIS. However, one employee, Mr. Thomas J. Shaw, our President and CEO,is compensated pursuant to an employment agreement.  Please see **CompensationPursuant to Employment Agreement**, set forth above for an in depthsummary of the terms of such agreement.

 

CompensationCommittee Interlocks and Insider Participation

 

TheCompensation and Benefits Committee is currently composed of Messrs. ClarenceZierhut and Marco Laterza and Ms. Amy Mack.  Each of these members of this committee is anindependent Board member and none have ever been employees.

 

Thereare no interlocking Directors or executive officers between us and any othercompany.  Accordingly, none of ourexecutive officers or Directors served as a Director or executive officer foranother entity one of whose executives or Directors served on our Board ofDirectors.

 

COMPENSATION POLICIES ANDPRACTICES AS THEY RELATE TO RISK MANAGEMENT

 

We donot believe that risk-taking incentives are created by our compensationpolicies.  We do not have businessunits.  We believe that our compensationexpense is a reasonable percentage of revenues overall.  We have not set specific performance criteriafor the award of bonuses.  Salaries areawarded based on skill, experience, and our overall revenues.  Non-cash awards to employees are madeperiodically in the form of stock options, which we believe align theemployees’ interests with those of stockholders.  We review our compensation policies andpractices as they relate to risk management objectives if compensation amountsare materially amended or if our risk

 

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profile changes.  No changes to our compensation policies andpractices have been implemented as a result of changes to our risk profile.

 

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

 

EQUITY COMPENSATION PLANINFORMATION

 

Thefollowing table sets forth information relating to our equity compensation plansas of December 31, 2009:

 

**EquityCompensation 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      |       | 5,888,128                    |       | $                         | 1.08       |                          | 150,892 |   |
|                                                         |       |                         |       |                      |       |                          |    |
| Equity  compensation plans not approved by security holders* |       | 225,000                      |       | $                         | 6.90       |                          | 0       |   |
|                                                         |       |                         |       |                      |       |                          |    |
| Total                                                        |       | 6,113,128                    |       | $                         | 1.29       |                          | 150,892 |   |

 

*                                         We authorized the issuance of anindividual option plan for the purchase of 200,000 shares of Common Stock toJimmie Shiu, M.D., for his past services in introducing us to purchasers ofvarious series of Preferred Stock as well as for introducing us to Mr. JackJackson, who controlled Katie Petroleum. The option is exercisable at $6.90 per share and will terminate in 2012.

 

Weauthorized the issuance of an individual option plan for the purchase of 25,000shares of Common Stock to Mr. Harry Watson for his past services inassisting us in protecting our intellectual property.  The option is exercisable at $6.90 per shareand will terminate in 2012.

 

TheCompensation and Benefits Committee authorized (and the shareholders approved)a grant of an option for the purchase of 3,000,000 shares of Common Stock toour CEO, Thomas J. Shaw.  The option isexercisable at a price of $0.81 per share, the market price on the date ofgrant.  The option will terminate in2019.

 

**SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS**

 

The following table sets forth certain informationregarding the beneficial ownership of our capital stock as of March 1,2010, for each person known by us to own beneficially 5% or more of the votingcapital stock.  Except pursuant to applicable community property laws,each shareholder identified in the table possesses sole voting and investmentpower with respect to his or her shares, except as noted below.

 

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| **Title of Class**  | ** ** | **Name  and Address of  Beneficial Owner**                                    | ** ** | **Amount  and  Nature of  Beneficial  Ownership** | ** ** | **Percent  of  Class****(1)** | ** ** |
|---------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------|------------|
| Common  Stock       |       |                                                                          |       |                                              |       |                          |       |
|                |       | Thomas J. Shaw(2)

511 Lobo Lane

P.O. Box 9

Little Elm, TX  75068-0009 |       | 14,580,000                                        |       | 54.2                          | %          |
|                |       |                                                                          |       |                                              |       |                          |       |
|                |       | Suzanne M. August(3)

5793 Lois Lane

Plano, TX 75024                         |       | 2,800,000                                         |       | 11.8                          | %          |
|                |       |                                                                          |       |                                              |       |                          |       |
|                |       | Lillian E. Salerno(4)

432 Edwards

Lewisville, TX 75067                      |       | 1,968,500                                         |       | 8.3                           | %          |
|                |       |                                                                          |       |                                              |       |                          |       |
|                |       | Lloyd I.  Miller, III(5)

4550 Gordon Drive

Naples, FL 34102            |       | 1,224,075                                         |       | 5.1                           | %          |
|                |       |                                                                          |       |                                              |       |                          |       |
| Class B  Stock |       |                                                                          |       |                                              |       |                          |       |
|                |       | Thomas J. Shaw                                                                |       | 80,000                                            |       | 3.5                           | %          |
|                |       | Lillian E. Salerno                                                            |       | 12,500                                            |       | <1                         | %          |

 

(1)                                  The Percent of Class is calculatedfor the Common Stock class by dividing each beneficial owner’s Amount ofBeneficial Ownership, as shown in the table above, by the sum of the totaloutstanding Common Stock (23,825,149 shares) plus that beneficial owner’s stockequivalents (options and/or preferred stock), if any.  The Percent of Class is calculated forthe Class B stock by dividing each beneficial owner’s Amount of BeneficialOwnership, as shown in the table above, by the total outstanding Class Bshares (2,285,266 shares).

 

(2)                                  3,000,000 of the shares identified asCommon Stock are shares acquirable through the exercise of a stock optionbeginning on July 15, 2010.  80,000of the shares identified as Common Stock are preferred shares which areeligible for conversion into Common Stock.  2,800,000 of the shares areowned by Ms. Suzanne August (see footnote 3) but are controlled by Mr. Shawpursuant 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 percentages in theabove table.

 

(3)                                  Ms. August’s 2,800,000 shares arecontrolled by Mr. Thomas J. Shaw pursuant to a Voting Agreement. Accordingly, they are also included in the Common Stock equivalents andpercentages for Mr. Shaw in the above table.

 

(4)                                  12,500 of the shares identified as CommonStock are preferred shares which are eligible for conversion into Common Stockand 25,000 shares identified as Common Stock are shares which are obtainable bythe exercise of options.

 

 

(5)                                  The number of shares held by this personwas obtained from a Schedule 13G/A filed on February 8, 2010. Pursuant to the Schedule 13G/A, Lloyd I. Miller has sole voting and dispositivepower for 303,300 of the shares, and shared voting and dispositive power for920,775 shares.

 

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**SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS**

 

The following table setsforth certain information regarding the beneficial ownership of our capitalstock as of March 1, 2010, for each Named Executive Officer specified byItem 402 of Regulation S-K (i.e., our CEO, CFO, and three other highest paidofficers) and Director of the Company.  Except pursuant to applicablecommunity property laws or as otherwise discussed below, each shareholderidentified in the table possesses sole voting and investment power with respectto his or her shares.

 
| **Title  of Class** |   | **Name  of  Beneficial Owner**          |   | **Amount  and  Nature of  Beneficial  Ownership** |   | **Percent    of   Class****(1)** |   |
|---------------------|--------|-----------------------------------------|--------|---------------------------------------------------|--------|----------------------------------|--------|
| Common Stock        |   |                                    |   |                                              |   |                             |   |
| As a Group          |   | Named Executive  Officers and Directors |   | 15,887,650                                        |   | 59.6                             | %      |
| As Individuals      |   | Thomas J. Shaw(2)                       |   | 14,580,000                                        |   | 54.2                             | %      |
|                |   | Marwan Saker(3)                         |   | 445,500                                           |   | 1.8                              | %      |
|                |   | Clarence Zierhut(4)                     |   | 72,500                                            |   | <1                            | %      |
|                |   | Douglas W. Cowan(5)                     |   | 200,000                                           |   | <1                            | %      |
|                |   | Steven R. Wisner(6)                     |   | 129,200                                           |   | <1                            | %      |
|                |   | Russell B. Kuhlman(7)                   |   | 89,450                                            |   | <1                            | %      |
|                |   | Michele M. Larios(8)                    |   | 261,000                                           |   | 1.1                              | %      |
|                |   | Marco Laterza(9)                        |   | 60,000                                            |   | <1                            | %      |
|                |   | Amy Mack(10)                            |   | 50,000                                            |   | <1                            | %      |
| Class B Stock  |   |                                    |   |                                              |   |                             |   |
| As a Group          |   | Named Executive  Officers and Directors |   | 435,000                                           |   | 19.0                             | %      |
| As Individuals      |   | Thomas J. Shaw                          |   | 80,000                                            |   | 3.5                              | %      |
|                |   | Marwan Saker                            |   | 355,000                                           |   | 15.5                             | %      |

 

(1)                                  The Percent of Class is calculatedfor the individuals holding Common Stock by dividing each beneficial owner’sAmount of Beneficial Ownership, as shown in the table above, by the sum of thetotal outstanding Common Stock (23,825,149 shares) plus that beneficial owner’sstock equivalents (options and/or preferred stock), if any.  The Percent of Class is calculated forthe “As a Group” rows by totaling all of the Percent of Class percentagesappearing in the chart for individuals for each relevant class.  The Percent of Class is calculated forthe Class B stock by dividing each beneficial owner’s Amount of BeneficialOwnership, as shown in the table above, by the total outstanding Class Bshares (2,285,266 shares).

 

(2)                                  3,000,000 of the shares identified asCommon Stock are shares acquirable through the exercise of a stock optionbeginning on July 15, 2010. 80,000 of the shares identified as CommonStock are preferred shares which are eligible for conversion into CommonStock.  2,800,000 of the shares are owned by Ms. Suzanne August but are controlled by Mr. Shaw pursuant to a Voting Agreement.  Theseshares are permanently controlled by Mr. Shaw until such time as they aresold by Ms. August.  These shares are included in calculating Mr. Shaw’spercentages in the above table.

 

(3)                                  355,000 shares identified as Common Stockare preferred shares which are eligible for conversion into Common Stock. Theshares are held as follows: Saker Investments holds 15,500 shares of Series IVClass B Convertible Preferred Stock and 25,000 shares of Series V Class BConvertible Preferred Stock, Sovana Cayman Islands, Inc. holds 300,000shares of Series IV Class B Convertible Preferred Stock, and MyInvestments Co. LLC holds 14,500 shares of Series IV Class BConvertible Preferred Stock. Mr. Saker is an Officer or Director andshareholder for each of these companies. The remaining 90,500 shares identifiedas Common Stock are shares currently obtainable through the exercise of optionsheld by Mr. Saker.

 

(4)                                  62,500 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options.

 

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(5)                                  102,000 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options and theremainder vest in July 2010.

 

(6)                                  100,700 of these shares identified as CommonStock are shares acquirable by the exercise of stock options and options forthe purchase of 23,500 shares vest in July 2010.

 

(7)                                  63,450 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options and optionsfor the purchase of 25,000 vest in July 2010.

 

(8)                                  97,050 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options and optionsfor the purchase of 152,950 shares vest in July 2010.

 

(9)                                  50,000 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options.

 

(10)                            These shares identified as Common Stockare shares acquirable by the exercise of stock options.

 

There are no arrangements, the operation of whichwould result in a change in control of the Company, other than:

 

1. Ms. August’s shares shall cease to becontrolled by Mr. Shaw under their Voting Agreement upon their sale to athird party; and

 

2. Mr. Shaw was granted an option for thepurchase of 3,000,000 shares of Common Stock. Mr. Shaw is able  to control54.2% of the currently outstanding shares of the Common Stock and would control44.6% of the Common Stock assuming the exercise of all outstanding options andconversion of all outstanding preferred shares and convertible loans.

 

# **Item13. Certain Relationships and Related Transactions, and Director Independence**

# ** **

Related Party 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.  Inaccordance with our Audit Committee Charter, the Audit Committee has reviewedand approved all related party transactions.** **In particular, the Audit Committeereviews all proposed transactions where the amount involved meets or exceeds$120,000.

 

Thomas J. Shaw, our President and Chief ExecutiveOfficer, beneficially owned 36.5% of the outstanding Common Stock (andcontrolled another 11.8% pursuant to a Voting Agreement with Ms. SuzanneAugust) as of March 1, 2010.  In1995, Mr. Shaw was paid a licensing fee of $500,000 (amortized over 17years) by us for the exclusive worldwide licensing rights to manufacture,market, sell, and distribute retractable medical safety products.  A royalty of 5% of gross sales of alllicensed products sold to customers over the life of the Technology LicensingAgreement is paid.  Of this royalty, Ms. SuzanneAugust, the former spouse of Mr. Shaw, is entitled to $100,000 perquarter.  Mr. Shaw receives theremainder of this royalty.  A royalty of$1,183,883 and $1,766,585 was paid to Thomas J. Shaw in 2009 and 2008,respectively.  Ms. August received$400,000 in 2009 and 2008.  Royalties of$843,327 were paid to Mr. Shaw and Ms. August from January 1, 2010 through March 1,2010. In the third quarter of 2009, the Company announced several cost cuttinginitiatives to conserve its cash. As part of those initiatives, Mr. Shaw waived$1,000,000 in royalty payments, most of which affect cash outlays in 2009.

 

Director Independence

 

The Board of Directors has the responsibility forestablishing corporate policies and for our overall performance, although it isnot involved in day-to-day operations. Currently, a majority (four of seven) of the Directors serving on ourBoard of Directors are independent Directors as defined in Section 121(A) ofthe listing standards of the NYSE Amex. Our current independent Directors are Messrs. Clarence Zierhut,Marwan Saker, and Marco Laterza, and Ms. Amy Mack.  Each of our committees is constituted solelyby independent Directors.

 

The Board of Directors, in reviewing the independenceof its members, further considered the fact that we paid Ms. Mack’scompany $9,940 in 2009 and $20,875 in 2008 for conducting clinical trials.  The Board of Directors determined that herindependence was not compromised by such transactions.

 

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

 

AUDIT FEES

 

The aggregate fees billed by CF & Co., L.L.P. forprofessional services rendered for the audit of our annual financial statementsfor 2009 and 2008 and the reviews of the financial statements included in ourForms 10-Q or services normally provided by the accountant in connection withstatutory and regulatory filings for those fiscal years were $257,085 and$195,700, 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) plan for2009 and 2008 were $11,500 and $11,500, respectively.

 

TAX FEES

 

The aggregate fees billed by CF & Co., L.L.P.for preparation of federal and state income tax returns and tax consultingcosts related to notices from taxing authorities for 2009 and 2008 were $64,929and $91,520, respectively.

 

PRE-APPROVAL POLICIES AND PROCEDURES

 

The engagement of CF & Co., L.L.P. wasentered into pursuant to the approval policies and procedures of the AuditCommittee.  Before CF & Co.,L.L.P. was engaged to render services the engagement was approved by the AuditCommittee.  The engagement is for auditand tax services which were detailed separately.  The Audit Committee implemented its approvalprocedures, i.e., they were not delegated to any other party.  All of the services provided werepre-approved by the Audit Committee.

 

# **PART IV**

# ** **

**Item 15.Exhibits, Financial Statement 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,  2009, 2008, and 2007: |

** **
|                                | ** ** | **Balance at  beginning****of  period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance  at****end  of period** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|---------------|------------|----------------|------------|-----------------------------------|------------|
| Provision  for Inventories          |       |                                    |       |          |       |           |       |                              |       |
| Fiscal  year ended 2007             |       | $                                       | 50,000     |          | $          | 155,600        |       | $                                 | —     |   | $ | 205,600 |   |
| Fiscal  year ended 2008             |       | $                                       | 205,600    |          | $          | —         |       | $                                 | —     |   | $ | 205,600 |   |
| Fiscal  year ended 2009             |       | $                                       | 205,600    |          | $          | —         |       | $                                 | —     |   | $ | 205,600 |   |
|                                |       |                                    |       |          |       |           |       |                              |       |
| Provision  for Accounts Receivables |       |                                    |       |          |       |           |       |                              |       |
| Fiscal  year ended 2007             |       | $                                       | 87,030     |          | $          | 166,978        |       | $                                 | —     |   | $ | 254,008 |   |
| Fiscal  year ended 2008             |       | $                                       | 254,008    |          | $          | 245,958        |       | $                                 | —     |   | $ | 499,966 |   |
| Fiscal  year ended 2009             |       | $                                       | 499,966    |          | $          | 182,000        |       | $                                 | —     |   | $ | 681,966 |   |
|                                |       |                                    |       |          |       |           |       |                              |       |
| Deferred  Tax Valuation             |       |                                    |       |          |       |           |       |                              |       |
| Fiscal  year ended 2007             |       | $                                       | 640,423    |          | $          | 3,026,509      |       | $                                 | —     |   | $ | 3,666,932 |   |
| Fiscal  year ended 2008             |       | $                                       | 3,666,932  |          | $          | 2,366,454      |       | $                                 | —     |   | $ | 6,033,386 |   |

 

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|                    | ** ** | **Balance at  beginning****of  period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance  at****end  of period** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|---------------|------------|----------------|------------|-----------------------------------|------------|
| Fiscal  year ended 2009 |       | $                                       | 6,033,386  |          | $          | 613,818        |       | $                                 | —     |   | $ | 6,647,204 |   |
|                    |       |                                    |       |          |       |           |       |                              |       |
| Provision  for Rebates  | ** ** |                                    | ** ** | **(A)**       | ** ** | **(B)**        |       |                              |       |
|                    |       |                                    |       |          |       |           |       |                              |       |
| Fiscal  year ended 2007 |       | $                                       | 2,712,750  |          | $          | 15,329,840     |       | $                                 | 13,404,097 |   | $ | 4,638,493 |   |
| Fiscal  year ended 2008 |       | $                                       | 4,638,493  |          | $          | 13,625,257     |       | $                                 | 14,395,904 |   | $ | 3,867,846 |   |
| Fiscal  year ended 2009 |       | $                                       | 3,867,846  |          | $          | 16,554,163     |       | $                                 | 14,365,035 |   | $ | 6,056,974 |   |

 

(A)                              Represents estimated rebates deductedfrom gross revenues

 

(B)                                Represents rebates credited to thedistributor

 

(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** and by that  certain Articles of Amendment Pursuant to Article 4.04 of the Texas  Business Corporation Act filed on October 16, 2009 o.  See Exhibit no. 4.    |
|              |       |                                                                                                                                                                                                                                                                                                                                                 |
| 3(ii)             |       | Third Amended and  Restated Bylaws of RTI***                                                                                                                                                                                                                                                                                                         |
|              |       |                                                                                                                                                                                                                                                                                                                                                 |
| 4                 |       | 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** and by that  certain Articles of Amendment Pursuant to Article 4.04 of the Texas  Business Corporation Act filed on October 16, 2009 o.  See Exhibit no. 3(i). |
|              |       |                                                                                                                                                                                                                                                                                                                                                 |
| 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 January 1, 2008 (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              |       | First Amendment to  Technology License Agreement between Thomas J. Shaw and RTI dated the 3rd day  of July, 2008 †                                                                                                                                                                                                                              |
|              |       |                                                                                                                                                                                                                                                                                                                                                 |
| 10.6              |       | Loan Agreement among  RTI, Katie Petroleum and Thomas J. Shaw as of the 30th day of  September, 2002 and Promissory Note††                                                                                                                                                                                                            |
|              |       |                                                                                                                                                                                                                                                                                                                                                 |
| 10.7              |       | RTI’s 1999 Stock Option  Plan****                                                                                                                                                                                                                                                                                                               |
|              |       |                                                                                                                                                                                                                                                                                                                                                 |
| 10.8              |       | First Amendment to 1999  Stock Option Plan†††                                                                                                                                                                                                                                                                                         |
|              |       |                                                                                                                                                                                                                                                                                                                                                 |
| 10.9              |       | Retractable Technologies, Inc.  2008 Stock Option Plan††††                                                                                                                                                                                                                                                                  |

 

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| **Exhibit   No.** | ** ** | **Description of Document**                                                                      |
|-------------------|------------|--------------------------------------------------------------------------------------------------|
|              |       |                                                                                             |
| 10.10             |       | Thomas J. Shaw Nonqualified  Stock Option Agreement Issued Outside of Any Plan oo                |
|              |       |                                                                                             |
| 10.11             |       | Voting Agreement  Between Thomas J. Shaw and Suzanne August dated November 8, 2006 ooo |
|              |       |                                                                                             |
| 14                |       | Retractable  Technologies, Inc. Code of Business Conduct and Ethics oooo                    |
|              |       |                                                                                             |
| 23                |       | Consent of Independent  Registered Public Accounting Firm oo                                     |
|              |       |                                                                                             |
| 31.1              |       | Certification of  Principal Executive Officer oo                                                 |
|              |       |                                                                                             |
| 31.2              |       | Certification of  Principal Financial Officer oo                                                 |
|              |       |                                                                                             |
| 32                |       | Section 1350  Certifications oo                                                             |
|              |       |                                                                                             |
| 99.1              |       | Retractable  Technologies, Inc. Audit Committee Charter oo                                  |
|              |       |                                                                                             |
| 99.2              |       | Retractable  Technologies, Inc. Compensation and Benefits Committee Charter oo              |
|              |       |                                                                                             |
| 99.3              |       | Retractable  Technologies, Inc. Nominating Committee Charter oo                             |
|              |       |                                                                                             |
|              |       |                                                                                             |

----

| *                        |   | Incorporated herein by  reference to RTI’s Form 10-Q filed on November 14, 2005                         |
|--------------------------|--------|------------------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                                   |
| **                       |   | Incorporated herein by  reference to RTI’s Form 10-K filed on March 31, 2008                            |
|                     |   |                                                                                                                   |
| ***                      |   | Incorporated herein by  reference to RTI’s Form 10-Q filed on November 14, 2008                         |
|                     |   |                                                                                                                   |
| ****                     |   | 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 10-K filed on March 31, 2009                            |
|                     |   |                                                                                                                   |
| ††             |   | 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 definitive Schedule 14A filed on August 19, 2008                  |
|                     |   |                                                                                                                   |
| o                        |   | Incorporated herein by  reference to RTI’s Form 10-Q filed on November 16, 2009                         |   |
|                     |   |                                                                                                                   |   |
| oo                       |   | Filed herewith                                                                                                         |
|                     |   |                                                                                                                   |   |
| ooo                      |   | Incorporated herein by  reference to RTI’s Schedule TO filed on October 17, 2008                             |   |
|                     |   |                                                                                                                   |
| oooo                     |   | Incorporated herein by  reference to RTI’s Form 8-K filed on February 19, 2010                          |
|                     |   |                                                                                                                   |
|                     |   |                                                                                                                   |
| (c)                      |   | Excluded Financial  Statement Schedules: None                                                                          |
|                          |        |                                                                                                                        |  |  |

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | RETRACTABLE TECHNOLOGIES, INC. |                      |
|--------|--------------------------------|---------------------------|
|   | (Registrant)                   |                      |
|   |                           |                      |
|   | By:                            | /s/ Thomas J. Shaw        |
|   |                           | THOMAS J. SHAW            |
|   |                           | CHAIRMAN, PRESIDENT,  AND |
|   |                           | CHIEF EXECUTIVE OFFICER   |
|   |                           |                      |
|   | Date:                          | March 31, 2010       |
|   |                           |                      |
|        |                                |                           |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.                                                                                    

 
|   |                                                               |
|--------|--------------------------------------------------------------------|
|   | /s/ Steven R. Wisner                                               |   |
|   | Steven R. Wisner                                                   |   |
|   | Executive Vice  President, Engineering &                  |   |
|   | Production and Director                                            |   |
|   |                                                               |   |
|   | March 31, 2010                                                |   |
|   |                                                               |   |
|   | /s/ Douglas W. Cowan                                               |   |
|   | Douglas W. Cowan                                                   |   |
|   | Vice President, Chief  Financial Officer, Treasurer,  and Director |   |
|   |                                                               |   |
|   | March 31, 2010                                                |   |
|   |                                                               |   |
|   | /s/ Clarence Zierhut                                               |   |
|   | Clarence Zierhut                                                   |   |
|   | Director                                                           |   |
|   |                                                               |   |
|   | March 31, 2010                                                |   |
|   |                                                               |   |
|   | /s/ Amy Mack                                                       |   |
|   | Amy Mack                                                           |   |
|   | Director                                                           |   |
|   |                                                               |   |
|   | March 31, 2010                                                |   |
|   |                                                               |   |
|   | /s/ Marco Laterza                                                  |   |
|   | Marco Laterza                                                      |   |
|   | Director                                                           |   |
|   |                                                               |   |
|   | March 31, 2010                                                |   |
|   |                                                               |   |
|   | /s/ Marwan Saker                                                   |   |
|   | Marwan Saker                                                       |   |
|   | Director                                                           |   |
|   |                                                               |   |
|   | March 31, 2010                                                |   |
|        |                                                                    |  |  |

 

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