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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 
| **(Mark  One)**                                      |
|------------------------------------------------------|
| x                                                    | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                 |   |
| **For the fiscal year ended December 31, 2008** |
|                                                 |   |
| **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)

 

**(972) 294-1010**

Registrant’s telephone number, including area code

 

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

** **

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|-------------------------|------------|-----------------------------------------------|
| Common                  |       | NYSE  Alternext, US, LLC                      |

 

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

 

**Preferred Stock**

(Title of class)

 

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

 

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

 

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

 

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

 

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

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

 

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

 

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas last sold, or the average bid and asked price of such common equity, as ofthe last business day of the registrant’s most recently completed second fiscalquarter.  The aggregate market value ofthe common equity held by non-affiliates as of June 30, 2008 was$15,047,254.72, assuming a price of $1.48 and volume of 10,167,064.

 

APPLICABLE ONLY TO REGISTRANTS INVOLVED INBANKRUPTCY

 

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

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

 

(APPLICABLE ONLY TOCORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant’sclasses of common equity, as of the latest practicable date.  As of March 2, 2009, there were23,800,064 shares of our Common Stock issued and outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

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

 

None except exhibits.

 

 

 

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**RETRACTABLETECHNOLOGIES, INC.**

**FORM 10-K**

**For theFiscal Year Ended December 31, 2008**

 

**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**     |
| **Item 4. Submission of Matters to a Vote of Security  Holders**                                                                | **14**     |
| ** **                                                                                                                      | ** ** |
| **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**                                                                                             | **16**     |
| **Item 7. Management’s Discussion and Analysis of  Financial Condition and Results of Operation**                          | **17**     |
| **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**                                                                                                 | **25**     |
| ** **                                                                                                                      | ** ** |
| **PART III**                                                                                                               | ** ** |
| ** **                                                                                                                      | ** ** |
| **Item 10. Directors, Executive Officers and Corporate  Governance**                                                            | **26**     |
| **Item 11. Executive Compensation**                                                                                             | **30**     |
| **Item 12. Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters**                    | **41**     |
| **Item 13. Certain Relationships And Related  Transactions, and Director Independence**                                         | **44**     |
| **Item 14. Principal Accounting Fees and Services**                                                                             | **45**     |
| ** **                                                                                                                      | ** ** |
| **PART IV**                                                                                                                | ** ** |
| ** **                                                                                                                      | ** ** |
| **Item 15. Exhibits, Financial Statement Schedules**                                                                            | **45**     |
| **SIGNATURES**                                                                                                                  | **48**     |

 

 

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**PART I**

 

FORWARD-LOOKING STATEMENT WARNING

 

Certain statements included by reference inthis filing containing the words “could,” “may,” “believes,” “anticipates,” “intends,”“expects,” and similar such words constitute forward-looking statements withinthe 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 and the viability of our patents), our ability tomaintain favorable supplier arrangements and relationships, our receipt ofroyalties from Baiyin Tonsun Medical Device Co., Ltd. (“BTMD”), the impact ofdramatic increases in demand, our ability to quickly increase capacity, ourability to access the market, our ability to maintain or lower productioncosts, our ability to continue to finance research and development as well asoperations and expansion of production, the increased interest of larger marketplayers, specifically Becton Dickinson and Company (“BD”), in providing devicesto the safety market, and other factors referenced in **Item 1A. Risk Factors**.  Given these uncertainties, undue relianceshould not be placed on forward-looking statements.

 

**Item 1.Business.**

 

DESCRIPTION OF BUSINESS

 

General Description

 

On May 9, 1994, our company was incorporated inTexas to design, develop, manufacture, and market innovative patented safetymedical products for the healthcare industry.

 

Our VanishPoint® safety needle products (consisting of 1cctuberculin, insulin, and allergy antigen VanishPoint® syringes; 0.5cc, 3cc, 5cc, and 10ccVanishPoint® syringes; the VanishPoint® blood collection tube holder; autodisable syringeand the VanishPoint® IVsafety catheter) 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 syringe needle into the barrel of the syringe,directly from the patient, after delivery of the medication is completed.  The VanishPoint® blood collection tube holder utilizes the 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 from thepatient 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 PatientSafeTM syringe which reduces the risk of infection resulting from IV line contamination.

 

Advantages of our VanishPoint® safety needle products includeprotection from needlestick injuries, prevention of cross contamination throughreuse, and reduction of disposal and other associated costs.  Federal regulation now requires the use ofsafe needle devices.

 

We and Thomas J. Shaw entered into a TechnologyLicense Agreement dated effective as of the 23rd day of June 1995, wherebyMr. Shaw granted us a worldwide exclusive license to manufacture, market,sell, and distribute ‘Licensed Products’ and ‘Improvements’ until theexpiration of the last ‘Licensed Patents’ unless sooner terminated undercertain conditions without right to sublicense. ‘Licensed Products’, ‘Improvements’, and ‘Licensed Patents’ are allterms that are extensively defined in the Technology License Agreement.  In exchange, we paid a $500,000 initiallicensing fee and a five percent 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.

 

 

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See“Patents, Trademarks, Licenses, and Proprietary Rights” for a moredetailed discussion.  We and Thomas J.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 in 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.

 

Our goal is to become a leading provider of safetymedical products.

 

Our products have been and continue to bedistributed nationally through numerous distributors.  However, we have been blocked from access tothe market by exclusive marketing practices engaged in by BD which dominatesour market.  We initiated a lawsuit in2007 against BD.  The suit is for patentinfringement, antitrust practices, and false advertising.

 

We continue to attempt to gain access to the marketthrough our sales efforts, our innovative technology, introduction of newproducts and, when necessary, litigation. We are focusing on methods of upgrading our manufacturing capability andefficiency in order to enable us to offer our technology at a reducedprice.  We believe our currentcapitalization provides the resources necessary to implement these changes andimprove our manufacturing capacity and efficiency, thereby reducing our unitcost.

 

We are developing new safety medical products, someof which do not utilize our patented retraction technology.  The Patient SafeTM syringe is one suchproduct.  This product reduces the riskof infection resulting from IV line contamination.

 

FinancialInformation

 

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

 

Principal Products

 

Our products with Notice of Substantial Equivalenceto the U.S. Food and Drug Administration (“FDA”) and which are currently soldinclude the 1cc tuberculin; insulin; allergy antigen VanishPoint® syringes; 0.5cc, 3cc, 5cc, and10cc VanishPoint® syringes; the VanishPoint® blood collection tube holder; the VanishPoint® IV safety catheter; and a smalldiameter tube adapter.  We are alsoselling autodisable syringes in the international market.  We also received a Notice of SubstantialEquivalence for our Patient SafeTM syringe, which reduces the risk of infectionresulting from IV line contamination.

 

We began marketing the Patient SafeTMsyringe in 2008.

 

In the September 2003 issue of *Health Devices*, ECRI listed three syringes with the highestpossible rating: our VanishPoint® syringe, New Medical Technology’s (“NMT”)safety syringe, and BD’s IntegraTM syringe. In the August 2007 issue of *Health Devices*,ECRI listed two syringes with the highest possible rating: our VanishPoint® syringe and BD’s IntegraTMsyringe.

 

Syringe sales comprised 98.8%, 98.0%, and 98.6% ofrevenues in 2006, 2007, and 2008.

 

Principal Markets

 

Our products are sold to and used by healthcareproviders primarily in the United States (with 16.7% of revenues in 2008generated from sales outside the United States) which include, but are notlimited to, acute care hospitals, alternate care facilities, doctors’ offices,clinics, emergency centers, surgical centers, convalescent hospitals, VeteransAdministration facilities, military organizations, public health facilities,and prisons.

 

 

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The syringe and needle device market continues to bea market in transition.  The nature ofthe products comprising the market is slowly****changingfrom standard to safety devices.  Theimpetus for the change to safety devices is the risk that is carried with eachneedlestick injury which includes the transmission of over 20 bloodbornepathogens, including the human immunodeficiency virus (“HIV,” which causesAIDS), hepatitis B, and hepatitis C. Because of the occupational and public health hazards posed byconventional disposable syringes, public health policy makers, domesticorganizations and government agencies have been involved in the effort to getmore effective safety needle products to healthcare workers.  Federal legislation was signed into law on November 6,2000, by former President William Jefferson Clinton.  This legislation, which became effective formost states on April 12, 2001, now requires safety needle products be usedfor the vast majority of procedures. However, even with this requirement, many hospitals are neglecting tofollow the law intended to protect healthcare workers.

 

Methods of Marketing and Distribution

 

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

 

We distribute our products throughout theU.S. and its territories through general line and specialty distributors.  We also utilize internationaldistributors.  We have developed a nationaldirect marketing network in order to market our products to health carecustomers and their purchaser representatives. Our marketers make calls on target markets that are users of theseproducts.  Our marketers make contactwith all of the departments that affect the decision-making process for safetyproducts, including the purchasing agents. They call acute care and alternate care sites and speak directly withthe decision-makers of these facilities. We employ 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 the needle and syringe market, the market shareleader, BD, has utilized, among other things, long-term exclusive contractswhich have restricted our entry into the market.

 

We have numerous agreements with organizations forthe distribution of our products in foreign markets.  Sales to these markets decreased from 18.4%to 16.7% of revenues due to lower volumes and lower average prices in 2007 and2008, respectively.  The total populationof Western Europe exceeds 310 million, and the recognition for the urgency ofsafe needle devices in parts of Europe has followed the United States model.  In France, England, Germany, and Italy, organizedhealthcare worker unions have taken action to force hospitals and governmentagencies to place safety as a priority. Regions within Asia, South America, and Africa are also recognizing theneed for our products.  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 of safetysyringes in this program is uncertain.

 

As a result of the introduction ofVanishPoint® syringes through the PEPFAR initiative,African countries have begun to procure products outside of the US-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 Ministerof Namibia also publically endorsed automated retraction syringes as a publicintervention that would “protect health workers and save their patient’slives”.

 

Key components of our strategy to increase ourmarket share are to: (a) defeat monopolistic practices through litigation;(b) focus on methods of upgrading our manufacturing capability andefficiency in order to enable us to reduce costs and improve profit margins; (c) continuemarketing emphasis in the U.S.; (d) continue to add VeteransAdministration facilities, health departments, emergency medical services,federal prisons, long-term care and home healthcare facilities as customers; (e) educatehealthcare providers, insurers, healthcare workers, government agencies,government officials, and the general public on the reduction of risk and thecost effectiveness afforded by our products; (f) supply product throughGPOs and Integrated Delivery Networks where possible; (g) considerpossibilities for future licensing agreements and joint venture agreements forthe manufacture and distribution of safety products in the 

 

 

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UnitedStates and abroad; (h) introduce new products; and (i) increaseinternational sales.

 

Status of Publicly Announced New Products

 

We have patented and are in the process ofdeveloping additional safety medical products. We are producing catheters with a wide range of needle sizes and have anincreased number of sizes available for the Patient SafeTM syringe.

 

Sources and Availability of Raw Materials

 

We purchase most of our product components fromsingle suppliers, including needle adhesives and packaging materials.  There are multiple sources of thesematerials.  We own the molds that areused to manufacture the plastic components of our products in the U.S.  Our suppliers include Magor Mold, Inc.,Helix Medical (formerly APEC), Channel Prime Alliance, Exacto SpringCorporation, Sterigenics, and ISPG.  Somesuppliers increased their prices generally due to the higher costs of petroleumproducts in 2008. 

 

Patents, Trademarks, Licenses, and Proprietary Rights

 

We and Thomas J. Shaw entered into a TechnologyLicense Agreement dated effective as of the 23rd day of June, 1995 (the “TechnologyLicense Agreement”), whereby Mr. Shaw granted us “... a worldwide exclusivelicense and right under the ‘Licensed Patents’ and ‘Information’, to manufacture,market, sell and distribute ‘Licensed Products’ and ‘Improvements’ withoutright to sublicense and subject to such nonexclusive rights as may be possessedby the Federal Government...”.  ‘LicensedPatents’, ‘Information’, ‘Licensed Products’, and ‘Improvements’ are alldefined extensively in the Technology License Agreement.  We may enter into sublicensing arrangementswith Mr. Shaw’s written approval of the terms and conditions of thelicensing agreement.  The ‘LicensedProducts’ include all retractable syringes and retractable fluid samplingdevices and components thereof, assembled or unassembled, which comprise aninvention described in ‘Licensed Patents’, and improvements thereto includingany and all ‘Products’ which employ the inventive concept disclosed or claimedin the ‘Licensed Patents’.  We and ThomasJ. 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.

 

In exchange for the Technology License Agreement, wenegotiated a licensing fee and agreed to pay a five percent royalty on grosssales after returns.  The licenseterminates upon expiration of the last licensed patents unless soonerterminated under certain circumstances. The licensing fees have been paid in accordance with this agreement withthe exception of $1,500,000 in fees which were waived by Mr. Shaw and hisformer wife.

 

We have the right and obligation to obtainprotection of the invention, including prosecution of patent properties.  The license unilaterally changes to anonexclusive license in the event of a hostile takeover.  Also, if Mr. Shaw involuntarily losescontrol of the Company, the license becomes a nonexclusive license and a rightto information.

 

We seek foreign patent protection through the PatentCooperation Treaty and have filed applications for regional and national patentprotection in selective countries where we believe our products can be utilizedmost.

 

We hold numerous U.S. patents related to ourautomated retraction technology, including patents for IV safety catheters,winged IV sets, syringes, dental syringes, and blood collection tubeholders.  In addition, we have multipleapplications for patents currently pending. The principal syringe patent in the U.S., as well as its foreigncounterpart, will expire in May 2015. We have also registered the following trade names and trademarks:VanishPoint, VanishPoint logos, RT with a circle mark, the Spiral Logo 

 

 

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usedin packaging our products, and the color coded spots on the ends of oursyringes.  We also have trademarkprotection for the phrase “The New Standard for Safety.”  We have applied for a trademark for thePatient Safe syringe and Port Prep.

 

We have a patent infringement claim pending againstBD involving four patents, a case involving two patents against Occupationaland Medical Innovations Limited (“OMI”), and a case involving two patentsagainst Safety Medical International (“SMI”). There are also two patent infringement claims pending against us.  These claims are detailed in **Item 3.  LegalProceedings**.  We have decided,on the advice of patent counsel, not to purchase patent insurance because itwould require inappropriate disclosure of information that is currentlyproprietary and confidential.

 

We currently obtain roughly 74.0% of our finishedproducts through Double Dove, a Chinese manufacturer.  We believe we could make up any long-termdisruption in these supplies by utilizing more of the capacity at the LittleElm facility, except for 0.5cc, autodisable, 5cc and 10cc syringes whichcomprised about 4.6% of our  2008revenues.

 

We had a Licensing Agreement with BTMD which expiredon May 13, 2008.  Royalties thatwere expected in 2008 and 2007 were not received due to the time needed tobuild the factory, assembly equipment, and the related infrastructure as wellas the need of BTMD to meet the requisite Chinese government requirements.  The facility has been completed and BTMD isin the process of meeting Chinese government requirements.  We still continue to expect royalty paymentsalthough we are unable to predict the date we will begin to receive suchroyalties.  Royalties should begin oncewe have an effective agreement, Chinese government requirements are met, andBTMD is able to produce and sell products.

 

Seasonal Effect on Business

 

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

 

WorkingCapital Practices

 

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

 

We record trade receivables when revenue isrecognized.  No product has beenconsigned to customers.  Our allowancefor doubtful 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 are valued at the lower of cost ormarket, with cost being determined using a standard cost method, whichapproximates average cost.  A reserve isestablished for any excess or obsolete inventories.

 

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

 

Accounts payable and other short-term liabilitiesinclude amounts that we believe we have an obligation for at the end ofyear.  These included charges for goodsor services received in 2008 but not billed to us at the end of the year.  It also included estimates of potentialliabilities such as rebates and other fees.

 

Our domestic return policy is set forth in ourstandard Distribution Agreement, a copy of which was attached as exhibit no.6.3 to our Form 10-SB filed on June 23, 2000.  This policy provides that a 

 

 

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customermay 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.

 

Our international contracts do not provide for anyreturns.

 

Our return policy also provides that a customer mayreturn product that is overstocked. Overstocking returns are limited to two times in each 12 month period upto one percent of distributor’s total purchase of products for the prior 12month period upon the following terms: i) an “overstocked” product is thatportion of distributor’s inventory of the product which exceeds distributor’ssales volume for the product during the preceding four months; ii) distributormust not have taken delivery of the product which is overstocked during thepreceding four months; iii) overstocked product held by distributor in excessof 12 months from the date of original invoice will not be eligible for return;iv) the overstocked product must be returned to us in our saleable case cartonswhich are unopened and untampered, with no broken or re-taped seals; v)distributor will be granted a credit which may be used only to purchase otherproducts from us, the credit to be in the amount of the invoice price of thereturned products less a 10% restocking fee which will be assessed againstdistributor’s subsequent purchase of product; vi) distributor must obtain anauthorization code from our distribution department and affix the code to thereturned product; and vii) distributor shall bear the cost of shipping thereturned products to us.  All productoverstocks and returns are subject to inspection and acceptance by manufacturer.

 

Dependence on Major Customers

 

One distributor, McKesson and its affiliates,accounted for an aggregate of 16.8% of our revenue in 2008.  We have numerous other distributors that sellour products in the U.S. and internationally.

 

Backlog Orders

 

Order backlog is not material to our businessinasmuch as orders for our products generally are received and filled on acurrent basis, except for items temporarily out of stock.

 

Government Funding of Research and Right to License

 

Thomas J. Shaw developed his initial version of asafety syringe with the aid of grants by the National Institute of Drug Abuse,a subsidiary of the National Institutes of Health.  As a result, the federal government has theright, where the public interest justifies it, to disperse the technology tomultiple manufacturers so that this early version of a safety syringe could bemade widely available to the public. However, the earlier design of 1991 was a bulkier, less effective, andmore expensive version of the current VanishPoint® product. Accordingly, Management believes that the risk of the governmentdemanding manufacture of this alternative product is minimal.  The VanishPoint® syringe design was only partly funded withgrant money and the product, as sold, incorporates technology for which the governmenthas no rights.  Therefore the governmenthas no right to allow others to manufacture the VanishPoint®.

 

Competitive Conditions

 

We believe our competitive advantages include butare not limited to our leadership in quality and innovation. We believe ourproducts continue to be the most effective safety devices in today’smarket.  Our syringe products includepassive safety activation, require less disposal space, and are activated whilein the patient.  Our price per unit iscompetitive or even lower than the competition once all the costs incurredduring the life cycle of a syringe are considered. Such life cycle costsinclude disposal costs, testing and treatment costs for needlestick injuries,and treatment for contracted illnesses through needlestick injuries.

 

 

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We have three major competitors: BD, Covidien Ltd.(formerly known as Tyco Healthcare which was spun off from Tyco International)(“Covidien”), and Terumo Medical Corp. (“Terumo”).

 

Founded in 1897, BD is headquartered in NewJersey.  BD’s safety-engineered product salesaccounted for approximately 22% of BD’s total 2008 sales.  BD currently manufactures the SafetyLokTM, asyringe that utilizes a tubular plastic sheath that must be manually slid overthe needle after an injection, and the SafetyGlideTM, a needle which utilizes ahinged lever to cover the needle tip.  BDalso manufactures a safety blood collection and hypodermic needle that utilizesthe EclipseTM needle cover.  BD alsomanufactures a 3cc and 1cc retracting needle product based on a licenseagreement with Specialized Health Products International, Inc. (formerlythe Med-Design Corporation).  TheIntegraTM, a retractable syringe offered by BD, does not offer a full productline and cannot be used with highly viscous medication due to leakage (asdescribed on their labels).  Theintroduction of this syringe has had little impact on our sales due to BD’shistoric market dominance.  BD’s “Vacutainer®” blood collection products are commonly used as industry jargon torefer to blood collection products in general.

 

Sherwood Medical Co. (“Sherwood”), was acquired by TycoInternational. Sherwood is now part of Covidien.  Covidien manufactures various safety syringesand needles.

 

Founded in 1974, Terumo was the first company tosell disposable syringes in Japan. Today, Terumo manufactures standard syringes, blood collection tubeholders, safety syringes, and blood collection devices.  It operates internationally and has sales inmore than 150 countries.

 

Both BD’s SafetyLokTM and Covidien’s Monoject® safety syringes require the useof two hands and several extra steps to activate the tubular plastic shieldwhich must be slid and locked into place to protect the needle.  These products must be removed from the patientin order for the safety mechanism to be activated.  In contrast, use of the VanishPoint® syringe is identical to that ofa standard syringe until the end of an injection, when the automated retractionmechanism retracts the needle directly from the patient safely into the barrelof the syringe.  This allows both handsto remain safely out of harm’s way.  BD’sIntegraTM operates in a similar way but may have to be removed from the patientin order to have retraction of the needle occur.

 

BD and Covidien have controlling U.S. market share;greater financial resources; larger and more established sales, marketing anddistribution organizations; and greater market influence, including thelong-term and/or exclusive contracts. The current conditions have restricted competition in the needle andsyringe market.  BD may be able to useits resources to improve its products through research or acquisitions ordevelop new products, which may compete more effectively with our products.

 

We continue to attempt to gain access to the marketthrough our sales efforts, our innovative technology, introduction of newproducts and, when necessary, litigation. We are focusing on methods of upgrading our manufacturing capability andefficiency in order to enable us to compete by offering our technology at areduced price.  We believe our currentcapitalization provides the resources necessary to implement these changes andimprove our manufacturing capacity and efficiency, thereby reducing our unitcost.

 

Our products have consistently received high qualityratings. In the September 2003 issue of *HealthDevices*, ECRI Institute (“ECRI”) listed three syringes with thehighest possible rating: our VanishPoint® syringe, NMT’s safety syringe, and BD’sIntegraTM syringe.  In the August 2007issue of *Health Devices*, ECRI listed two syringeswith the highest possible rating: our VanishPoint® syringe and BD’s IntegraTM syringe.

 

In the October 1999 issue of *Health Devices*, our VanishPoint® blood collection tube holder was one of thetwo blood collection devices that was given ECRI’s highest possible award.  The other was the Bio-Plexus Punctur-Guard(when used with a disposable holder).**** ECRI listed the same two products for theirhighest rating in 2000 and in 2001.

 

 

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Our safety needle products also have an advantageover non-retracting safety needles because minimal training and changes topractitioners’ normal routines are required. Use of our products also prohibits unfortunate and improper reuse.  Several factors could materially andbeneficially affect the marketability of our products.  Demand could be increased by existinglegislation and other legislative and investigative****efforts.  Outsourcingarrangements such as our purchases from Double Dove have increased ourmanufacturing capacity with little or no capital outlay and provide acompetitive cost.  Licensing agreementscould provide entry into new markets and generate additional revenue.

 

Our competitive weaknesses include our current lackof market share because two well-established companies control most of the U.S.market.  Our competitive position is alsoweakened by the method that providers use for making purchasing decisions andthe fact that our initial price per unit for our safety needle products may behigher.    Demand for our products coulddecrease due to the sale of the IntegraTM, a retractable syringe manufactured byBD, which dominates the market and has a wider range of product offerings andmore capital resources.

 

Research and Development

 

We spent $958,798; $1,071,143; and $1,066,068 infiscal 2006, 2007, and 2008 respectively, on research and development.  Costs in 2008 were primarily for validation testingand development work for the safety catheter as well as higher compensationcosts.** **Our ongoing research and development activities are performedby an internal research and development staff. This team of engineers is developing process improvements for currentand future automated machines.  Ourlimited access to the market has slowed the introduction of products.  Possible future products include needlemedical devices to which the automated retraction mechanism can be applied aswell as other safety medical devices.

** **

Environmental Compliance

 

We believe that we do not incur material costs inconnection with compliance with environmental laws.  We are considered a Conditionally ExemptSmall Quantity Generator because we generate less than 100 kilograms (220 lbs.)of hazardous waste per month.  Therefore,we are exempt from the reporting requirements set forth by the Texas Commissionon Environmental Quality.  The waste thatis generated at our facility is primarily made up of flammable liquids andpaint-related waste and is sent for fuel blending by Safety Kleen.  This fuel blending process completelydestroys our waste and satisfies our “cradle-to-grave” responsibility.

 

Other nonhazardous production waste includes cleanpolypropylene regrind that is sold for recycling.  We also grind dirty plastics, syringes, andneedles for disposal by Waste Management. All other nonhazardous waste produced is considered municipal solidwaste and sent to a sanitary landfill by Waste Management.

 

We also produce small amounts of regulatedbiohazardous waste from contaminated sharps and laboratory wastes.  This waste is sent for incineration byStericycle.

 

Employees

 

As of March 2, 2009, we had 144 full-timeemployees, six part-time employees, and four independently contractedconsultants.  Of the 144 full-timeemployees, six persons were engaged in research and development activities, 57persons were engaged in manufacturing and engineering, 16 persons were engagedin quality assurance and regulatory affairs, 36 persons were engaged in salesand marketing, 28 persons were engaged in general and administrative functions,and one person in facilities.  Noemployees are covered by collective bargaining agreements.  We are dependent upon a number of managementand technical personnel, and the loss of services of one or more of suchemployees could have a material adverse effect on us.  Our President and Chief Executive Officer,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.

 

 

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FinancialInformation About Geographic Areas

 

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

** **
| ** **          | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|---------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic sales      |       | $         | 23,244,370 |      | $          | 21,461,717 |       | $ | 22,240,347 |   |
| International sales |       | 4,654,948 |       | 4,828,003 |       | 3,084,172  |       |
| Total sales         |       | $         | 27,899,318 |      | $          | 26,289,720 |       | $ | 25,324,519 |   |
|                |       |      |       |      |       |       |       |
| Long-lived assets   |       |      |       |      |       |       |       |
| Domestic            |       | $         | 14,435,667 |      | $          | 11,483,423 |       | $ | 12,212,140 |   |
| Foreign             |       | $         | —     |      | $          | —     |       | $ | — |   |

 

We have no sales in any foreign country thatexceeds 3% of revenue.

 

AvailableInformation

 

Our internet address is www.vanishpoint.com.  We make our filings with the U.S. Securitiesand Exchange Commission (the “SEC”) available via our website.  Upon request, we will be pleased to deliverwritten copies of our filings free of charge.

 

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

 

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

 

We Compete in a Monopolistic Marketplace

 

We operate in an environment that isdominated by the major syringe manufacturer in the U.S., BD.  We believe that its monopolistic businesspractices continue despite its paying us $100 million to settle a prior lawsuitfor anticompetitive practices, business disparagement, and tortiousinterference.  Although we have madelimited progress in some areas, such as the alternate care and internationalmarkets, our volumes are not as high as they should be given the nature andquality of our products, and the federal and state legislation requiring use ofsafe needle devices.  In June 2007,we sued BD alleging infringement of three patents and violations by BD of thefederal and state antitrust laws, and of the Lanham Act.  We subsequently dropped one patent claim fromthe lawsuit. In April 2008, we sued BD for infringement of a newly issuedpatent that was subsequently consolidated with the other patent case.

 

Our Cash Position Is Decreasing and Legal ExpensesAre Increasing

 

Due to our operating losses and currentlyincreasing legal fees, our cash position declined $7.2 million as of December 31,2008.  Our litigation efforts willcontinue to require a significant amount of cash until the issues areresolved.  Our lawsuit against BD iscurrently scheduled for trial in October 2009.  After conclusion of the trial, legal expensesare expected to decrease significantly for the patent infringement cases.

 

In the event we continue to have only limitedmarket access,  the cash provided by theprior litigation settlements and generated from operations becomes insufficient,and royalties from BTMD are not forthcoming, we would take cost cuttingmeasures to reduce cash requirements. Such measures could 

 

 

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result in reduction of units being produced,reduction of workforce, reduction of salaries of officers and other nonhourlyemployees, and deferral of royalty payments.

 

We Have Generally Been Unable to Gain SufficientMarket Access to Achieve Profitable Operations

 

We have incurred net operating losses throughall fiscal quarters of 2008.  We mayexperience operating losses in the future. If we are unable to gain sufficient market access and market share, wemay be unable to continue to finance research and development as well assupport operations and expansion of production.

 

We Are Dependent On Our Aging Patent Protection

 

Our main competitive strength is ourtechnology.  We are dependent on ourpatent rights, and if our patent rights are invalidated or circumvented, ourbusiness would be adversely affected. Patent protection is considered, in the aggregate, to be of materialimportance in our marketing of products in the U.S. and in most major foreignmarkets.  Patents covering products thatwe have introduced normally provide market exclusivity, which is important forthe successful marketing and sale of our products.

 

As our technology ages (and the associatedpatent life expires), our competitive position in the marketplace willweaken.  The initial patents protectingour revolutionary 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.

 

Our Patents Are Subject to Litigation

 

We are currently involved in multiple patentdisputes.  Patent litigation andchallenges involving our patents are costly and unpredictable and may depriveus of market exclusivity for a patented product or, in some cases, third partypatents may prevent us from marketing and selling a product in a particulargeographic area.

 

We Are Vulnerable to New Technologies

 

Because we have a narrow focus on particularproduct lines and technology (currently predominantly retractable needleproducts), we are vulnerable to the development of superior competing productsand to changes in technology which could eliminate or reduce the need for ourproducts.  If a superior technology iscreated, the demand for our products could greatly diminish.

 

Our Competitors Have Greater Resources

 

The three leading manufacturers of hypodermicsyringes and blood collection products are BD, Covidien, and Terumo.  All three companies offer both standardsyringes and at least one safety syringe alternative.  BD also offers a retractable syringe.  These competitors have greater financialresources, larger and more established sales and marketing and distributionorganizations, and greater market influence, including long-termcontracts.  These competitors may be ableto use these resources to improve their products through research andacquisitions or develop new products, which may compete more effectively withour products.  If our competitors chooseto use their resources to create products superior to ours, we may be unable tosell our products and our ability to continue operations would be weakened.

 

 

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TheMajority of Our International Sales Are Filled Using One Supplier

 

Most international sales are filled by productionfrom Double Dove.  In the event that webecome unable to purchase such product from Double Dove, we would need to findan alternate supplier for the 0.5cc insulin syringe and the 5cc and 10ccsyringes and increase domestic production for the 1cc and 3cc syringes to avoida disruption in supply.  As of December 31,2008, approximately 74.0% of our production was provided by Double Dove.

 

Fluctuations in Supplies of Inventory CouldTemporarily Increase Costs

 

Fluctuations in the cost and availability ofraw materials and inventory and the ability to maintain favorable supplierarrangements and relationships could result in the need to manufacture all (asopposed to 26.0%) of the products in the U.S. This could temporarily increase unit costs as we ramp up domesticproduction.

 

We Are Controlled by One Shareholder

 

Thomas J. Shaw, our President and Chairman of theBoard, and Ms. Suzanne August own 35.7% and 11.8%, respectively, ofthe outstanding Common Stock as of March 2, 2009.  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 offer orotherwise attempting to obtain control of us, which in turn could materiallyadversely affect the market price of our Common Stock.  Of the 23,800,064 shares of Common Stockoutstanding as of March 2, 2009, executive officers and Directors own orcontrol 11,337,000 (47.6%) of the shares of outstanding Common Stock, notincluding Common Stock equivalents such as preferred shares and options.

 

We Have Limited Access to the Capital Markets

 

The volume of trading in our Common Stock onthe NYSE Alternext US, LLC (“NYSE Alternext”) (formerly the American Stock Exchange)is low.  Accordingly, it is unclear ifthere is any significant market for our shares. This may reduce our ability to raise cash through public or privateofferings in the future.

 

Our Stock Price Sometimes Decreases Below NYSEAlternext Continued****ListingStandards

 

Our stock price may be deemed to have beenselling “for a substantial period of time at a low price per share” which mayresult in our receipt of a notification from the NYSE Alternext that a reversesplit is necessary.  We have received nosuch notification.  When a companyreceives such a notification, failure to effect a reverse stock split mayresult in suspension or removal from trading on the NYSE Alternext.  The NYSE Alternext 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 Alternext, wewill have the right to appeal such determination.  In addition, entities that were given suchnotices under the American Stock Exchange standards were generally given up to18 months to execute a plan to bring themselves into compliance with thelisting standards.

 

 

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Oil Prices and Transportation Costs May IncreaseOur Costs

 

As our products are made from petroleumproducts, fluctuations in the costs of oil and transportation may have animpact on our costs.  Increases in costsmay not be recoverable through price increases of our products.

 

Current Economic Conditions May DecreaseCollectability of Accounts

 

Although we believe that we have grantedcredit to credit-worthy firms, current economic conditions may affect thetiming and/or collectability of some accounts. The Provision for doubtful accounts increased by $245,958 for 2008 whichbrings the balance to $499,966.

 

We Face Inherent Product Liability Risks

 

As a manufacturer and provider of safetyneedle products, we face an inherent business risk of exposure to productliability claims in the event of product failure or claim of harm caused byproduct operation.  Product failure couldresult in injury to the patient and could expose healthcare workers to the riskof blood 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 anddamages are in excess of our product liability coverage, our competitiveposition could be weakened by the amount of money we could be required to payto compensate those injured by our products. We have products liability coverage with St. Paul Insurance Companycovering up to $1,000,000 per occurrence, with coverage up to $2,000,000 in theaggregate.  Each claim is subject to a$25,000 deductible.  Additionally, wehave additional product liability protection under an Umbrella LiabilityPolicy.  This policy provides anadditional $10,000,000 per occurrence and aggregate limits in the event claimsexceed the primary commercial general liability policy limit.  We have not had any product liability claims.

 

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

** **

Not applicable and none.

 

**Item 2.Properties.**

** **

Our 22,500 square foot headquarters is located at511 Lobo Lane, on 35 acres, which we own, overlooking Lake Lewisville in LittleElm, Texas.  The headquarters are in goodcondition and house our administrative offices and manufacturing facility.  The manufacturing facility producedapproximately 26.0% of the units that were sold in 2008.  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 inservice of our outside supplier, Double Dove, we believe we could producequantities sufficient to meet demand under current circumstances except fordemand for 0.5cc, 5cc, and 10cc syringes which are sold principally in theinternational market.  In that event, wewould attempt to engage another manufacturer. We are currently utilizing less than 25% of our current productivecapacity.

 

We obtained a loan from 1st International Bank (“1stInternational”) for $2,500,000, secured by the land and existing buildings,which provided funding for the construction of the 47,250 square foot warehouseplaced in service in 2005.  The proceedsfrom the loan were used to pay off the remaining $475,000 of the revolvingcredit agreement with 1st International in addition to funding the warehouseand related infrastructure.  The paymentsfor the permanent 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 one percent, withfloors that may range from 4.25% to 6.50%. Compensating balances at 1stInternational affecting the interest rate will range from $0 to $500,000.

 

 

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On August 29, 2008, we obtained a $4,210,000straight line of credit from Lewisville State Bank, a division of 1stInternational Bank.  The purpose of theline of credit was to expand the warehouse, including additional office space,and construct a new Controlled Environment. The maturity date is February 28, 2010.  The interest rate is WSJPR plus 0.25%.  We may prepay the line of credit withoutpenalty.  The construction project hasbeen substantially completed.  We expectto replace our note with permanent financing in the second quarter.

** **

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

 

**Item 3.Legal Proceedings.**

** **

On August 12, 2005, we filed a lawsuitagainst Abbott Laboratories (“Abbott”) in the United States District Court inthe Eastern District of Texas, Texarkana Division.  We are alleging fraud and breach of contractin connection with the National Marketing and Distribution Agreement dated as ofMay 4, 2000, which was terminated on October 15, 2003.  We are seeking damages which we estimate tobe in millions of dollars of lost profits, out of pocket expenses, and otherdamages.  In addition, we are seekingpunitive damages, pre- and post-judgment interest, and attorney’s 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.  We deny the validity ofAbbott’s counterclaims.  Some discoveryhas already taken place (related to the hearings addressing the prior motion tocompel arbitration) and additional discovery is underway.  The District Court has issued a schedulingorder calling for trial in January 2010.

 

In August 2006, we were sued by OMI inFederal Court of Australia, alleging that two letters written to OMI by outsidecounsel contained unjustified threats of patent infringement, but seeking nodamages.  OMI later amended its complaintto seek a declaratory judgment that OMI does not infringe Australian Patent No. 701878,again seeking no damages.  Following aone-day trial in June 2007, the Court held that one of the two letterswritten by outside counsel contained a threat of patent infringement, andawarded costs to OMI.  Following aone-day trial in June 2008, the Court issued a declaratory judgment in August 2008stating that OMI’s syringe does not infringe our Australian patent no. 701878but also awarding costs to us.  We andOMI subsequently agreed that each party will bear its own costs, and the matterwas settled in October 2008.

 

In April 2008, we sued OMI in the UnitedStates District Court for the Eastern District of Texas, Tyler Division,alleging that OMI has infringed two U.S. patents that are not at issue in theAustralian litigation (6,572,584 and 7,351,224).  We also allege theft of confidentialinformation, intentional interference with contracts and engaging in falseadvertising that wrongfully disparages and mischaracterizes our syringeproducts.  We further allege that OMImade false allegations regarding the source of origin of its safety syringeproducts being offered in the U.S. We seek injunctive relief, unspecifieddamages (including treble damages) and reimbursement of attorneys fees in thesuit.  OMI has counterclaimed against us,seeking declaratory judgments of non-infringement and invalidity of ourasserted patents.  OMI is not seekingmonetary damages.  Trial is set for December 2009and discovery is ongoing.

 

In June 2007, we sued BD in the UnitedStates District Court for the Eastern District of Texas, Marshall Division,alleging infringement of three patents (5,578,011; 5,632,733; and 6,090,077)and violations by BD of the federal and state antitrust laws, and of the LanhamAct.  We subsequently dropped the5,578,011 patent allegations from the lawsuit. We and Thomas J. Shaw, a co-plaintiff, are seeking injunctive relief,unspecified monetary damages and reimbursement of attorneys fees in thesuit.  BD counterclaimed fornon-infringement and invalidity of the asserted patents.  In January 2008, the Court severed thepatent claims from the other claims pending resolution of the patent dispute,which is set for trial in October 2009. In April 2008, we and Thomas J. Shaw sued BD in the United StatesDistrict Court 

 

 

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for the Eastern District of Texas, MarshallDivision, alleging infringement of another recently issued patent (7,351,224),and seeking injunctive relief, unspecified monetary damages (including trebledamages) and reimbursement of attorneys fees. BD counterclaimed for non-infringement and invalidity of the assertedpatent.  We and Thomas J. Shaw moved toconsolidate this case with the other patent case against BD that was pending inMarshall and the Court granted our motion, consolidating this case with ourabove-stated case filed in June 2007. The Court issued its claimconstruction order in this matter on January 4, 2009.

 

In September 2007, BD and MDC InvestmentHoldings, Inc. (“MDC”) sued us in the United States District Court for theEastern District of Texas, Texarkana Division, initially alleging that theCompany is infringing two U.S. patents of MDC (6,179,812 and 7,090,656) thatare licensed to BD. BD and MDC seek injunctive relief and unspecifieddamages.  We counterclaimed fordeclarations of non-infringement, invalidity and unenforceability of theasserted patents.  The plaintiffssubsequently dropped allegations with regard to patent no. 7,090,656 and wesubsequently dropped our counterclaims for unenforceability of the assertedpatents.  The Court conducted a claimsconstruction hearing on September 25, 2008 and issued its claimsconstruction order on November 14, 2008. No trial date has been set.

 

In March 2008, MedSafe Technologies LLC(“MedSafe”) initially sued us and BD in the United States District Court forthe District of South Carolina, Greenville Division, alleging infringement of aMedSafe patent (6,074,370) and seeking injunctive relief and unspecifiedmonetary damages.  We counterclaimed fordeclarations of non-infringement, invalidity, and unenforceability of theasserted patent.  BD subsequently settledwith MedSafe.  Effective December 22,2008, we resolved our litigation with MedSafe by entering into a PATENTLICENSE/ASSIGNMENT AND SETTLEMENT AGREEMENT with MedSafe and SyringeDevelopment Partners, LLC; William B.S. Pressly, Sr.; Charles A Vaughn, Sr.;G. Samuel Brockway; and Thomas R. Ellis (collectively, the “MedSafe Plaintiffs”)(the “MedSafe Settlement Agreement”). This MedSafe Settlement Agreement ends the patent infringementlitigation between us and MedSafe.

** **

In September 2008, we and Thomas J. Shawsued SMI in the United States District Court for the Eastern District of Texas,Tyler Division, alleging infringement of U.S. patent nos. 6,572,584 and7,351,224, and seeking injunctive relief, unspecified monetary damages andreimbursement of attorneys fees.  SMI hascounterclaimed against us, seeking declaratory judgments of non-infringementand invalidity of the asserted patents. SMI is not seeking monetary damages. No trial date has been set and discovery has not yet commenced.

 

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

** **

No matters were submitted to a vote duringthe fourth quarter of 2008.

 

**PART II**

** **

**Item5.  Market for Registrant’s CommonEquity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.**

** **

MARKETINFORMATION

 

Our Common Stock has been listed on the NYSEAlternext under the symbol “RVP” since May 4, 2001.  Shown below are the high and low sales pricesof our Common Stock as reported by the NYSE Alternext for each quarter of thelast two fiscal years:

 

| **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   |       |

 

 

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

 

SHAREHOLDERS

 

As of March 2, 2009, there were 23,800,064shares of Common Stock held by 261 shareholders of record not includingshareholders who beneficially own Common Stock held in nominee or “street name.”

 

DIVIDENDS

 

We have not ever declared or paid any dividends onthe Common Stock.  We have no currentplans to pay any cash dividends on the Common Stock.  We intend to retain all earnings, exceptthose required to be paid to the holders of the Preferred Stock as resourcesallow, to support operations and future growth. Dividends on Common Stock cannot be paid so long as preferred dividendsare unpaid.  As of December 31,2008, an aggregate of $13,883,000 in preferred dividends were in arrears.

 

EQUITY COMPENSATION 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 are authorized.

 

RECENTSALES OF UNREGISTERED SECURITIES

 

In the first quarter of 2008, threeaccredited investors converted 44,650 shares of Preferred Stock into CommonStock on a one for one basis for no additional consideration, as reported inour Form 10-Q quarterly report filed with the SEC which is available onEDGAR.  There were no sales ofunregistered securities in the second, third, or fourth quarters of 2008.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER ANDAFFILIATED PURCHASERS

 

The following table showspurchases of equity securities by the issuer in 2008.  No purchases were made by affiliatedpurchasers in 2008.

** **

| **Period**         | ** ** | ** ** | **Total number of  shares (or units  purchased)**           | ** ** | ** ** | **Average  price paid  per share  (or unit)** | ** ** | ** ** | **Total number of  shares (or units)  purchased as part of  publicly announced  plans or programs** | ** ** | ** ** | **Maximum number (or  approximate dollar value)  of shares (or units) that  may yet be purchased  under the plans or  programs** |
|--------------------|------------|------------|-------------------------------------------------------------|------------|------------|-----------------------------------------------|------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------|
| November  18, 2008 |       |       | Options to  purchase an  aggregate of  1,925,365  shares(1) |       |       | N/A                                           |       |       | Options to purchase an  aggregate of 1,925,365  shares                                              |       |       | 0                                                                                                                                |

** **

(1)           We offered, pursuant to Section 3(a)(9) ofthe Securities Act of 1933 to exchange certain outstanding eligible options fornew options.  Such new options weregranted under our 2008 Stock Option Plan. The offer was made on the terms and subject to the conditions describedin the Offer to Exchange Stock Options dated October 17, 2008 (the “ExchangeOffer”).  The Exchange Offer expired at5:00 p.m., Central Standard Time, on November 18, 2008.  Eligible participants (totaling 103 persons)tendered, and 

 

 

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weaccepted for cancellation, eligible options to purchase an aggregate of1,925,365 shares of our Common Stock representing 99.4% of the total shares ofCommon Stock underlying options eligible to exchange in the ExchangeOffer.  We issued new options to purchasean aggregate of 962,683 shares of Common Stock in exchange for the cancellationof the tendered options.

 

**Item 6.Selected Financial Data.**

** **

The following selected financial data are qualifiedby reference to, and should be read in conjunction with, our audited financialstatements and the notes to those statements and **Management’s Discussion and Analysis of Financial Condition and Resultsof Operations** appearing elsewhere herein.  The selected Statements of Operations datapresented below for the years ended December 31, 2005 and 2004 and the BalanceSheet data as of December 31, 2006, 2005, and 2004 have been derived fromour audited financial statements, which are not included herein.

 

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

 
| ** **                                         | ** ** | **As of and for the Years Ended December 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales, net                                    |       | $                                                                                      | 27,899     |   | $ | 26,290 |   | $ | 20,897 |   | $ | 21,157 |   | $ | 21,136 |   |
| Reimbursed discounts                               |       | —                                                                                 |       | — |   | 4,427 |   | 3,078 |   | 386 |   |
| Total sales                                        |       | 27,899                                                                                 |       | 26,290 |   | 25,324 |   | 24,235 |   | 21,522 |   |
| Cost of sales                                      |       | 19,673                                                                                 |       | 18,300 |   | 17,778 |   | 15,429 |   | 16,411 |   |
| Gross profit                                       |       | 8,226                                                                                  |       | 7,990 |   | 7,546 |   | 8,806 |   | 5,111 |   |
| Total operating expenses                           |       | 18,671                                                                                 |       | 17,936 |   | 14,261 |   | 11,683 |   | 13,110 |   |
| Loss from operations                               |       | (10,445                                                                                | )          | (9,946 | ) | (6,715 | ) | (2,877 | ) | (7,999 | ) |
| Interest income                                    |       | 855                                                                                    |       | 1,870 |   | 1,976 |   | 1,373 |   | 475 |   |
| Interest expense, net                              |       | (54                                                                                    | )          | (326 | ) | (411 | ) | (340 | ) | (243 | ) |
| Litigation settlements, net                        |       | —                                                                                 |       | — |   | — |   | — |   | 74,635 |   |
| Net income (loss) before income taxes              |       | (9,644                                                                                 | )          | (8,402 | ) | (5,150 | ) | (1,844 | ) | 66,868 |   |
| Provision (benefit) for income taxes               |       | —                                                                                 |       | (1,454 | ) | (1,280 | ) | (606 | ) | 12,177 |   |
| Net income (loss)                                  |       | (9,644                                                                                 | )          | (6,948 | ) | (3,870 | ) | (1,238 | ) | 54,691 |   |
| Preferred Stock dividend requirements              |       | (1,373                                                                                 | )          | (1,399 | ) | (1,451 | ) | (1,503 | ) | (1,993 | ) |
| Earnings (loss) applicable to common  shareholders |       | $                                                                                      | (11,017    | ) | $ | (8,347 | ) | $ | (5,321 | ) | $ | (2,741 | ) | $ | 52,698 |   |
|                                               |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Earnings (loss) per share — basic             |       | $                                                                                      | (0.46      | ) | $ | (0.35 | ) | $ | (0.23 | ) | $ | (0.12 | ) | $ | 2.33 |   |
| Earnings (loss) per share — diluted           |       | $                                                                                      | (0.46      | ) | $ | (0.35 | ) | $ | (0.23 | ) | $ | (0.12 | ) | $ | 2.08 |   |
|                                               |       |                                                                                   |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding                |       | 23,794,566                                                                             |       | 23,727,029 |   | 23,591,999 |   | 23,332,277 |   | 22,600,166 |   |

 

 

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|                                      |   | **As of and for the Years Ended December 31,** |       |
|-------------------------------------------|--------|----------------------------------------------------------------------------------------|------------|
|                                      |   | **2008**                                                                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** |   |
| Current assets                            |   | $                                                                                      | 43,614     |   | $ | 51,916 |   | $ | 57,781 |   | $ | 61,485 |   | $ | 64,674 |   |
| Current liabilities                       |   | $                                                                                      | 10,238     |   | $ | 8,786 |   | $ | 6,891 |   | $ | 5,458 |   | $ | 7,852 |   |
| Property, plant, and equipment, net       |   | $                                                                                      | 14,436     |   | $ | 11,483 |   | $ | 12,212 |   | $ | 11,926 |   | $ | 11,057 |   |
| Total assets                              |   | $                                                                                      | 58,539     |   | $ | 64,330 |   | $ | 70,795 |   | $ | 73,756 |   | $ | 76,123 |   |
| Long-term debt, net of current maturities |   | $                                                                                      | 6,096      |   | $ | 3,747 |   | $ | 4,137 |   | $ | 4,351 |   | $ | 3,535 |   |
| Stockholders’ equity                 |   | $                                                                                      | 42,206     |   | $ | 51,761 |   | $ | 59,710 |   | $ | 63,235 |   | $ | 63,665 |   |
| Redeemable Preferred Stock (in shares)    |   | 2,285,266                                                                              |       | 2,329,916 |   | 2,441,166 |   | 2,498,666 |   | 2,572,116 |   |
| Cash dividends per common share           |   | $                                                                                      | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Gross profit margin                       |   | 29.5                                                                                   | %          | 30.4 | % | 29.8 | % | 36.3 | % | 23.7 | % |

 

*              Events that could positivelyaffect the trends indicated above include receipt of royalties from BTMD,continued reductions in manufactured costs, continued increasing average salesprices, and the gaining of market access. Future interest income trends may negatively affect the trends indicatedabove due to possibly continuing low interest rates, lower cash balances, aswill our investment of our cash in U.S. Treasury bills and other U.S.government backed securities. Furthermore, as our products are made from petroleum products, thechanging cost of oil and transportation may have an impact on our costs to theextent increases may not be recoverable through price increases of our productsand reductions in oil prices may not quickly affect petroleum product prices.

 

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

** **

FORWARD-LOOKING STATEMENT WARNING

 

Certain statements included by reference inthis filing containing the words “could,” “may,” “believes,” “anticipates,” “intends,”“expects,” and similar such words constitute forward-looking statements withinthe 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 and the viability of our patents), our ability tomaintain favorable supplier arrangements and relationships, receive royaltiesfrom BTMD, the impact of dramatic increases in demand, our ability to quicklyincrease capacity, our ability to access the market, our ability to maintain orlower production costs, our ability to continue to finance research anddevelopment as well as operations and expansion of production, the increasedinterest of larger market players, specifically 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.

** **

OVERVIEW

 

We have been manufacturing and marketing ourproducts into the marketplace since 1997. We currently provide other safety medical products in addition to safetysyringe products.  One such product, thePatient SafeTM syringe, which reduces the risk of infection resulting from IV linecontamination, entered the market in 2008. Safety syringes comprised 98.6% ofour sales in 2008.

 

Our products have been and continue to bedistributed nationally through numerous distributors.  However, we have been blocked from access tothe market by exclusive marketing practices engaged in by BD, who dominates themarket.  We believe that its monopolisticbusiness practices continue despite its paying $100 million in 2004 to settle aprior lawsuit with us for anticompetitive practices, business disparagement,and tortious interference.  Although wehave made limited progress in some areas, such as the alternate care andinternational markets, our volumes are not as high as they should be given thenature and quality of our products, the federal and state legislation requiringthe use of safe needle devices, and various Senate Subcommittee hearings onGroup Purchasing Organizations.

 

We continue to pursue various strategies tohave better access to the hospital market, as well as other markets, includingattempting to gain access to the market through our sales efforts, ourinnovative technology, introduction of new products, and, when necessary,litigation.  We are also marketing more 

 

 

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product internationally.  Beginning in 2004, we were given an award(from PATH) to supply syringes to various African countries under thePresident’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 programis uncertain.

 

As a result of the introduction ofVanishPoint® syringes through the PEPFAR initiative,African countries have begun to procure products outside of the US-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”.

 

Additionally, an Australian distributor wasawarded a one-year contract in March 2007 to supply our VanishPoint® automated retraction syringes toall of Queensland Health’s 202 acute care facilities.  Queensland Health is a department within thegovernment of Queensland, Australia.  Thecontract was renewed for an additional two years.  VanishPoint® products are distributed in Australia byBrisbane-based Scientific Educational Supplies Pty Ltd.  The number of international distributorscontinues to increase.

 

In the event we continue to have only limitedmarket access, the cash provided by the litigation settlements and generatedfrom operations becomes insufficient and royalties from BTMD are not forthcoming,we would take cost 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 royaltypayments.

 

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 manufactured cost.  Double Dove manufactured, in 2008,approximately 74.0% of the units we produced. These purchases have improved profit margins in spite of limitedrevenues.  The cost of production perunit has generally declined as volumes increased.  Double Dove increased the prices in thefourth quarter of 2008 to us by $0.005 per unit.  Product cost reductions could be adversely affectedby increased material and transportation costs. We believe we could make up any long-term disruption in these suppliesby utilizing more of the capacity at the Little Elm facility, except for the0.5cc insulin syringe, the 5cc and 10cc syringes and the autodisable syringewhich altogether comprised about 4.6% of our 2008 revenues.

 

We had a Licensing Agreement with BTMD whichexpired on May 13, 2008.  As aresult of the expiration of the contract, we recognized $100,000 of prepaidroyalty income in the second quarter of 2008 as other income.  Royalties that were expected in 2008 and 2007were not received due to the time needed to build the factory, assemblyequipment, and the related infrastructure as well as the need of BTMD to meetthe requisite Chinese government requirements. The facility has been completed and BTMD is in the process of meetingChinese government requirements.  Westill continue to expect royalty payments although we are unable to predict thedate we will begin to receive such royalties. We should begin earning royalties once we have an effective agreement,Chinese government requirements are met, and BTMD is able to produce and sellproducts.

 

Historically, unit sales have increased inthe latter part of the year due, in part, to the demand for syringes during theflu season.

 

With increased volumes, our manufacturingunit costs have generally tended to decline. Factors that could affect our unit costs, in addition to Double Dove’srecent increase in unit costs of $0.005, include changing production volumes,costs of petroleum products, and transportation costs.  Increases in such costs may not berecoverable through price increases of our products.

 

We have substantially completed the expansionof an existing warehouse.  This expansionwill increase our warehouse area, provide for additional office space, and adda second Controlled Environment.

 

 

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**LIQUIDITY AND FUTURE CAPITALREQUIREMENTS**

 

At the present time, Management does notintend to raise equity capital.  Due tothe funds received from prior litigation settlements, we have sufficient cashreserves and intend to rely on operations, cash reserves, and debt financing asthe primary ongoing sources of cash.

 

Historical Sources of Liquidity

 

We have historically funded operationsprimarily from the proceeds from private placements, loans, and litigationsettlements.  We were capitalized withapproximately $52,600,000 raised from six separate private placementofferings.  We raised $47,375,600 in cashfrom the private sales of an aggregate of 11,710,221 shares of ConvertiblePreferred Stock.  In addition, weobtained a cancellation of $3,679,284 in debt and $1,550,000 in Accountspayable in exchange for Series V Class B Convertible Preferred Stock.

 

We obtained $3,910,000 in 2000 from bankloans of which $3,435,000 has been repaid and $475,000 was refinanced with anew note for $2,500,000 with Lewisville State Bank, a division of 1stInternational Bank.  Additionally, wereceived a Small Business Administration loan of $1,000,000 in 1996 to pay forportions of automated assembly equipment, multi-cavity molds, and otherequipment.  This loan has beenrepaid.  Furthermore, we borrowed$5,000,000 in 2000 under our Credit Agreement with Abbott.  In October 2002 we repaid the Abbottnote with proceeds from a new note from Katie Petroleum, Inc. for$3,000,000 and a portion of the proceeds from a private placement.  In 2008, we received a construction line ofcredit for up to $4,210,000 to fund an expansion of our warehouse.

 

Internal Sources of Liquidity

 

*Margins and Market Access*

 

To achieve break even quarters, we needminimal access to hospital markets which has been difficult to obtain due tothe monopolistic marketplace which was the subject of our initial lawsuit andnow also included in our second lawsuit against BD. ** **We will continue toattempt to gain access to the market through our sales efforts, innovativetechnology, the introduction of 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 toimplement some of these changes and improve our manufacturing capacity andefficiency, thereby reducing our unit cost.

 

Beginning in early 2004, we began to receiveshipment of product from Double Dove which enabled us to lower our unitcosts.  Fluctuations in the cost andavailability of raw materials and inventory and our ability to maintainfavorable supplier arrangements and relationships could result in the need tomanufacture all (as opposed to 26.0%) of our products in the U.S.  This could temporarily increase unit costs aswe ramp up domestic production.

 

The mix of domestic and international salesaffects the average sales price of our products.  Generally, the higher the ratio of domesticsales to international sales, 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.  Double Dove increased their prices to us by$0.005 per unit in the fourth quarter of 2008. The number of units produced by the Company versus manufactured in Chinacan have a significant effect on the carrying costs of inventory as well asCost of sales.  We will continue toevaluate the appropriate mix of products manufactured domestically and those manufacturedin China to achieve economic benefits as well as to maintain our domesticmanufacturing capability.  Currently,approximately 26.0%****of ourproducts are produced domestically.

 

Fluctuations in the cost of oil (since ourproducts are petroleum based) and transportation and the volume of unitspurchased from Double Dove may have an impact on the unit costs of our product.

 

 

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Increases in such costs may not be recoverablethrough price increases of our products. Reductions in oil prices may not quickly affect petroleum productprices.

 

*Seasonality*

 

Historically, unit sales have increased inthe latter part of the year due, in part, to the demand for syringes during theflu season.

 

*Licensing Agreement*

 

We had a Licensing Agreement with BTMD whichexpired on May 13, 2008.  As aresult of the expiration of the contract, we recognized $100,000 of prepaidroyalty income in the second quarter of 2008 as other income.  Royalties that were expected in 2008 and 2007were not received due to the time needed to build the factory, assemblyequipment, and the related infrastructure as well as the need of BTMD to meetthe requisite Chinese government requirements. The facility has been completed and BTMD is in the process of meetingChinese government requirements.  Westill continue to expect royalty payments, although we are unable to predictthe date we will begin to receive such royalties.  We should begin earning royalties once wehave an effective agreement, Chinese government requirements are met, and BTMDis able to produce and sell products.

 

*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 cost cutting measures to reduce cashrequirements.  Such measures could resultin the reduction of units being produced, the reduction of workforce, thereduction of salaries of officers and other nonhourly employees, and thedeferral of royalty payments.

 

External Sources of Liquidity

 

We have obtained several loans from ourinception, which have, together with the proceeds from the sales of equitiesand litigation 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.

 

CAPITAL RESOURCES

 

In 2006, we invested $500,000 in a limitedliability company (“LLC”).  We exercisedour option and our funds were returned in 2008.

 

Material Commitments for Expenditures

 

We have substantially completed expansion ofour warehouse (including additional warehouse space, additional office space,and a new Controlled Environment).  Weare funding this expansion with a construction line of credit from LewisvilleState Bank, a division of 1st International Bank, for approximately $4.2million, secured by a second lien deed on the land and existing buildings.  Draws under the construction line of credit,which have totaled approximately $2.8 million at the end of the year, areexpected to be replaced by permanent financing in the second quarter of 2009.

 

 

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Trends in Capital Resources

 

Interest expense will increase due to therecent loan****of approximately $4.2million, but will be somewhat mitigated by lower borrowing rates if currentconditions in the credit markets continue. Interest income may be negatively affected by lower interest rates andour prior movement of cash to U.S. Treasury bills and other U.S. governmentbacked securities.** **Although we believe that we havegranted credit to credit-worthy firms, current economic conditions may affectthe timing and/or collectability of some accounts.

 

RESULTS OF OPERATIONS

 

The following discussion contains trend informationand other forward-looking statements that involve a number of risks anduncertainties.  Our actual future resultscould differ materially from our historical results of operations and thosediscussed in the forward-looking statements. All period references are to our fiscal years ended December 2008,2007 or 2006.  Dollar amounts have beenrounded for ease of reading.

 

*Comparison of Year Ended*

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

 

Revenues increased 6.1%, due principally to higheraverage sales prices and greater volumes. Domestic sales were 83.3% of revenues with international salescomprising the remainder.  Unit sales ofthe 1cc syringe increased 22.7% and 3cc unit sales decreased 4.0%.  Unit sales of all products increased3.1%.  Domestic unit sales as well asaverage sales prices increased. International unit sales and average selling prices declined.  Sales to one distributor accounted for 17.1%and 13.7% of our revenues in 2008 and 2007, respectively.

 

Cost of sales increased due to higher manufacturingcosts and higher volumes.  Royaltyexpenses were higher due to an increase in gross revenues.

 

As a result, gross profit margins declined from30.4% in 2007 to 29.5% in 2008.

 

Operating expenses increased from the prior year dueto higher general and administrative expenses mitigated by lower Sales andmarketing and Research and development costs.

 

Sales and marketing expenses decreased due primarilyto reduced travel and entertainment, trade shows and market expense,compensation and office supplies. Consulting expense also decreased.

 

Research and development costs were flat.  We had decreases in engineering costs dueprincipally to higher costs of validation and engineering samples offset byhigher compensation costs.

 

General and administrative costs increased due principallyto increased legal costs (including a settlement of litigation whereby weobtained a patent license/assignment), office expenses, compensation, propertytaxes and freight costs.  Travel andentertainment costs and fees to distributors decreased.

 

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

 

Interest income decreased due to lower interestrates and cash balances.  Interestexpense decreased due to lower interest rates mitigated by higher debt balancesand capitalized interest, principally due to the construction of the warehouse.

 

Other accrued liabilities increased due toprepayments from international customers.

 

Cash flow from operations was a negative $5.9million for 2008 due principally to our losses. The effect of non-cash expenses and the change in working capital was apositive $3.7 million.  Investingactivities utilized $1.9 million in cash.

 

 

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

 

Revenues increased due principally to increasedsales in the international market. Domestic sales were 81.6% of revenues with international salescomprising the remainder.  Unit sales ofthe 1cc syringe increased 7.3% and 5cc unit sales increased 30.6%.  Unit sales of all products increased7.5%.  The discount reimbursements endedin 2006.  The discount reimbursementprogram expired after the settlement agreement under which it was establishedprovided for a total of $8.0 million in reimbursements.  We had recognized $8.0 million in cumulativediscount reimbursements by the third quarter of 2006.  Sales to three distributors accounted for36.5% and 31.3% of our revenues in 2007 and 2006, respectively.

 

Cost of sales as a percentage of revenues decreasedslightly****due to higher volumesoffset by the lower average selling price principally in the internationalsales.  The increased volume ofproduction resulted in a lower unit cost. Royalty expenses were flat.

 

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

 

Operating expenses increased from the prior yearprimarily due to increases in General and administrative costs.

 

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

 

Research and development costs were somewhathigher.  We had increases in engineeringcosts due principally to validation testing and the development work on the IVsafety catheter and higher compensation costs.

 

General and administrative costs increased dueprincipally to higher legal expenses. Compensation costs, outside accounting costs, and distribution fees alsoincreased.  Stock option expenses,shareholder expenses, consulting and training decreased.  Legal costs concerning the litigation againstBD comprise the largest amount of legal fees and have a significant effect onour expenses.  Our lawsuit against BD iscurrently scheduled for trial in October 2009.  After conclusion of the trial, legal expensesare expected to decrease significantly. The legal costs incurred in 2007 with regard to the Abbott litigationare lower than those in 2006.  We expect suchcosts to continue until the litigation is resolved.  We also have higher litigation expensesconcerning OMI.  We had decreases intaxes other than income taxes in 2007. We awarded merit increases to our employees in 2006.  We donated product in an internationalhumanitarian effort in 2006.  There havebeen no stock options awarded since 2004; therefore, this expense continues todecline as the costs become fully amortized with virtually none recorded in2007.  We also increased our allowancefor bad debt.

 

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

 

Interest income decreased due to lower interestrates and cash balances.  Interestexpense decreased due to lower interest rates and debt balances.

 

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

 

Cash flow from operations was negative for 2007 dueprincipally to the loss for the year. The effect of non-cash expenses and the change in working capital were apositive $2.7 million.

 

 

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OFF-BALANCESHEET ARRANGEMENTS

 

None.

 

CONTRACTUALOBLIGATIONS

 

Contractual Obligations and Commercial Commitments

 

The following chart summarizes our materialobligations and commitments to make future payments under contracts forlong-term debt as of December 31, 2008:

** **
| ** **                                    | ** ** | **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 |       | $6,642,854                                |   | $543,748 |   | $3,129,735 |   | $510,126 |   | $2,459,245 |

** **

The presentation of contractual obligationsof long-term debt includes assumptions regarding our ability to replace aconstruction loan with permanent financing.

 

SIGNIFICANT ACCOUNTING POLICIES

 

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

 

**Accounts Receivable**

 

We record trade receivables when revenue isrecognized.  No product has beenconsigned to customers.  Our allowancefor doubtful 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.

 

**Revenue Recognition**

 

Revenue is recognized for sales to distributors whentitle and risk of ownership passes to the distributor, generally uponshipment.  Revenue is recorded on thebasis of sales price to distributors, less contractual pricing allowances.  Contractual pricing allowances consist of (i) rebatesgranted to distributors who provide tracking reports which show, among otherthings, the facility that purchased the products, and (ii) a provision forestimated contractual pricing allowances for products that we have 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 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.

 

 

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

 

Our return policy also provides that a customer mayreturn product that is overstocked. Overstocking returns are limited to two times in each 12 month period upto one percent of distributor’s total purchase of products for the prior 12month period.  All product overstocks andreturns are subject to inspection and acceptance by manufacturer.

 

Our international Distribution Agreements do notprovide for any returns.

 

We record an allowance for estimated returns as areduction to accounts receivable and gross sales.  Historically, returns have been less than 0.5%of Total sales.

 

**Inventories**

 

Inventories are valued at the lower of cost ormarket, with cost being determined using a standard cost method, whichapproximates average cost.  A reserve isestablished for any excess or obsolete inventories.

 

**Marketing Fees**

 

Under a sales and marketing agreement with Abbott,we paid marketing fees until we terminated the contract for breach.  The contracted services were to includeparticipation in promotional activities, development of educational andpromotional materials, representation at trade shows, clinical demonstrations,inservicing and training, and tracking reports detailing the placement of ourproducts to end-users.  Marketing feeswere accrued at the time of the sale of product to Abbott.  These fees were paid after Abbott provided usa tracking report of product sales to end-users.  These costs were included in Sales andmarketing 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.  We do not expect the eventual liability formarketing fees, if any, to exceed the amount accrued.

 

**Reimbursed Discounts**

 

We received reimbursed discounts from one of thesettlement agreements reached in our previous federal antitrust lawsuit, *Retractable Technologies, Inc. v. BD, et al*.  Payments under the discount reimbursementprogram were recognized upon invoicing of amounts due under the agreement,provided collection was reasonably assured. Such amounts are presented in the Statements of Operations as a separatecomponent of revenues.  All fundsavailable under the discount reimbursement program were recognized by the thirdquarter of 2006.

 

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

 

We believe that our market risk exposures regardingour cash and cash equivalents are immaterial as we do not have instruments fortrading purposes.  We shifted the bulk of our funds into U.S.Treasury bills and other U.S. government backed securities in April 2008.  Additionally, reasonable, possiblenear-term changes in market rates or prices will not result in materialnear-term losses in earnings.

 

 

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

 

**RETRACTABLE TECHNOLOGIES, INC.**

 

**FINANCIAL STATEMENTS AND**

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

**DECEMBER 31, 2008 AND 2007**

 

 

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**RETRACTABLE TECHNOLOGIES, INC.****INDEXTO FINANCIAL STATEMENTS**

 
| ** **                                                                                                             | **Page** |
|------------------------------------------------------------------------------------------------------------------------|----------|
| Report  of Independent Registered Public Accounting Firm                                                               | F-3      |
|                                                                                                                   |     |
| Financial  Statements:                                                                                                 |     |
|                                                                                                                   |     |
| Balance  Sheets as of December 31, 2008 and 2007                                                                  | F-4      |
|                                                                                                                   |     |
| Statements of  Operations for the years ended  December 31, 2008, 2007 and 2006                                   | F-5      |
|                                                                                                                   |     |
| Statements of Changes in Stockholders’ Equity  for the years ended December 31, 2008, 2007 and 2006          | F-6      |
|                                                                                                                   |     |
| Statements  of Cash Flows for the years ended  December 31, 2008, 2007 and 2006                                   | F-9      |
|                                                                                                                   |     |
| Notes to Financial Statements                                                                                          | F-11     |
|                                                                                                                   |     |
| Selected Quarterly Financial Data - Unaudited                                                                          | F-26     |
|                                                                                                                   |     |
| Financial Statement Schedule:                                                                                          |     |
|                                                                                                                   |     |
| Schedule II: Schedule of Valuation and Qualifying  Accounts  for the years ended December 31, 2008, 2007 and 2006 | 45       |

 

 

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**Report of Independent RegisteredPublic Accounting Firm**

 

 

Tothe Board of Directors and Stockholders

ofRetractable Technologies, Inc.

 

Wehave audited the accompanying balance sheets of Retractable Technologies, Inc.as of December 31, 2008 and 2007, and the related statements ofoperations, changes in stockholders’ equity, and cash flows for each of thethree years in the period ended December 31, 2008.  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.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Retractable Technologies, Inc.as of December 31, 2008 and 2007, and the results of its operations andits cash flows for each of the three years in the period ended December 31,2008 in conformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, therelated financial statement schedule when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information 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 31,2008 included in Item 9A of the Company’s December 31, 2008 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,  2009 |   |                           |

 

 

F-3

Tableof Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**BALANCE SHEETS**

 
| ** **                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                                             |       |                  |       |   |   |
| Current assets:                                                                                                                                                                        |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                             |       | $                     | 33,283,740 |   | $ | 40,507,431 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $499,966 and $254,008,  respectively                                                                                   |       | 3,288,942             |       | 1,667,636 |   |
| Inventories, net                                                                                                                                                                       |       | 6,641,532             |       | 7,037,129 |   |
| Income taxes  receivable                                                                                                                                                               |       | —                |       | 2,345,041 |   |
| Other current  assets                                                                                                                                                                  |       | 400,113               |       | 358,807 |   |
| Total current  assets                                                                                                                                                                  |       | 43,614,327            |       | 51,916,044 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| Property, plant,  and equipment, net                                                                                                                                                   |       | 14,435,667            |       | 11,483,423 |   |
| Intangible  assets, net                                                                                                                                                                |       | 470,115               |       | 424,560 |   |
| Other assets                                                                                                                                                                           |       | 18,750                |       | 505,899 |   |
| Total assets                                                                                                                                                                           |       | $                     | 58,538,859 |   | $ | 64,329,926 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                         |       |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                  |       |                  |       |   |   |
| Accounts payable                                                                                                                                                                       |       | $                     | 6,144,435  |   | $ | 5,535,365 |   |
| Current portion  of long-term debt                                                                                                                                                     |       | 451,865               |       | 387,906 |   |
| Accrued  compensation                                                                                                                                                                  |       | 650,704               |       | 539,330 |   |
| Marketing fees  payable                                                                                                                                                                |       | 1,419,760             |       | 1,419,760 |   |
| Accrued royalties  to shareholders                                                                                                                                                     |       | 620,987               |       | 619,304 |   |
| Other accrued  liabilities                                                                                                                                                             |       | 949,770               |       | 263,339 |   |
| Current deferred  tax liability                                                                                                                                                        |       | —                |       | 20,626 |   |
| Total current  liabilities                                                                                                                                                             |       | 10,237,521            |       | 8,785,630 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| Long-term debt,  net of current maturities                                                                                                                                             |       | 6,095,535             |       | 3,747,259 |   |
| Long-term  deferred tax liability                                                                                                                                                      |       | —                |       | 36,200 |   |
| Total liabilities                                                                                                                                                                      |       | 16,333,056            |       | 12,569,089 |   |
|                                                                                                                                                                                   |       |                  |       |   |   |
| 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 553,500  shares (liquidation preference of $6,077,500 and $6,088,500)                                |       | 552,500               |       | 553,500 |   |
| Series V,  Class B; issued 2,416,221 shares; outstanding: 1,238,821 and 1,282,471  shares, respectively (liquidation preference of $5,450,812 and $5,642,872,  respectively) |       | 1,238,821             |       | 1,282,471 |   |
| Common Stock, no  par value; authorized: 100,000,000 shares; issued and outstanding: 23,800,064  and 23,755,414 shares, respectively                                                   |       | —                |       | — |   |
| Additional  paid-in capital                                                                                                                                                            |       | 53,952,183            |       | 53,818,987 |   |
| Retained deficit                                                                                                                                                                       |       | (14,031,646           | )          | (4,388,066 | ) |
| Total  stockholders’ equity                                                                                                                                                       |       | 42,205,803            |       | 51,760,837 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                       |       | $                     | 58,538,859 |   | $ | 64,329,926 |   |

 

 

See accompanying notes to financialstatements

 

 

F-4

Tableof Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**STATEMENTS OF OPERATIONS**

 
| ** **                                 | ** ** | **Years Ended December 31,** | ** **  |
|--------------------------------------------|------------|---------------------------------------------|-------------|
| ** **                                 | ** ** | **2008**                                    | ** **  | **2007** | ** ** | **2006** | ** ** |
| Sales, net                                 |       | $                                           | 27,899,318  |   | $ | 26,289,720 |   | $ | 20,897,207 |   |
| Reimbursed discounts                       |       | —                                      |        | — |   | 4,427,312 |   |
| Total sales                                |       | 27,899,318                                  |        | 26,289,720 |   | 25,324,519 |   |
| Cost of Sales                              |       |                                        |        |   |   |   |   |
| Costs of manufactured product              |       | 17,504,842                                  |        | 16,212,609 |   | 15,684,450 |   |
| Royalty expense to shareholders            |       | 2,168,268                                   |        | 2,087,596 |   | 2,093,822 |   |
| Total cost of sales                        |       | 19,673,110                                  |        | 18,300,205 |   | 17,778,272 |   |
| Gross profit                               |       | 8,226,208                                   |        | 7,989,515 |   | 7,546,247 |   |
|                                       |       |                                        |        |   |   |   |   |
| Operating expenses:                        |       |                                        |        |   |   |   |   |
| Sales and marketing                        |       | 4,835,272                                   |        | 5,299,157 |   | 5,545,500 |   |
| Research and development                   |       | 1,066,068                                   |        | 1,071,143 |   | 958,798 |   |
| General and administrative                 |       | 12,769,774                                  |        | 11,565,144 |   | 7,756,647 |   |
| Total operating expenses                   |       | 18,671,114                                  |        | 17,935,444 |   | 14,260,945 |   |
| Loss from operations                       |       | (10,444,906                                 | )           | (9,945,929 | ) | (6,714,698 | ) |
|                                       |       |                                        |        |   |   |   |   |
| Interest and other income                  |       | 855,685                                     |        | 1,870,512 |   | 1,976,406 |   |
| Interest expense, net                      |       | (54,359                                     | )           | (326,304 | ) | (411,154 | ) |
| Loss before income taxes                   |       | (9,643,580                                  | )           | (8,401,721 | ) | (5,149,446 | ) |
| Benefit for income taxes                   |       | —                                      |        | (1,453,617 | ) | (1,279,962 | ) |
| Net loss                                   |       | (9,643,580                                  | )           | (6,948,104 | ) | (3,869,484 | ) |
| Preferred Stock dividend requirements      |       | (1,373,019                                  | )           | (1,399,062 | ) | (1,451,321 | ) |
| Net loss applicable to common shareholders |       | $                                           | (11,016,599 | ) | $ | (8,347,166 | ) | $ | (5,320,805 | ) |
|                                       |       |                                        |        |   |   |   |   |
| Loss per share                             |       | $                                           | (0.46       | ) | $ | (0.35 | ) | $ | (0.23 | ) |
|                                       |       |                                        |        |   |   |   |   |
| Weighted average common shares outstanding |       | 23,794,566                                  |        | 23,727,029 |   | 23,591,999 |   |

 

 

See accompanying notes to financialstatements

 

 

F-5

Table of Contents

 

**RETRACTABLE TECHNOLOGIES, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

** **
| ** **                                                                        | **  Series I   Class B  **

**Shares****     Amount** | ** ** | **Series II   Class B**

**Shares****     Amount** | ** ** | **Series III   Class B**

**Shares****     Amount** | ** ** | **Series IV   Class B**

**Shares****    Amount** | ** ** | **    Series V   Class B  **

**Shares****          Amount** | ** ** | **            Common           Shares****      Amount** | ** ** |
|-----------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Balance  as of

December 31,  2005                                           | 171,000                                                                                                 |       | $171,000                                                                         |       | 255,200                                                                           |       | $255,200                                                                   |       | 135,245                                                                                                                                           |       | $135,245                                                                                                                                                                             |       | 556,000 |   | $556,000 |   | 1,381,221 |   | $1,381,221 |   | 23,511,884 |   | $ | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion  of Preferred Stock into Common Stock                                  | (7,000                                                                                                  | )          | (7,000                                                                           | )          | (30,500                                                                           | )          | (30,500                                                                    | )          | —                                                                                                                                            |       | —                                                                                                                                                                               |       | (2,500 | ) | (2,500 | ) | (17,500 | ) | (17,500 | ) | 57,500 |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition  of stock option exercise                                             | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | 74,780 |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition  of stock option compensation                                         | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss                                                                         | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance  as of December 31, 2006                                             | 164,000                                                                                                 |       | 164,000                                                                          |       | 224,700                                                                           |       | 224,700                                                                    |       | 135,245                                                                                                                                           |       | 135,245                                                                                                                                                                              |       | 553,500 |   | 553,500 |   | 1,363,721 |   | 1,363,721 |   | 23,644,164 |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion  of Preferred Stock into Common Stock                                  | (20,000                                                                                                 | )          | (20,000                                                                          | )          | (5,000                                                                            | )          | (5,000                                                                     | )          | (5,000                                                                                                                                            | )          | (5,000                                                                                                                                                                               | )          | — |   | — |   | (81,250 | ) | (81,250 | ) | 111,250 |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition  of stock option compensation                                         | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
|  Dividends declared and paid on Series I  Class B Preferred Stock  | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
|  Dividends declared and paid on Series II  Class B Preferred Stock | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss                                                                         | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance  as of December 31, 2007                                             | 144,000                                                                                                 |       |    144,000                                                             |       | 219,700                                                                           |       |    219,700                                                       |       | 130,245                                                                                                                                           |       |    130,245                                                                                                                                                                 |       | 553,500 |   |    553,500 |   | 1,282,471 |   | 1,282,471 |   | 23,755,414 |   |            — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Conversion  of Preferred Stock into Common Stock                                  | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | (1,000 | ) | (1,000 | ) | (43,650 | ) | (43,650 | ) | 44,650 |   | — |   |
|                                                                              |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Recognition  of stock option compensation                                         | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                                                   |                                                                                                         |            |                                                                                  |            |                                                                                   |            |                                                                            |            |                                                                                                                                                   |            |                                                                                                                                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

F-6

Table of Contents

 
| ** **                                    | **  Series I   Class B  **

**Shares****     Amount** | ** ** | **Series II   Class B**

**Shares****     Amount** | ** ** | **Series III   Class B**

**Shares****     Amount** | ** ** | **Series IV   Class B**

**Shares****    Amount** | ** ** | **    Series V   Class B  **

**Shares****          Amount** | ** ** | **            Common           Shares****      Amount** | ** ** |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Recognition  of beneficial conversion feature | —                                                                                                  |       | —                                                                           |       | —                                                                            |       | —                                                                     |       | —                                                                                                                                            |       | —                                                                                                                                                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
|                                          |                                                                                                    |       |                                                                             |       |                                                                              |       |                                                                       |       |                                                                                                                                              |       |                                                                                                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| 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 |   | $ | — |   |
|                                               |                                                                                                         |            |                                                                                  |            |                                                                                   |            |                                                                            |            |                                                                                                                                                   |            |                                                                                                                                                                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

See accompanying notes to financial statements

 

 

F-7

Tableof Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

 
|                                                                        | ** ** | **Additional  Paid-in  Capital**                                        | ** ** | **Retained  Earnings  (Deficit)**                                            | ** ** | **Total**                                                         | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
|  Balance as of December 31, 2005                                  |       | $          54,307,053 |       | $           6,429,522 |       | $         63,235,241 |       |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
|  Conversion of Preferred Stock into Common  Stock                      |       | 57,500                                                                  |       | —                                                                       |       | —                                                            |       |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
|  Recognition of stock option exercise                                  |       | 74,780                                                                  |       | —                                                                       |       | 74,780                                                            |       |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
|  Recognition of stock option compensation                              |       | 269,775                                                                 |       | —                                                                       |       | 269,775                                                           |       |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
|  Net loss                                                              |       | —                                                                  |       | (3,869,484                                                                   | )          | (3,869,484                                                        | )          |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
| Balance as of December 31,  2006                                       |       | 54,709,108                                                              |       | 2,560,038                                                                    |       | 59,710,312                                                        |       |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
| Conversion of Preferred  Stock into Common Stock                            |       | 111,250                                                                 |       | —                                                                       |       | —                                                            |       |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
| Recognition of stock  option compensation                                   |       | 52,173                                                                  |       | —                                                                       |       | 52,173                                                            |       |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
| Dividends declared and  paid on Series I Class B Preferred Stock  |       | (262,819                                                                | )          | —                                                                       |       | (262,819                                                          | )          |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
| Dividends declared and  paid on Series II Class B Preferred Stock |       | (790,725                                                                | )          | —                                                                       |       | (790,725                                                          | )          |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
| Net loss                                                                    |       | —                                                                  |       | (6,948,104                                                                   | )          | (6,948,104                                                        | )          |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
|  Balance as of December 31, 2007                                  |       | 53,818,987                                                              |       |  (4,388,066                                                             | )          | 51,760,837                                                        |       |
|                                                                        |       |                                                                    |       |                                                                         |       |                                                              |       |
| 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 |       |

 

 

See accompanying notes to financial statements

 

 

F-8

Tableof Contents

 

**RETRACTABLE TECHNOLOGIES, INC.**

**STATEMENTS OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **Years  Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash flows from operating activities:**                                    |       |                               |       |   |   |   |   |
| Net  loss                                                                    |       | $                                  | (9,643,580 | ) | $ | (6,948,104 | ) | $ | (3,869,484 | ) |
| Adjustments  to reconcile net loss to net cash used by operating activities: |       |                               |       |   |   |   |   |
| Depreciation  and amortization                                               |       | 1,397,333                          |       | 1,430,072 |   | 1,426,748 |   |
| Capitalized  interest                                                        |       | (236,960                           | )          | (177,086 | ) | (135,857 | ) |
| Stock  option compensation                                                   |       | 32,629                             |       | 6,478 |   | 372,298 |   |
| Provision  for inventory valuation                                           |       | —                             |       | 155,600 |   | (61,296 | ) |
| Provision  for doubtful accounts                                             |       | 224,633                            |       | 169,223 |   | 65,362 |   |
| Accreted  interest                                                           |       | 54,387                             |       | 120,486 |   | 138,155 |   |
| Deferred  income taxes                                                       |       | —                             |       | — |   | 534,065 |   |
| (Increase)  decrease in assets:                                              |       |                               |       |   |   |   |   |
| Inventories                                                                  |       | 395,597                            |       | (806,949 | ) | (3,026,759 | ) |
| Accounts  receivable                                                         |       | (1,845,939                         | )          | 119,897 |   | 1,382,790 |   |
| Income  taxes receivable                                                     |       | 2,345,041                          |       | 10,691 |   | (1,794,670 | ) |
| Other  current assets                                                        |       | (41,306                            | )          | (91,100 | ) | 194,443 |   |
| Other  assets                                                                |       | (12,725                            | )          | — |   | — |   |
| Increase  (decrease) in liabilities:                                         |       |                               |       |   |   |   |   |
| Accounts  payable                                                            |       | 609,070                            |       | 1,287,735 |   | 1,902,016 |   |
| Other  accrued liabilities                                                   |       | 798,578                            |       | 506,386 |   | (481,842 | ) |
|                                                                         |       |                               |       |   |   |   |   |
| Net  cash used by operating activities                                       |       | (5,923,242                         | )          | (4,216,671 | ) | (3,354,031 | ) |
|                                                                         |       |                               |       |   |   |   |   |
| **Cash flows from investing activities:**                                    |       |                               |       |   |   |   |   |
| Purchase  of property, plant and equipment                                   |       | (2,343,556                         | )          | (464,415 | ) | (1,530,357 | ) |
| Investment  in LLC                                                           |       | 497,690                            |       | — |   | (500,000 | ) |
| Acquisitions  of patents, trademarks, licenses, and intangibles              |       | (89,152                            | )          | (188,168 | ) | (4,576 | ) |
|                                                                         |       |                               |       |   |   |   |   |
| Net  cash used by investing activities                                       |       | (1,935,018                         | )          | (652,583 | ) | (2,034,933 | ) |
|                                                                         |       |                               |       |   |   |   |   |
| **Cash flows from financing activities:**                                    |       |                               |       |   |   |   |   |
| Repayments  of long-term debt and notes payable                              |       | (489,160                           | )          | (384,460 | ) | (385,062 | ) |
| Proceeds  from long-term debt                                                |       | 1,123,729                          |       | — |   | — |   |
| Proceeds  from the exercise of stock options                                 |       | —                             |       | — |   | 74,780 |   |
| Payment  of Preferred Stock dividends                                        |       | —                             |       | (1,053,544 | ) | — |   |
|                                                                         |       |                               |       |   |   |   |   |
| Net  cash provided (used) by financing activities                            |       | 634,569                            |       | (1,438,004 | ) | (310,282 | ) |
|                                                                         |       |                               |       |   |   |   |   |
| Net  decrease in cash and cash equivalents                                   |       | (7,223,691                         | )          | (6,307,258 | ) | (5,699,246 | ) |
| Cash  and cash equivalents at:                                               |       |                               |       |   |   |   |   |
| Beginning  of period                                                         |       | 40,507,431                         |       | 46,814,689 |   | 52,513,935 |   |
| End  of period                                                               |       | $                                  | 33,283,740 |   | $ | 40,507,431 |   | $ | 46,814,689 |   |

 

 

F-9

Table of Contents

 
| ** **                                                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Supplemental  schedule of cash flow information:                      |       |     |       |     |       |     |       |
| Interest  paid                                                        |       | $        | 236,932    |     | $          | 382,901  |       | $ | 425,429 |   |
| Income  taxes paid                                                    |       | $        | —     |     | $          | —   |       | $ | 45,893 |   |
| Supplemental schedule of  noncash investing and financing activities: |       |     |       |     |       |     |       |
| Debt  assumed to construct a warehouse                                |       | $        | 1,723,277  |     | $          | —   |       | $ | — |   |
|                                                                       |            |          |            |          |            |          |            |  |  |  |  |

 

 

See accompanying notes to financialstatements

 

 

F-10

Tableof Contents

 

**NOTES TO FINANCIAL STATEMENTS**

**1.**                **BUSINESS OF THE COMPANY ANDBASIS OF PRESENTATION**

 

**Business of the Company**

 

Retractable Technologies, Inc. (the “Company”)was incorporated in Texas on May 9, 1994, and designs, develops,manufactures, and markets safety syringes and other safety medical products forthe healthcare profession.  The Companybegan to develop its manufacturing operations in 1995.  The Company’s manufacturing andadministrative facilities are located in Little Elm, Texas.  The Company’s primary products with Notice ofSubstantial Equivalence to the FDA are the VanishPoint® 0.5cc insulin syringe; 1cctuberculin, insulin, and allergy antigen syringes; the 0.5cc, 3cc, 5cc, and10cc syringes; the autodisable syringe; the small diameter tube adapter; theblood collection tube holder; the allergy tray; the IV safety catheter; and thePatient SafeTM syringe.

 

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

 

**Accounting estimates**

 

The preparation of financial statements inconformity with U.S. generally accepted accounting principles (“GAAP”) requiresManagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ significantly from those estimates.

 

**Cash and cash equivalents**

 

For purposes of reporting cash flows, cash and cashequivalents include unrestricted cash, money market accounts, and investmentswith original maturities of three months or less.

 

**Accounts receivable**

 

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

 

**Inventories**

 

Inventories are valued at the lower of cost ormarket, with cost being determined using a standard cost method, whichapproximates average cost.  A reserve isestablished for any excess or obsolete inventories.

 

**Property, plant, and equipment**

 

Property, plant, and equipment are stated atcost.  Expenditures for maintenance andrepairs are charged to operations as incurred. Cost includes major expenditures for improvements and replacements whichextend useful lives or increase capacity and interest cost associated withsignificant capital additions.  For theyears ended December 31, 2008, 2007, and 2006, the Company capitalizedinterest of approximately $237,000; $177,000; and $136,000.  Gains or losses from property disposals areincluded in income.

 

Depreciation and amortization are calculated usingthe straight-line method over the following useful lives:

 

 

F-11

Table of Contents

 

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

 

**Long-lived assets**

 

The Company assesses the recoverability oflong-lived assets using an assessment of the estimated undiscounted future cashflows related to such assets.  In theevent that assets are found to be carried at amounts which are in excess ofestimated gross future cash flows, the assets will be adjusted for impairmentto a level commensurate with a discounted cash flow analysis of the underlyingassets.

 

**Reclassifications**

 

Certainprior year amounts have been reclassified to conform with the current year’spresentation.

 

**Intangible assets**

 

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

 

**Financial instruments**

 

Thefair value of financial instruments is determined by reference to variousmarket data and other valuation techniques as appropriate.  The Company believes that the fair values offinancial instruments approximates their recorded values.

 

**Concentration risks**

 

The Company’s financial instruments exposed toconcentrations of credit risk consist primarily of cash, cash equivalents, andaccounts receivable.  Cash balances, someof which exceed federally insured limits, are maintained in financialinstitutions; however, Management believes the institutions are of high creditquality.  The majority of accountsreceivable are due from companies which are well-established entities.  As a consequence, Management considers anyexposure from concentrations of credit risks to be limited.  The Company had a high concentration of saleswith one significant customer.  For theyear ended December 31, 2008, the aforementioned customer accounted for $4,679,478,or 16.8% of net sales.

 

Considering the current economic climate, theCompany increased its Provision for doubtful accounts by approximately $246,000this year.

 

The Company manufactures syringes in Little Elm,Texas as well as utilizing manufacturers in China.  The Company purchases most of its productcomponents from single suppliers, including needle adhesives and packagingmaterials.  There are multiple sources ofthese materials.  The Company obtainsroughly 74.0% of its finished products through Double Dove, a Chinesemanufacturer.  In the event that theCompany becomes unable to purchase such product from Double Dove, the Companywould need to find an alternate supplier for its 0.5cc insulin syringe, its 5ccand 10cc syringes and its autodisable syringe and increase domestic productionfor 1cc and 3cc syringes to avoid a disruption in supply.

 

 

F-12

Tableof Contents

 

**Revenue recognition**

 

Revenue is recognized for sales to distributors whentitle and risk of ownership passes to the distributor, generally uponshipment.  Revenue is recorded on thebasis of sales price to distributors, less contractual pricing allowances.  Contractual pricing allowances consist of: (i) rebatesgranted to distributors who provide tracking reports which show, among otherthings, the facility that purchased the products, and (ii) a provision forestimated contractual pricing allowances for products that the Company has notreceived tracking reports.  Rebates arerecorded when issued and are applied against the customer’s receivablebalance.  The provision for contractualpricing allowances is reviewed at the end of each quarter and adjusted forchanges in levels of products for which there is no tracking report.  Additionally, if it becomes clear 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.

 

The Company’s domestic return policy is set forth inits standard Distribution Agreement. This policy provides that a customer may return incorrect shipmentswithin 10 days following arrival at the distributor’s facility.  In all such cases the distributor must obtainan authorization code from the Company and affix the code to the returnedproduct.  The Company will not acceptreturned goods without a returned goods authorization number.  The Company may refund the customer’s moneyor replace the product.

 

The Company’s return policy also provides that acustomer may return product that is overstocked.  Overstocking returns are limited to two timesin each 12-month period up to one percent of distributor’s total purchase ofproducts for the prior 12-month period. All product overstocks and returns are subject to inspection andacceptance by manufacturer.

 

The Company’s international distribution agreementsdo not provide for any returns.

 

The Company records an allowance for estimatedreturns as a reduction to Accounts receivable and Gross sales.  Historically, returns have been less than 0.5%of Total sales.

 

**Marketing fees**

 

Under a sales and marketing agreement with AbbottLaboratories (“Abbott”), the Company paid marketing fees until the Companyterminated 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 the Company’s products to end-users.  Marketing fees were accrued at the time ofthe sale of product to Abbott.  Thesefees were paid after Abbott provided the Company a tracking report of productsales to end-users.  These costs wereincluded in Sales 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.  Abbott filed an answer and counterclaim July 15,2008.  See Note 5 **COMMITMENTS AND CONTINGENCIES-**Litigationfor further discussion.

 

**Reimbursed Discounts**

 

TheCompany received reimbursed discounts from one of the settlement agreementsreached in its previous federal antitrust lawsuit, *Retractable Technologies, Inc. v. Becton Dickinson and Co.*(“BD”)*et al*.  Payments under the discount reimbursementprogram were recognized upon invoicing of amounts due under the agreementprovided collection was reasonably assured. Such amounts are presented in the Statements of 

 

 

F-13

Tableof Contents

 

Operationsas a separate component of revenues.  Allfunds available under the discount reimbursement program were recognized by thethird quarter of 2006.

 

**Income taxes**

 

The Company provides for deferred income taxes inaccordance with SFAS No. 109, *Accountingfor Income Taxes* (“SFAS 109”). SFAS 109 requires an asset and liability approach for financialaccounting and reporting for income taxes based on the tax effects ofdifferences between the financial statement and tax bases of assets and liabilities,based on enacted rates expected to be in effect when such differences reversein future periods.  Deferred tax assetsare periodically reviewed for realizability. The Company had sufficient taxable income from prior carryback years torealize all of its taxable losses through December 31, 2006.  Taxable losses for 2007 and thereafter aresubject to loss carryforwards.  TheCompany has established a valuation allowance for its net deferred tax asset asfuture taxable income cannot be reasonably assured.  Penalties and interest on uncertain taxpositions are classified as income taxes in the Statements of Operations.

 

**Earnings per share**

 

The Company has adopted SFAS No. 128, *Earnings Per Share*, which establishesstandards for computing and presenting earnings per share.  Basic earnings per share is computed bydividing net earnings for the period (adjusted for any cumulative dividends forthe period) by the weighted average number of common shares outstanding duringthe period.  The Company’s potentiallydilutive Common Stock equivalents, consisting of options, convertible debt andconvertible Preferred Stock, are all antidilutive as the Company is in a lossposition for all periods presented. Accordingly basic loss per share is equal to diluted earnings per share.  Annual cumulative preferred dividends havebeen added to net losses for the years ended December 31, 2008, 2007 and2006 to arrive at net loss per share.

 

**Shipping and handling costs**

 

The Company classifies shipping and handling costsas part of Cost of sales in the Statements of Operations.

 

**Research and development costs**

 

Research and development costs are expensed asincurred.

 

**Share-based compensation**

 

On September 26, 2008, the Company’sshareholders approved the 2008 Stock Option Plan and also approved an Offer toExchange Stock Options (the “Exchange Offer”) whereby employees, includingexecutive officers, and Directors may exchange certain outstanding underwateroptions for options issued 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 oneyear. Options issued to non-employee Directors vested immediately.

 

Prior to 2008, the Company had issued options underthree stock-based Director, independent contractor and employee compensationplans as well as several individual option agreements.  Two of these plans and one individual optionagreement have terminated and the unissued and unsold stock under theseterminated plans has been deregistered pursuant to Post-Effective Amendment No. 1to Form S-8 Registration Statement, filed December 2, 2008.  As earlier mentioned, in 2008, the 2008 StockOption Plan was approved and options have been issued under it pursuant to theExchange Offer.

 

 

F-14

Tableof Contents

 

The Company’s share-based payments are accounted forin accordance with the provisions of SFAS No. 123 (Revised 2004) (“SFAS123 R”), *Share-Based Payment*,using the fair value method.  The Companyrecords share-based compensation expense on a straight-line basis over therequisite service period.  In accordancewith the disclosure requirements of SFAS No. 123 R, the Company incurredthe following share-based compensation costs:

 
| ** **                 | ** ** | ** ** | **Years  ended December 31,** |
|----------------------------|------------|------------|------------------------------------|
| ** **                 | ** ** | ** ** | **2008**                           | ** ** | ** ** | **2007** | ** ** | ** ** | **2006** |   |
|                       |       |       |                               |   |   |   |   |   |   |   |
| Cost of sales              |       | $          | (1,797                             | ) | $ | 6,648 |   | $ | 67,561 |   |
|                       |       |       |                               |   |   |   |   |   |   |   |
| Sales and marketing        |       |       | (2,156                             | ) |   | 3,086 |   |   | 101,608 |   |
|                       |       |       |                               |   |   |   |   |   |   |   |
| Research and development   |       |       | (281                               | ) |   | (7,863 | ) |   | 12,418 |   |
|                       |       |       |                               |   |   |   |   |   |   |   |
| General and administrative |       |       | 36,863                             |   |   | 4,607 |   |   | 190,711 |   |
|                       |       | $          | 32,629                             |   | $ | 6,478 |   | $ | 372,298 |   |

 

Options awarded to employees are amortizedover twelve months. The Company amortized one month’s expense in the fourthquarter. Non-employee Directors’ option expense was all expensed in the fourthquarter. The Company recognized a credit for the cancelled options in thefourth quarter, resulting in a net credit to stock option expense for employeesof $7,651.

 

**Recent****Pronouncements**

 

In April 2008, the Financial Accounting StandardsBoard (“FASB”) issued FASB Staff Position (“FSP”) FAS 142-3, “*Determination of the Useful Life of Intangible Assets*”.  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 SFAS 141R, and other GAAP.  This FSP is effective for financialstatements issued for fiscal years and interim periods beginning after December 15,2008.  Early adoption of the standard isprohibited.  FAS 142-3 is effective on January 1,2009.  We are currently evaluating theimpact of FAS 142-3, and have not yet determined the impact, if any, that theadoption of FSP FAS 142-3 will have on the Company’s financial statements.

 

**3.**                **INVENTORIES**

 

Inventories consist of the following:

 
| ** **        | ** ** | **Year  ended December 31,**                                                                                |       |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** ** | **2008**                                                                                                         | ** ** | **2007** |   |
| Raw materials     |       | $                 1,885,158 |       | $                 1,743,990 |   |
| Finished goods    |       | 4,961,975                                                                                                        |       | 5,498,739 |   |
|              |       | 6,847,133                                                                                                        |       | 7,242,729 |   |
| Inventory reserve |       | (205,600                                                                                                         | )          | (205,600 | ) |
|              |       | $                 6,641,533 |       | $                 7,037,129 |   |

 

 

F-15

Tableof Contents

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

 

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

 
|                                      |   | **December 31,** |             |
|-------------------------------------------|--------|-----------------------|------------------|
|                                      |   | **2008**              |             | **2007** |   |
|                                      |   |                  |             |   |   |
| Land                                      |   | $                     |  261,893    |   | $ | 261,893 |   |
| Buildings and building improvements       |   | 5,319,732             |             | 5,314,725 |   |
| Production equipment                      |   | 14,270,577            |             | 14,169,902 |   |
| Office furniture and equipment            |   | 1,825,781             |             | 1,729,199 |   |
| Construction in progress                  |   | 6,287,503             |             | 2,185,976 |   |
| Automobiles                               |   | 102,321               |             | 102,321 |   |
|                                      |   | 28,067,807            |             | 23,764,016 |   |
| Accumulated depreciation and amortization |   | (13,632,140           | )                | (12,280,593 | ) |
|                                      |   | $                     |  14,435,667 |   | $ | 11,483,423 |   |

 

Depreciationexpense for the years ended December 31, 2008, 2007, and 2006 was$1,351,547; $1,370,228; and $1,380,047, respectively.

 
| **5.** | **INTANGIBLE ASSETS** |
|--------|-----------------------|

 

Intangibleassets consist of the following:

 
|                     |   | **December 31,** |          |
|--------------------------|--------|-----------------------|---------------|
|                     |   | **2008**              |          | **2007** |   |
|                     |   |                  |          |   |   |
| License agreement        |   | $                     | 500,000       |   | $ | 500,000 |   |
| Trademarks and patents   |   | 508,743               |          | 419,591 |   |
|                     |   | 1,008,743             |          | 919,591 |   |
| Accumulated amortization |   | (538,628              | )             | (495,031 | ) |
|                     |   | $                     |  470,115 |   | $ |  424,560 |   |

 

In 1995, the Company entered into a licenseagreement with the Chief Executive Officer of the Company for the exclusiveright to manufacture, market, and distribute products utilizing automatedretraction technology.  This licenseagreement was amended July 3, 2008 to include certain additional patentapplications owned by such officer in the definition of “Patent Properties” sothat such additional patent applications would be covered by the license.  This technology is the subject of variouspatents and patent applications owned by such officer of the Company.  The initial licensing fee of $500,000 isbeing amortized over 17 years.  Thelicense agreement also provides for quarterly payments of a 5% royalty fee ongross sales.  The royalty fee expense isrecognized in the period in which it is earned. Royalty fees of $2,168,268; $2,087,596; and $2,093,822 are included inCost of sales for the years ended December 31, 2008, 2007, and 2006,respectively.  Royalties payable underthis agreement aggregated $620,987 and $619,304 at December 31, 2008 and 2007,respectively.  Gross sales upon whichroyalties are based were $43,365,361; $41,751,897; and $42,026,447 for 2008,2007, and 2006, respectively.

 

Amortizationexpense for the years ended December 31, 2008, 2007, and 2006, was$43,597; $43,454; and $41,657, respectively. Future amortization expense for the years 2009 through 2013  is estimated to be $53,000 per year.

 

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

 

In 2006, the Company invested $500,000 in a limitedliability company.  The Company exercisedits option to have that investment returned. The investment was returned in April 2008.

 

 

F-16

Tableof Contents

 

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

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Long-term debt consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                  |       |   |   |
| Note payable to Katie Petroleum.  Interest accrues at prime plus 1%, which  was 5.0% and 8.50%, at December 31, 2008 and 2007, respectively.  Interest only was payable monthly through February 1,  2004.  The original amount of the note  of $3,000,000 was discounted for presentation purposes by $299,346 for stock  options issued in conjunction with the debt and $412,500 for the intrinsic  value of a beneficial conversion feature of the debt.  Beginning March 1, 2004, the loan is  payable in equal installments of principal and interest payments (except for  changes in the interest rate) of approximately $37,000 and matures on September 30,  2012.  Guaranteed by an officer.  Approximately $163,736 of the principal  payment was converted into 40,934 shares of Common Stock as of March 1,  2006.  Not otherwise  collateralized.  Convertible into  Common Stock at $4.00 per share at the option of the holder.                                           |       | $                     | 1,437,977  |   | $ | 1,735,392 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| 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, 2008  and  2007 was 4.25% and 7.50%,  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. |       | 2,241,145             |       | 2,362,852 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 12,711                |       | 23,793 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Note payable to GMAC.  Sixty (60) monthly payments at $427.  Interest is zero percent.  Collateralized by a 2005 Chevrolet van.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | 8,561                 |       | 13,128 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Construction line of  credit 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 bears interest at WSJPR plus  0.25%.  Payments are interest only and the  line of credit matures in February 2010. The line of credit is secured  by the Company’s land and buildings. The Company has obtained an intent to  refinance this line of credit with Lewisville State Bank. Terms of the  refinanced loan are expected to be principal and interest payments of  approximately $35,000 based on a 21 year amortization and maturing in 10  years.                                                                                                                                                                                                                                                                                                         |       | 2,847,006             |       | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 6,547,400             |       | 4,135,165 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |                  |       |   |   |
| Less: current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | (451,865              | )          | (387,906 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | $                     | 6,095,535  |   | $ | 3,747,259 |   |

 

The aggregate maturities of long-term debt asof December 31, 2008, are as follows:

 

|       |   |      |      |
|------------|--------|-----------|-----------|
| 2009       |   | $         | 451,865   |   |
| 2010       |   | 5,365,563 |      |
| 2011       |   | 403,687   |      |
| 2012       |   | 326,285   |      |
| 2013       |   | —    |      |
| Thereafter |   | —    |      |
|       |   | $         | 6,547,400 |   |

 

 

F-17

Tableof Contents

 

 **8.****COMMITMENTS AND CONTINGENCIES**

 

Litigation

 

On August 12, 2005, the Company filed a lawsuitagainst Abbott in the United States District Court in the Eastern District ofTexas, Texarkana Division.  The Companyis alleging fraud and breach of contract in connection with the National Marketingand Distribution Agreement dated as of May 4, 2000, which was terminatedon October 15, 2003.  The Company isseeking damages which it estimates to be in millions of dollars of lostprofits, out of pocket expenses, and other damages.  In addition, the Company is seeking punitivedamages, pre- and post-judgment interest, and attorney’s 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.  Somediscovery has already taken place (related to the hearings addressing the priormotion to compel arbitration) and additional discovery is underway.  The District Court has issued a schedulingorder calling for trial in January 2010.

 

In August 2006, the Company was sued byOccupational and Medical Innovations Limited (“OMI”) in Federal Court ofAustralia, alleging that two letters written to OMI by outside counselcontained unjustified threats of patent infringement, but seeking nodamages.  OMI later amended its complaintto seek a declaratory judgment that OMI does not infringe Australian Patent No. 701878,again seeking no damages.  Following aone-day trial in June 2007, the Court held that one of the two letterswritten by outside counsel contained a threat of patent infringement, andawarded costs to OMI.  Following aone-day trial in June 2008, the Court issued a declaratory judgment in August 2008stating that OMI’s syringe does not infringe the Australian patent no. 701878but also awarding costs to the Company. The Company and OMI subsequently agreed that each party will bear itsown costs, and the matter was settled in October 2008.

 

In April 2008, the Company sued OMI in theUnited States District Court for the Eastern District of Texas, Tyler Division,alleging that OMI has infringed two U.S. patents that are not at issue in theAustralian litigation (6,572,584 and 7,351,224).  The Company also alleges theft ofconfidential information, intentional interference with contracts and engagingin false advertising that wrongfully disparages and mischaracterizes theCompany’s syringe products.  The Companyfurther alleges that OMI made false allegations regarding the source of originof its safety syringe products being offered in the U.S.  The Company seeks injunctive relief, unspecifieddamages (including treble damages) and reimbursement of attorneys fees in thesuit.  OMI has counterclaimed against theCompany, seeking declaratory judgments of non-infringement and invalidity ofthe asserted patents.  OMI is not seekingmonetary damages.  Trial is set for December 2009and discovery is ongoing.

 

In June 2007, the Company sued Becton Dickinsonand Company (“BD”) in the United States District Court for the Eastern Districtof Texas, Marshall Division, alleging infringement of three patents (5,578,011;5,632,733; and 6,090,077) and violations by BD of the federal and stateantitrust laws, and of the Lanham Act. The Company subsequently dropped the 5,578,011 patent allegations fromthe lawsuit.  The Company and an officer,a co-plaintiff, are seeking injunctive relief, unspecified monetary damages andreimbursement of attorneys fees in the suit. BD counterclaimed for non-infringement and invalidity of the assertedpatents.  In January 2008, the Courtsevered the patent claims from the other claims pending resolution of thepatent dispute, which is set for trial in October 2009.  In April 2008, the Company and that sameofficer sued BD in the United States District Court for the Eastern District ofTexas, Marshall Division, alleging infringement of another recently issuedpatent (7,351,224), and seeking injunctive relief, unspecified monetary damages(including treble damages) and reimbursement of attorneys fees.  BD counterclaimed for non-infringement andinvalidity of the asserted patent.  TheCompany and officer moved to consolidate this case with the other patent caseagainst BD that was pending in Marshall and the Court granted the Company’smotion, consolidating this case with the above-stated case filed in June 2007.  The Court issued its claim construction orderin this matter on January 4, 2009.

 

 

F-18

Tableof Contents

 

In September 2007, BD and MDC InvestmentHoldings, Inc. (“MDC”) sued the Company in the United States DistrictCourt for the Eastern District of Texas, Texarkana Division, initially allegingthat the Company is infringing two U.S. patents of MDC (6,179,812 and7,090,656) that are licensed to BD. BD and MDC seek injunctive relief andunspecified damages.  The Companycounterclaimed for declarations of non-infringement, invalidity andunenforceability of the asserted patents. The plaintiffs subsequently dropped allegations with regard to patent no.7,090,656 and the Company subsequently dropped its counterclaims forunenforceability 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.

 

InMarch 2008, MedSafe Technologies LLC (“MedSafe”) initially sued theCompany and BD in the United States District Court for the District of SouthCarolina, Greenville Division, alleging infringement of a MedSafe patent(6,074,370) and seeking injunctive relief and unspecified monetarydamages.  The Company counterclaimed fordeclarations of non-infringement, invalidity, and unenforceability of theasserted patent.  BD subsequently settledwith MedSafe.  Effective December 22,2008, the Company resolved its litigation with MedSafe by entering into aPATENT LICENSE/ASSIGNMENT AND SETTLEMENT AGREEMENT with MedSafe and SyringeDevelopment Partners, LLC; William B.S. Pressly, Sr.; Charles A Vaughn, Sr.;G. Samuel Brockway; and Thomas R. Ellis (collectively, the “MedSafe Plaintiffs”)(the “MedSafe Settlement Agreement”).  TheMedSafe Settlement Agreement ends the patent infringement litigation betweenthe Company and MedSafe. 

 

In September 2008, the Company and an officersued Safety Medical International (“SMI”) in the United States District Courtfor the Eastern District of Texas, Tyler Division, alleging infringement ofU.S. patent nos. 6,572,584 and 7,351,224 and seeking injunctive relief,unspecified monetary damages and reimbursement of attorneys fees.  SMI has counterclaimed against the Company,seeking declaratory judgments of non-infringement and invalidity of theasserted patents.  SMI is not seeking monetarydamages.  No trial date has been set anddiscovery has not yet commenced.

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

 

Theprovision for income taxes consists of the following:

 
|                                    | ** ** | **For the  Years Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current tax provision (benefit)         |       |                                       |       |   |   |   |   |
| Federal                                 |       | $                                          | —     |   | $ |  (143,459) |   | $ |  (1,696,318 | ) |
| State                                   |       | —                                     |       | (1,310,158 | ) | (117,709 | ) |
| Total current provision  (benefit)      |       | —                                     |       | (1,453,617 | ) | (1,814,027 | ) |
|                                    |       |                                       |       |   |   |   |   |
| Deferred tax provision (benefit)        |       |                                       |       |   |   |   |   |
| Federal                                 |       | —                                     |       | — |   | 458,232 |   |
| State                                   |       | —                                     |       | — |   | 75,833 |   |
| Total deferred tax  provision (benefit) |       | —                                     |       | — |   | 534,065 |   |
| Total income tax provision  (benefit)   |       | $                                          | —     |   | $ |  (1,453,617 | ) | $ |  (1,279,962 | ) |

 

TheCompany recognized a tax benefit in 2007 primarily due to the net effect of astate tax refund for prior years that had not been previously recognized.

 

Deferredtaxes are provided for those items reported in different periods for income taxand financial reporting purposes.  Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and liabilities are presented below:

 

TheCompany has $13,935,832 in tax benefits attributable to carry back losses forfederal tax purposes.  The losscarryforwards will begin to expire in 2027 for federal tax purposes and willbegin to expire for state tax purposes in 2012.

 

 

F-19

Table of Contents

 
|                                               |    | **December 31,** |   |
|----------------------------------------------------|---------|-----------------------|--------|
|                                               |    | **2008**              |   |   | **2007** |   |
| Deferred tax assets                                |    |                  |   |   |   |   |
| Net  operating loss carryforwards                  |  $ | 5,285,164             |   | $ | 1,871,316 |   |
| Accrued expenses and  reserves                     |    | 1,261,168             |   |   | 1,204,160 |   |
| Employee option expense                            |    | 31,669                |   |   | 484,212 |   |
| Inventory                                          |    | 435,578               |   |   | 402,405 |   |
| Non-employee option  expense                       |    | 198,425               |   |   | 313,557 |   |
| Deferred tax assets                                |    | 7,212,004             |   |   | 4,275,650 |   |
| Deferred tax liabilities                           |    |                  |   |   |   |   |
| Property and equipment                             |    | (1,178,618            | )      |   | (1,341,293 | ) |
| Beneficial conversion  feature of debt - current   |    | —                |   |   | (20,626 | ) |
| Beneficial conversion  feature of debt - long term |    | —                |   |   | (36,200 | ) |
| Deferred tax liabilities                           |    | (1,178,618            | )      |   | (1,398,119 | ) |
| Net deferred assets                                |    | 6,033,386             |   |   | 2,877,531 |   |
| Valuation allowance                                |    | (6,033,386            | )      |   | (2,934,357 | ) |
| Net deferred tax liabilities                       | $       | —                |   | $ | (56,826 | ) |

 

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

 
|                                               | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| 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         |       | 32.1                  |       | 27.2 |   | 10.7 |   |
| Permanent differences                              |       | 0.4                   |       | 1.0 |   | 4.0 |   |
| Cancellation of options under Exchange Offer       |       | 5.4                   |       | — |   | — |   |
| State tax refund                                   |       | —                |       | (12.0 | ) | — |   |
| Return to accrual adjustments                      |       | —                |       | 3.2 |   | — |   |
| Other                                              |       | —                |       | 1.2 |   | (1.7 | ) |
| Effective tax (benefit)  rate                      |       | —                | %          | (17.3 | )% | (24.9 | )% |

 

InJune 2006, the Financial Accounting Standards Board (“FASB”) issuedFinancial Interpretation No. 48, *Accounting for Income TaxUncertainties* (“FIN 48”).  FIN48 is effective for years beginning after December 15, 2006.  FIN 48 prescribes a recognition threshold andmeasurement attribute for financial statement recognition and measurement of atax position taken or expected to be taken in a tax return.  FIN 48 requires that a company evaluatewhether it is “more-likely-than-not” that a tax position will be sustainedbased upon the technical merits of the position.  Measurement of the tax position is based uponthe largest amount of benefit that is greater than 50% likely of being realizedupon ultimate settlement.  The Companyadopted FIN 48 on January 1, 2007. FIN 48 had no material effect on the financial statements uponadoption.  During 2007, the Companyreserved approximately $100,000 for state nexus issues.  During 2008, the Company also recorded astate tax receivable of approximately $100,000 attributable to amended returns.

 

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, 2005, 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** |
|---------|-------------------------------|

 

**Preferred Stock**

 

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.

 

 

F-20

Tableof Contents

 

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.

 

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, 2008 and 2007, respectively.  Holders of Series I Class B Stockare entitled to receive a cumulative annual dividend of $.50 per share, payablequarterly if declared by the Board of Directors.  In 2004, the Company paid $2,550,000 individends.  In 2007, the Company paid$262,819 in dividends.  At December 31,2008 and 2007 approximately $108,000 and $36,000, respectively, of dividendswhich 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 in2008.  In the event of voluntary orinvoluntary dissolution, 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, 2008 and 2007. 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, 2008 and2007, approximately $331,000 and $111,000, 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 theevent the Company files an initial registration statement under the SecuritiesAct of 1933.  Pursuant to these terms, noshares of Series II Class B Stock were converted into Common Stock in2008.  In the event of voluntary or involuntarydissolution, liquidation or winding up of the Company, holders of Series IIClass B Stock then outstanding are entitled to $12.50 per share, plus allaccrued and unpaid dividends, after distribution obligations to holders of Series IClass B Stock have been satisfied and prior to any distributions toholders of Series III Class B Stock, Series IV Class BStock, Series V Class B Stock or Common Stock.

 

Series IIIClass B

 

Therewere 1,160,445 shares of $1 par value Series III Class B Stock issuedand 130,245 shares outstanding at December 31, 2008 and 2007,respectively.  Holders of Series IIIClass B Stock are entitled to receive a cumulative annual dividend of$1.00 per share, payable quarterly if declared by the Board of Directors.  At 

 

 

F-21

Tableof Contents

 

December 31,2008 and 2007, approximately $3,117,000 and $2,985,000, respectively, ofdividends which have not 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 2008.** **In the event of voluntary orinvoluntary dissolution, liquidation or winding up of the Company, holders of Series IIIClass B Stock then outstanding are entitled to $12.50 per share, plus allaccrued and unpaid 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 and 553,500 shares outstanding at December 31,2008 and 2007, respectively. Holders of Series IV Class B Stock areentitled to receive a cumulative annual dividend of $1.00 per share, payablequarterly, if declared by the Board of Directors.  Holders of Series IV Class B Stockgenerally have no voting rights.  At December 31,2008 and 2007, approximately $7,030,000 and $6,478,000, respectively, ofdividends which have 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, 1,000****shares of Series IVClass B Stock were converted into Common Stock in 2008.  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 liquidating distributionsof $11.00 per share, plus accrued and unpaid dividends after distributionobligations 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 and 1,282,471 outstanding at December 31,2008 and 2007, respectively.  Holders of Series VClass B Stock 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 31,2008 and 2007, approximately $3,297,000 and $2,898,000, 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, 43,650 shares of Series V Class B Stock were convertedinto Common Stock in 2008.  In the eventof voluntary or involuntary liquidation, dissolution, or winding up of theCompany, holders of Series V Class B Stock then outstanding areentitled to receive liquidating distributions of $4.40 per share, plus accruedand unpaid dividends after distribution obligations to Series I Class BStock, Series II Class B Stock, Series III Class B Stock,and Series IV Class B Stock have been satisfied and prior to anydistribution to the holders of the Common Stock.

 

**Common stock**

 

TheCompany is authorized to issue 100,000,000 shares of no par value Common Stock,of which 23,800,064 and 23,755,414 shares were issued and outstanding at December 31,2008 and 2007, respectively.

 

 

F-22

Table of Contents

 
| **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 years ended December 31, 2007 and 2006, the Company paid$14,500 and $34,800, respectively, under this lease.  This lease term expired in June 2007.

 

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, 2008, 2007, and 2006totaled $98,401; $129,618; and $91,883, respectively.

 

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

 

Duringthe years ended December 31, 2008, 2007, and 2006, the Company paid$40,191; $30,397; and $24,162, 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.  The 1999 Plan and 2008 Plan are the only planswith stock options currently being awarded. The Company has reserved an aggregate 7,000,000 shares of Common Stockfor issuance upon the exercise of options under these plans. We do not intendto issue any options under the 1999 Stock Option Plan.

 

On September 26, 2008, the Company’sshareholders approved the Exchange Offer whereby employees, including executiveofficers, and Directors may exchange certain outstanding underwater options foroptions issued 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 the cancellationof the tendered options.  Options issuedto employees vest in one year.  Optionsissued to non-employee Directors vested immediately.

 

The Company also had options for common shares outstanding under the1996 Incentive Stock Option Plan and the 1996 Stock Option Plan for Directorsand 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.

 

A committee of independent Directors appointed by the Board ofDirectors administers all plans and recommends to the Board exercise prices atwhich options are granted.  Shares issuedupon exercise of options come from the Company’s authorized but unissued CommonStock.  The options vest over periods upto three years from the date of grant and generally expire ten years after thedate of grant.  Unvested options issuedunder the 2008 Stock Option Plan expire immediately after termination ofemployment.

 

 

F-23

Table of Contents

 

**Employee options**

 

A summary of Director, officer, and employee options granted andoutstanding under the Plans is presented below:

 
| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                    | ** ** | **Shares**                                  | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of period                            |       | 2,187,455                                   |       | $ | 8.80 |   | 2,417,295 |   | $ | 8.58 |   | 2,495,125 |   | $ | 8.38 |   |
| Granted                                                       |       | 962,683                                     |       | 1.30 |   | — |   | — |   | — |   | — |   |
| Exercised                                                     |       | —                                      |       | — |   | — |   | — |   | (49,780 | ) | (1.00 | ) |
| Forfeited                                                     |       | (2,092,875                                  | )          | (8.79 | ) | (229,840 | ) | (6.50 | ) | (28,050 | ) | (4.47 | ) |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of period                                  |       | 1,057,263                                   |       | $ | 1.99 |   | 2,187,455 |   | $ | 8.80 |   | 2,417,295 |   | $ | 8.58 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of period                                  |       | 147,580                                     |       | $ | 6.25 |   | 2,187,455 |   | $ | 8.80 |   | 2,325,770 |   | $ | 8.57 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options granted  during period |       |                                        |       | $ | 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 averageassumptions used for grants in 2008: no dividend yield; expected volatility of67.53 percent; risk free interest rate of 2.83 percent; and an expected life of8.61 to 8.69 years.  The options wereissued under the 2008 Stock Option Plan. No options were issued in 2007 or2006.

 

Thefollowing table summarizes information about Director, officer, and employeeoptions outstanding under the aforementioned plans at December 31, 2008:

** **

| ** **   | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** ** | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** ** | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** ** | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** ** | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
| $            | 10.00      |            | 58,500     |            | 0.89       |            | 58,500     |   |
| $            | 6.90       |            | 15,080     |            | 3.75       |            | 15,080     |   |
| $            | 8.65       |            | 4,700      |            | 4.48       |            | 4,700      |   |
| $            | 7.50       |            | 15,000     |            | 0.36       |            | 15,000     |   |
| $            | 8.87       |            | 1,300      |            | 5.36       |            | 1,300      |   |
| $            | 1.30       |            | 962,683    |            | 9.89       |            | 53,000     |   |

 

TheCompany recorded $98,473 (offset by a credit of $65,844 for surrendered stockoptions); $6,478; and $372,298 as stock-based compensation expense in 2008,2007, and 2006, respectively.  The totalintrinsic value of options exercised was $0; $0; and $207,924 in 2008, 2007,and 2006, respectively.  The aggregateintrinsic value of options outstanding at December 31, 2008 was $0.  The total compensation cost related tonon-vested stock options to be recognized in the future was $635,511 at December 31,2008.

 

 

F-24

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**Non-employee options**

 

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

 
| ** **                                                    | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                    | ** ** | ** **                                  | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                                                    | ** ** | **Shares**                                  | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** | **Shares** | ** ** | **Price** | ** ** |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at beginning of period                            |       | 549,700                                     |       | $ | 8.69 |   | 579,700 |   | $ | 8.50 |   | 607,200 |   | $ | 8.16 |   |
| Granted                                                       |       | —                                      |       | — |   | — |   | — |   | — |   | — |   |
| Exercised                                                     |       | —                                      |       | — |   | — |   | — |   | (25,000 | ) | (1.00 | ) |
| Forfeited                                                     |       | (95,000                                     | )          | (10.00 | ) | (30,000 | ) | (5.00 | ) | (2,500 | ) | (1.00 | ) |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Outstanding at end of period                                  |       | 454,700                                     |       | $ | 8.41 |   | 549,700 |   | $ | 8.69 |   | 579,700 |   | $ | 8.50 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of period                                  |       | 454,700                                     |       | $ | 8.41 |   | 549,700 |   | $ | 8.69 |   | 579,700 |   | $ | 8.50 |   |
|                                                          |       |                                        |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average fair value of options  granted during period |       |                                        |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |

 

Nooptions were issued in 2008, 2007 or 2006.

 

Thefollowing table summarizes information about non-employee options outstandingunder the aforementioned plans at December 31, 2008:

 

| ** **   | ** ** | ** **      | ** ** | **Weighted**    | ** ** | ** **      | ** ** |
|--------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **   | ** ** | ** **      | ** ** | **Average**     | ** ** | ** **      | ** ** |
| ** **   | ** ** | ** **      | ** ** | **Remaining**   | ** ** | ** **      | ** ** |
| **Exercise** | ** ** | **Shares**      | ** ** | **Contractual** | ** ** | **Shares**      | ** ** |
| **Prices**   | ** ** | **Outstanding** | ** ** | **Life**        | ** ** | **Exercisable** | ** ** |
| $10.00       |       | 222,200         |       | 1.16            |       | 222,200         |       |
| $6.90        |       | 232,500         |       | 3.75            |       | 232,500         |       |

 
| **13.** | **LITIGATION SETTLEMENTS** |
|---------|----------------------------|

 

EffectiveDecember 22, 2008, the Company resolved its litigation with MedSafe byentering into a PATENT LICENSE/ASSIGNMENT AND SETTLEMENT AGREEMENT with MedSafeand Syringe Development Partners, LLC; William B.S. Pressly, Sr.; CharlesA Vaughn, Sr.; G. Samuel Brockway; and Thomas R. Ellis (collectively, the “MedSafePlaintiffs”) (the “MedSafe Settlement Agreement”).  This MedSafe Settlement 

 

 

F-25

Tableof Contents

 

Agreement ends the patent infringement litigation between the Companyand MedSafe.  

 
| **14.** | **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 90% of their compensation, or thestatutory prescribed limit, if less.  TheCompany may, at its discretion, match employee contributions.  The Company made matching contributions ofapproximately $122,000; $111,000; and $0 in 2008, 2007, and 2006, respectively.

 
| **15.** | **BUSINESS SEGMENTS** |
|---------|-----------------------|

** **
| ** **          | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**   | ** ** |
|---------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Domestic sales      |       | $         | 23,244,370 |      | $          | 21,461,717 |       | $ | 22,240,347 |   |
| International sales |       | 4,654,948 |       | 4,828,003 |       | 3,084,172  |       |
| Total sales         |       | $         | 27,899,318 |      | $          | 26,289,720 |       | $ | 25,324,519 |   |
|                |       |      |       |      |       |       |       |
| Long-lived assets   |       |      |       |      |       |       |       |
| Domestic            |       | $         | 14,435,667 |      | $          | 11,483,423 |       | $ | 12,212,140 |   |
| Foreign             |       | $         | —     |      | $          | —     |       | $ | — |   |

 

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 United States currency.

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

 

The selected quarterly financial data for the periods ended December 31,2008 and 2007, have been derived from the Company’s unaudited financialstatements and include all adjustments, consisting only of normal recurringadjustments, necessary for a fair presentation of the results of the interimperiods.

 
| ** **                             | ** ** | **(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% |   |
|                                        |            |                                                                                                                     |            |                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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

 

 

F-27

# **Table of Contents**

 

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

# ** **

None.

 

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

 

Disclosure Controls and Procedures

 

Pursuant to paragraph (b) of Rule 13a-15or Rule 15d-15 of the Securities Exchange Act of 1934 (the “Exchange Act”)and on March 30, 2009, Management, with the participation of ourPresident, Chairman, and Chief Executive Officer, Thomas J. Shaw (the “CEO”),and our Vice President and Chief Financial Officer, Douglas W. Cowan (the “CFO”),acting in their capacities as our principal executive and financial officers,evaluated the effectiveness of our disclosure controls and procedures, asdefined in Rule 13a-15(e) or Rule 15d-15(e).  The CEO and CFO concluded, as of December 31,2008 (the end of the period covered by the report), based on the evaluation ofthese controls and procedures required by paragraph (b) of Rule 13a-15or Rule 15d-15 that our disclosure controls and procedures are effectiveto ensure that information required to be disclosed in our periodic reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms.

 

**Management’s Annual Report on Internal Control over Financial Reporting**

 

Management is responsible for establishing andmaintaining adequate internal control over our financial reporting as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act.Management used the *Internal Control -Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”) to evaluate the effectivenessof our internal control over financial reporting as required by paragraph (c) ofRule 13a-15 or Rule 15d-15. Management, with the participation of our CEO and CFO, concluded thatour internal control over financial reporting as of December 31, 2008, waseffective.  No material weaknesses in ourinternal control 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 Securities and Exchange Commission thatpermit us to provide only Management’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.

 

**Changes in Internal Control over Financial Reporting**

 

There have been no changes during the fourth quarterof 2008 or subsequent to December 31, 2008, 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. 

 

**Item 9B.Other Information.**

 

We will hold our annual meeting on September 25,2009, at the Little Elm City Hall; 100 West Eldorado Parkway; Little Elm,Texas, 75068.  Beginning this year, wewill provide proxy disclosures to our shareholders utilizing the new notice andaccess method.  Accordingly, shareholderswill no longer receive a Proxy Statement and proxy card in the mail.  Instead they will receive a short one page noticewith the information allowed by the SEC which will give the shareholders theweb address where a copy of the Proxy Statement and related materials may befound.  Upon reaching such address, theshareholder may read or print the documents and may (after submitting theiraccount number) vote their shares.

 

Prior to the annual meeting, we expect to solicit the preferredshareholders to amend the various Certificates of Designation to allowpurchases of stock ranking junior to the preferred stock while dividends are inarrears. 

 

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The bylaws allow for uncertificated shares.  If any shareholder is interested in holdingtheir shares in electronic form only (which the Company does not recommend) youmay initiate that process by contacting Mr. Douglas Cowan at the Company.

 

Mr. Thomas Shaw’s Employment Agreement wasamended in 2008 to avoid adverse tax consequences to Mr. Shaw created bypassage of the American Jobs Creation Act of 2004.  A summary of the existing terms of suchagreement may be found in **Item 11**COMPENSATIONDISCUSSION AND ANALYSIS-**Compensation Pursuant toEmployment Agreement.**

 

**PART III**

 

**Item 10.Directors, Executive Officers and Corporate Governance.**

 

The following table sets forth informationconcerning our Directors, executives, and certain of our significant employeesas of the date of this report.  Our Boardof Directors 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 terms.

 
| **Name**                  | ** ** | ** ** | ** ** | **Age**                                                                                | ** ** | **Position** | ** ** | ** ** | **Term as  Director  Expires  ** | ** ** |
|---------------------------|------------|------------|------------|----------------------------------------------------------------------------------------|------------|--------------|------------|------------|--------------------------------------------|------------|
| **EXECUTIVES**            |       |       |       |                                                                                   |       |         |
| Thomas  J. Shaw           |       | 58         |       | Chairman,  President, Chief Executive Officer, and Class 2 Director               |       |         | 2010       |       |
| Douglas  W. Cowan         |       | 65         |       | Vice  President, Chief Financial Officer, Treasurer, and Class 2 Director         |       |         | 2010       |       |
| Kathryn  M. Duesman       |       | 46         |       | Executive  Director, Global Health                                                     |       |         | N/A        |       |
| Russell  B. Kuhlman       |       | 55         |       | Vice  President, Sales                                                                 |       |         | N/A        |       |
| Michele  M. Larios        |       | 42         |       | Vice  President, General Counsel, and Secretary                                        |       |         | N/A        |       |
| Lawrence  G. Salerno      |       | 48         |       | Director  of Operations                                                                |       |         | N/A        |       |
| Steven  R. Wisner         |       | 51         |       | Executive  Vice President, Engineering & Production and Class 2 Director |       |         | 2010       |       |
|                      |       |       |       |                                                                                   |       |         |       |       |
| **INDEPENDENT DIRECTORS** |
| Marco  Laterza            |       | 61         |       | Class 1  Director                                                                 |       |         | 2009       |       |
| Amy  Mack                 |       | 41         |       | Class 1  Director                                                                 |       |         | 2009       |       |
| Marwan  Saker             |       | 53         |       | Class 2  Director                                                                 |       |         | 2010       |       |
| Clarence  Zierhut         |       | 80         |       | Class 2  Director                                                                 |       |         | 2010       |       |
|                      |       |       |       |                                                                                   |       |         |       |       |
| **SIGNIFICANT EMPLOYEES** |
| Shayne  Blythe            |       | 40         |       | Director  of Sales and Marketing Logistics                                             |       |         | N/A        |       |
| John  W. Fort III         |       | 40         |       | Director  of Accounting                                                                |       |         | N/A        |       |
| James  A. Hoover          |       | 61         |       | Director  of Quality Assurance                                                         |       |         | N/A        |       |
| R.  John Maday            |       | 48         |       | Production  Manager                                                                    |       |         | N/A        |       |
| Jules  Millogo            |       | 48         |       | Medical  Director                                                                      |       |         | N/A        |       |
| Judy  Ni Zhu              |       | 50         |       | Research  and Development Manager                                                      |       |         | N/A        |       |
|                           |            |            |            |                                                                                        |            |              |            |            |                                            |            |  |

 

**Executives**

 

Thomas J. Shaw, our Founder, has served as Chairmanof the Board, President, Chief Executive Officer, and Director since ourinception.  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.

 

 

26

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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.  He isresponsible for our financial, accounting, risk management, and forecastingfunctions.  Mr. Cowan has a Bachelorof Business Administration from Texas Technological College.  He is a CPA licensed in Texas.

 

Kathryn M. Duesman, RN, joined us in 1996 andcurrently serves as the Executive Director, Global Health.  She 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 1997and is 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 nonpubliccompany.  He has a sales background inthe medical service industry that includes his most recent work for ICU Medical(formerly Bio-Plexus), a medical device manufacturing company, from 1994 to1997, where he developed strategic marketing plans for new safetyproducts.  Prior to his work there, Mr. Kuhlmanworked as Director of Sales and Marketing for Ryan Winfield Medical, Inc.,a medical device manufacturing company, from 1989 to 1994, where he launchedseveral new products, developed strategic sales territories, and was thetrainer for Sales and Regional Managers. Mr. Kuhlman also worked for BD Vacutainer® Systems, a medical productscompany, in several territories from 1980 to 1989, where he was recognized asthe National Sales Representative for the year 1987.  Mr. Kuhlman holds a Bachelor of Sciencein Finance from the University of Tennessee.

 

Michele M. Larios joined us in February 1998and currently serves as our Vice President, General Counsel and Secretary.  Ms. 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 Ms. Lillian E. Salerno, a shareholder 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.  Mr. Wisner’s responsibilities includethe management of engineering, production, Chinese operations, andinternational sales.  Mr. Wisner hasover 30 years of experience in product design, development, andmanufacturing.  Mr. Wisner holds aBachelor of Science in Computer Engineering from Iowa State University.

 

**Independent Directors**

 

Marco Laterza joined us as a Director effective asof March 22, 2005.  Since 1988, Mr. Laterzahas owned 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 Chief Financial Officer for EZ Blue Software Corporation, adevelopment stage software company. Formerly, Mr. Laterza was employed in a number of positions from1977 to 1985 with El Paso Natural Gas Company eventually serving as itsDirector of Accounting.  Mr. Laterzareceived his 

 

 

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Bachelorsof Business 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.  Since 2003, she has owned andoperated SPA 02, 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 inTexas.

 

Marwan Saker joined our Board of Directors in June 2000.  Since 1983, Mr. Saker has served asChief Executive Officer of Sovana, Inc., an export management company thatsupplies agricultural equipment and supplies to overseas markets.  Since 2000, he has served as Director ofConsolidated Food Concepts Inc. Since 1986, he has served as President ofInternational Exports & Consulting Inc., an export management,consulting, and distribution company. Since 2000, he has served as Vice President of Hanneke Corp., anoverseas sourcing company.  From 1998 to2001, he served as a Member of My Investments, LLC, an equity investmentcompany.  Since 1999, he has served asPresident of Saker Investments Inc., a company that manages an investmentportfolio.  Since 1998, he has served asa General Partner of Maya Investments, Ltd., an investment management limitedpartnership.  He also serves as a Memberof MMDA, LLC, a real estate development company.  He is also involved with Fig LandDevelopment.  Mr. Saker has acted asa representative for U.S. companies seeking distribution, licensing, andfranchising 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 ofDirectors since April 1996.  Mr. Zierhutfounded an industrial design firm in 1955, Zierhut Design, now Origin Design,that develops new products from concept through final prototypes.  He ceased management of the company for aperiod of time but has since resumed his executive duties.  During his professional career, Mr. Zierhuthas created over 3,000 product designs for more than 350 companies worldwide, invirtually every field of manufacturing, and has won many international awardsfor design excellence.  His clients haveincluded Johnson & Johnson, Abbott, Gould, and McDonnell Douglas.  He received a Bachelor of Arts from ArtCenter College of Design in Los Angeles, California.

 

**Significant Employees**

 

Shayne Blythe has been with us for over ten yearsand is our Director of Sales and Marketing Logistics.  She is responsible for developing andimplementing strategic directions, objectives, comprehensive sales andmarketing plans, and programs.  Inaddition, she directs and oversees all aspects of the distribution process andcustomer service policies in order to monitor and maintain customersatisfaction.  Prior to joining us, Ms. Blytheassisted Mr. Shaw with the original 3cc syringe and other SBIR grantprojects.  Ms. Blythe has aBachelors of Business Administration in management from the AmericanInternational 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 interim reviews by ourindependent accountants, as well as our cost accounting and forecastingfunctions.  Prior to joining us, heserved 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 andis our Director of Quality Assurance. Prior to his becoming Director of Quality Assurance he was ProductionManager.  He is responsible for ourquality assurance functions.  Mr. Hooverhas also developed and implemented FDA required procedures and has beeninvolved in the FDA 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 

 

 

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Off-LineMolding, Operating Room/Critical Care. In this capacity, he managed several departments, ran several productlines, and hired and supervised over 200 employees.  While at Sherwood, he also gained experiencewith one of the country’s first safety syringes, the Monoject®.

 

R. John Maday joined us in July 1999 and is 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 25 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.

 

Dr. Jules Millogo has served as our MedicalDirector since May 2007.  His dutiesinclude representing us at scientific forums and working with the Ministries ofHealth and international organizations on developing injection safety andhealth workers safety standards and policies. From 2004 to April 2007 Dr. Millogo was employed by John Snow, Inc.as the Project Director for the Washington-based Making Medical InjectionsSafer Project (“MMIS”), a $150 million project funded by the U.S. government todecrease unsafe injections and the medical transmission of HIV/AIDS, andhepatitis B and C as part of the U.S. President Emergency Plan for AIDS Relief(PEPFAR which was administered by PATH). Under his leadership, the MMIS Project trained more than 100,000 healthworkers in safer injection practices and donated more than 100 million safetysyringes to high HIV prevalence countries in Africa and the Caribbean.  From 2001 to 2004 Dr. Millogo was atechnical advisor for John Snow, Inc. Dr. Millogo’s experience includes working in several African andAsian countries under the World Health Organization.  Dr. Millogo holds a Master’s of Sciencein Epidemiology of Communicable Diseases from the University College of London,UK, and a MD from the University of Ouagadougou, Burkina Faso.  Dr Millogo is fluent in French, English, andseveral African languages.

 

Judy Ni Zhu joined us in 1995 and is our Researchand Development Manager.  Her primaryfocus is 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 3cc 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 3cc 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 3cc 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.

 

FAMILY RELATIONSHIPS

 

There are no family relationships among theabove persons except as set forth above.

 

DIRECTORSHIPS IN OTHER COMPANIES

 

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

 

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

 

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

 

SECTION 16(a) BENEFICIAL OWNERSHIPREPORTING COMPLIANCE

 

Section 16 of the Exchange Act requires ourDirectors, executive officers, and persons who own more than 10 percent of aregistered class of our equity securities to file with the SEC initial reportsof beneficial ownership (Form 3) and reports of changes in beneficialownership (Forms 4 and 5) of our Common Stock and our other equity 

 

 

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securities.  Officers, Directors, and greater than 10percent shareholders are required by the SEC’s regulations to furnish us withcopies of all Section 16(a) reports they file.

 

Ms. Michele M. Larios, an executive officer,filed a Form 5 on an untimely basis. The Form 5 addressed a bona fide gift (her two children’s receiptof 500 shares each of Common Stock).

 

CODE OF ETHICS

 

Effectiveas of March 9, 2004, we adopted a code of ethics that applies to allemployees, including, but not limited to, our principal executive and financialofficers.  Our Code of Business Conductand Ethics is designed to deter wrongdoing and to promote:

 

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

 

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

 

3.                                     Compliance with applicable governmental laws,rules, and regulations;

 

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

 

5.                                       Accountability for adherence to the code.

 

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.

 

AUDIT COMMITTEE

 

We have a separately-designated standingAudit Committee established in accordance with Section 3(a)(58)(A) ofthe Exchange Act consisting of Messrs.  Clarence Zierhut, Marco Laterza,and Marwan Saker.  Each of the members ofthe Audit Committee is independent as determined by the NYSE Alternext rules andItem 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

 

Audit Committee Financial Expert

 

The Board of Directors has determined that wehave at least 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 Alternext.

 

**Item 11.Executive Compensation.**

 

COMPENSATIONDISCUSSION AND ANALYSIS

 

**The Objectives 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 Compensation Programis intended to accomplish the following:

 

 

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attract and retain highly talented and productiveexecutive officers;

 

provide incentives and rewards for superiorperformance by the executive officers; and

 

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

 

**What the Compensation Program Is Designed to Award**

 

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

 

**Summary of Each Element of Compensation**

 

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

 

base salary;

 

periodic short-term incentive compensation in theform of cash bonuses;

 

periodic long-term incentive compensation in theform of stock options; and

 

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

 

**Why We Choose to Pay Each Element of Our CompensationProgram**

 

*Base Salary*

 

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 its paying $100 million to settle a priorlawsuit with us in 2004 for anticompetitive practices, business disparagement,and tortious interference.  Until suchtime as we believe that we have access to the market, we believe that it isappropriate to weigh our Compensation Program heavily in favor of base salariesrather than in incentive compensation.

 

*Cash Bonuses*

 

From time to time and when our cash reserves allow(taking into account the continued need to compete in this monopolisticenvironment and the continued need for significant cash reserves) we grant cashbonuses in order to reward significant efforts or the accomplishment ofshort-term goals.  The last bonuses weregranted in 2003.  The CEO has never beengranted any bonuses of any kind.

 

*Long-Term Incentives: Stock Options*

 

Long-term incentives are provided through grants ofstock options primarily under our 2008 Stock Option Plan.  The grants are designed to align theinterests of executive officers with those of stockholders and to provide eachexecutive officer with a significant incentive to manage from the perspectiveof an owner with an equity stake in the Company.

 

**How We Determine the Amount or Formula for Payment inLight of Our Objectives**

 

Executive compensation remains the same until thereis a review of such compensation by the Compensation and BenefitsCommittee.  Compensation, other than thatof the Chief Executive Officer, has not been reviewed annually.  Under the terms of Mr. Shaw’s employmentagreement, his compensation is reviewed annually.  

 

 

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Inthe past, when there is a review of executive compensation, we have retained anoutside consulting firm, Trinity Executive Recruiters, Inc., to providebenchmarks for similar compensation given the multiple and varied positionseach executive fulfills as well as our size and the hostile environment inwhich we operate.

 

*Base Salary*

 

Thebase salary for each of our executive officers is subjectively determinedprimarily on the basis of the following factors:  experience, individual performance,contribution to our performance, level of responsibility, duties and functions,salary levels in effect for comparable positions within and without ourindustry, and internal base salary comparability considerations.

 

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.

 

*Periodic Cash Bonuses*

 

For2008, we did not grant bonuses to our executive officers.  These bonuses, when paid, are paid on adiscretionary basis, as determined by the Compensation and BenefitsCommittee.  Factors considered by theCompensation and Benefits Committee in determining discretionary cash bonusesare personal performance, level of responsibility, and many of the same factorsconsidered by the Compensation and Benefits Committee and discussed above whenit reviews and sets base salaries, except with a greater focus on the priorfiscal year.  The Compensation and BenefitsCommittee also considers our need to retain cash in deciding whether to grantcash bonuses.

 

*Long-Term Incentive: Stock Options*

 

Wehave issued stock options to our employees from time to time and may do so inthe future.  We did not issue any stock optionsin 2006 or 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 toan Exchange Offer.  Options are generallygranted to regular full-time employees and officers.  However, no options have ever been granted toThomas J. Shaw, the Company’s President and CEO.

 

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 currently outstanding, the employees to beincluded, the amount of stock currently outstanding, and the method under whichthe options would be awarded.  If theproposal is approved by the Compensation and Benefits Committee, the proposalis generally submitted to the Board of Directors.  However, the committee can grant options onits own initiative.

 

Oncethe dollar amount of options to be granted is approved, Management beginsdetermining the aggregate number of shares underlying options that can begranted under such approval (based on the fair value of an option for the purchaseof one underlying share).  Factorsincluded in the determination of the value of an option grant for the purchaseof one share include current market price of the Company’s stock, the proposedexercise price, the proposed expiration date, the volatility of the Company’sstock, and the risk free rate.  We mayretain an independent outside consultant to determine such value.  In the past we have utilized theBlack-Scholes model.  Currently, we areusing the binomial model, but we may use other methods in the future as moreappropriate methods are developed.

 

Optionsto executive officers are approved by the Compensation and Benefits Committeeand then the Board of Directors individually and without regard to aformula.  However, the committee cangrant options on its own initiative.

 

 

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Withregard to past grants, after the aggregate number of shares underlying the optionsto be granted was determined, we allocated the options to our variousdepartments based on their annual compensation times their performancerating.  The individual employee’sallocation 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 past grants, eachoption generally became exercisable after three years, contingent upon theemployee’s continued employment with us. The exception is options issued to Officers and Directors pursuant tothe Exchange Offer, which vested 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.

 

Weoffered to exchange certain outstanding eligible options for new options, onthe terms and subject to the conditions described in the Exchange Offer.  The Exchange Offer expired at 5:00 p.m.,Central Standard Time, on November 18, 2008.  Eligible participants (totaling 103)tendered, and we accepted for cancellation, eligible options to purchase anaggregate of 1,925,365 shares of our Common Stock representing 99.4% of thetotal shares of Common Stock underlying options eligible to exchange in theExchange Offer.  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 the tendered options.  The exercise price per share of each newoption granted in the Offer was $1.30, which was $0.20 higher than the lastsales price of our Common Stock as reported by the NYSE Alternext on November 18,2008.  Options issued to employees vestin one year.  Options issued tonon-employee Directors vested immediately.

 

**Allocation Between Long-Term/Current and BetweenCash/Non-Cash Compensation**

 

Allof our long-term compensation consists of non-cash compensation in the form ofstock options.  We believe that thegranting of stock options incentivizes executives to maximize 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.

 

**How Determinations Are Made as to When Awards AreGranted**

 

Generally,option awards are granted at the discretion of the Board after recommendationof the Compensation and Benefits Committee or on the committee’s owninitiative.  No awards are granted if theCompensation and Benefits Committee does not support a recommendation.

 

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. Furthermore, it is our policy with regard to options that (although theoptions could be exercised) the underlying shares could not be sold into themarket while the executive was in possession of 

 

 

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materialnon-public information under our insider trading policy.  Accordingly, we believe that there is minimalrisk of the executive profiting from such material nonpublic information.

 

**What Specific Items of Corporate Performance Are Takeninto Account in Setting Compensation 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.  At such times that any of thesefactors make it inadvisable to increase salaries or grant bonuses, thenconsideration 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.

 

**Factors We Consider in Determining to ChangeCompensation 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.

 

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

 

**How Amounts Realized from Past Compensation AffectOther Elements of Compensation**

 

Weare very aware that the vast majority of options granted to our executives aresignificantly out of the money and that they may remain so until we are able toobtain real access to the market.  Thisis currently even true of the options issued pursuant to the Exchange Offerwhich occurred in November 2008, which, among its other purposes, wasintended to rectify the fact that options were underwater.  Accordingly, future compensation will likelycontinue to be dominated by base salary as well as periodic bonuses whenpossible.

 

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

 

Stockoptions granted to executives and other employees are expensed for accountingpurposes under Financial Accounting Standard (“FAS”) 123(R).  We expense all of our option costs as we dothe costs of salaries and 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.

 

**Our Policy Regarding Hedging Stock Ownership**

 

Weprohibit certain stock transactions by employees and Directors, including:

 

1.             Purchasesand sales of stock within a six month period;

 

2.             Shortsales; and

 

3.             Transactionsin puts, calls, or other derivative securities.

 

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

 

**Benchmarking of Our Compensation Program**

 

In2003, we hired Trinity Executive Recruiters, Inc. to assist us inproviding benchmarks for compensation by similarly sized companies in similarindustries for persons that hold positions which are currently fulfilled byvarious members of our executive team. These benchmarks support existing executive compensation.

 

 

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**The Role of Our Executives and Directors inDetermining Compensation**

 

Managementestablishes the initial recommendations regarding compensation for allemployees, including themselves.  Suchproposal is then submitted to the Compensation and Benefits Committee.  In the event that a proposal is affirmed, theproposal is then recommended to the entire Board of Directors for a vote unlessthe committee decides to act on its own initiative.

 

**Compensation Pursuant 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.

 

Thenew Employment Agreement with Mr. Shaw (the “Employment Agreement”)provides for an initial period of three years which ends December 31, 2010that automatically and continuously renews for consecutive two-yearperiods.  The Employment Agreement isterminable either by us or Mr. Shaw upon 30 days’ written notice or uponShaw’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 theConsumer Price Index (“CPI”) over the prior year.  The Employment Agreement requires that Mr. Shaw’ssalary be reviewed by the Compensation and Benefits Committee annually, whichshall make such increases as it considers appropriate.

 

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 furnish himwith a cellular telephone and suitable office space as well as reimburse himfor 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, Shaw’s estate shall be entitled to his salary through the date ofdeath, 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 shall mean 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, Shaw isentitled to his salary through the date of termination, reimbursement ofexpenses, and salary for a period of 24 months as well as applicable benefits.

 

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.

 

 

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IfShaw is terminated without cause and not at his implicit request, Shaw shall beentitled to his salary through the date of termination, reimbursement of expenses,his salary for 24 months, as well as applicable benefits.

 

IfShaw resigns (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 percent or more of the total possible votingpower of the stock of the Company (assuming the immediate conversion of allthen outstanding convertible preferred stock) or (ii) the date a majorityof members 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.  Shaw further has the rightto resign if there is a change in ownership. A change in ownership is defined to have occurred on the date that anyone person (other than Shaw) or more than one person acting as a group acquiresownership of the Company’s stock that, together with the stock previously heldby such person or group constitutes more than 50% of the total fair marketvalue or total voting power (assuming the immediate conversion of all thenoutstanding convertible preferred stock) of the Company.  In such event Shaw is entitled to salarythrough the date of termination, salary for 24 months, reimbursement of expensesand applicable benefits.

 

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.

 

SUMMARYOF TOTAL COMPENSATION

 

The following Summary Compensation Table sets forththe total compensation paid or accrued by us over the prior three years to orfor the account of the principal executive officer, the principal financialofficer, and the three highest paid additional executive officers:

 

 
| **SUMMARY  COMPENSATION TABLE FOR** |       |
|-------------------------------------|------------|
| **Name and Principal Position**     | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Option  Awards****(1)($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** |   |
| Thomas J. Shaw                      |       | 2006 |   | 400,000 |   | — |   | — |   | 400,000 |   |
| President and CEO                   |       | 2007 |   | 400,000 |   | — |   | 4,200 | (2) | 404,200 |   |
| (principal executive officer)       |       | 2008 |   | 416,548 |   | — |   | 4,600 | (2) | 421,148 |   |
|                                |       |   |   |   |   |   |   |   |   |   |   |
| Douglas W. Cowan                    |       | 2006 |   | 290,130 |   | 58,372 |   | — |   | 348,502 |   |
| Vice President, CFO                 |       | 2007 |   | 290,109 |   | 778 |   | 4,200 | (2) | 295,087 |   |
| (principal financial officer)       |       | 2008 |   | 290,000 |   | 6,460 |   | 4,600 | (2) | 301,060 |   |
|                                |       |   |   |   |   |   |   |   |   |   |   |
| Steven R. Wisner                    |       | 2006 |   | 290,000 |   | 8,367 |   | 6,750 | (3) | 305,117 |   |
| Executive Vice President,           |       | 2007 |   | 290,000 |   | 758 |   | 4,200 | (2) | 294,958 |   |
| Engineering and Production          |       | 2008 |   | 290,020 |   | 6,694 |   | 4,600 | (2) | 301,314 |   |
|                                |       |   |   |   |   |   |   |   |   |   |   |
| Michele M. Larios                   |       | 2006 |   | 351,299 |   | 58,265 |   | — |   | 409,564 |   |
| Vice President,                     |       | 2007 |   | 350,000 |   | 797 |   | 4,200 | (2) | 354,997 |   |

 

 

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| **Name and Principal Position** | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Option  Awards****(1)($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** |   |
|---------------------------------|------------|----------|------------|-----------------|------------|------------------------------|------------|----------------------------------|------------|----------------|--------|
| General Counsel                 |       | 2008     |       | 350,540         |       | 6,843                        |       | 4,600                            | (2)        | 361,983        |   |
|                            |       |     |       |            |       |                         |       |                             |       |           |   |
| Russell B. Kuhlman              |       | 2006     |       | 132,593         |       | 36,615                       |       | —                           |       | 169,208        |   |
| Vice President, Sales           |       | 2007     |       | 134,779         |       | 369                          |       | 2,695                            | (2)        | 137,843        |   |
|                            |       | 2008     |       | 140,000         |       | 4,019                        |       | 2,800                            | (2)        | 146,819        |   |

 

(1)           The fair value of each option grant wasestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions used for grants in 2004: nodividend yield; expected volatility of 37 percent; risk free interest rate of4.89 percent; and an expected life of 9.0 years.  No options were issued in 2005, 2006 or 2007.** **Options granted before 2008 wereissued under the 1999 Stock Option Plan, a copy of which Plan and amendmentwere filed as exhibits to our Form 10-SB filed on June 23, 2000 and our Form10-KSB filed on March 31, 2003, respectively.

 

Thefair value of each 2008 option grant was estimated on the date of grant usingthe binomial option pricing model with the following weighted averageassumptions used for grants in 2008: no dividend yield; expected volatility of67.53 percent; risk free interest rate of 2.83 percent; and an expected life of8.61 to 8.69 years.  The options wereissued 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.

 

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

 

(3)           This amount constitutes the excessmarket value of the underlying shares of an exercised stock option over theexercise price.

 

GRANTSOF PLAN-BASED AWARDS

 

Thefollowing Grants of Plan-Based Awards for 2008 Table sets forth informationregarding grants of awards made under any plan to each named executive officerin the last completed fiscal year.

 

**Grants of Plan-Based Awards for 2008**
| **Name**                      | ** ** | **Grant  Date** | ** ** | **Estimated  Future  Payouts Under  Equity  Incentive Plan  Awards  Target  #****(1)** | ** ** | **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****(2)** |
|-------------------------------|------------|-----------------|------------|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------------------|
| Thomas  J. Shaw               |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
| President and CEO             |       | —          |       | —                                                                                 |       | —                                                                   |       | —                                                   |       | —                                                          |
| (principal executive officer) |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
|                          |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
| Douglas  W. Cowan             |       | 11/18/08        |       | 90,909                                                                                 |       | 11,091                                                                   |       | 1.30                                                     |       | $77,752                                                         |
| Vice President, CFO           |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
| (principal financial officer) |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
|                          |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
| Steven  R. Wisner             |       | 11/18/08        |       | 90,909                                                                                 |       | 9,791                                                                    |       | 1.30                                                     |       | $76,761                                                         |
| Executive Vice President,     |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
| Engineering and Production    |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
|                          |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
| Michele  M. Larios            |       | 11/18/08        |       | 90,909                                                                                 |       | 6,141                                                                    |       | 1.30                                                     |       | $73,978                                                         |
| Vice President,               |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |
| General Counsel               |       |            |       |                                                                                   |       |                                                                     |       |                                                     |       |                                                            |

 

 

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| **Name**              | ** ** | **Grant  Date** | ** ** | **Estimated  Future  Payouts Under  Equity  Incentive Plan  Awards  Target  #****(1)** |   | **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   |       | 11/18/08        |       | 63,450                                                                                 |   | —                                                                   |   | 1.30                                                     |   | $48,366                                                  |
| Vice President, Sales |       |            |       |                                                                                   |   |                                                                     |   |                                                     |   |                                                     |

 

(1)         These options were granted under the 2008 Stock Option Plan in exchangefor other options pursuant to our Exchange Offer.

 

(2)         Thefair value of the new options issued under the Exchange Offer was determinedutilizing the binomial model for pricing stock options.  The incremental value of the new options overthe tendered options was based on the difference between the grant date fairvalue of the new options and the fair value of the tendered options immediatelybefore the exchange.  The tenderedoptions  were valued using the binomial model.  The incremental values are equal to thefollowing: $68,400 for Mr. Cowan; $74,417 for Mr. Wisner; $64,639 for Ms. Larios;and $42,270 for Mr. Kuhlman.

 

**Narrative Disclosure to Summary Compensation Table and Grants ofPlan-Based Awards Table**

 

Please see **Compensation Pursuant toEmployment Agreement** and POTENTIAL PAYMENTS UPON TERMINATION ORCHANGE IN CONTROL in this Item 11 for terms of our only employment agreement ineffect.

 

Therewas not a re-pricing of options or other award in the last fiscal year, butthere was an exchange of options pursuant to our Option Exchange Plan, wherebywe offered to exchange certain outstanding eligible options for new options, onthe terms and subject to the conditions described in the Exchange Offer.  The exercise price was arbitrarily chosen asthe higher of:  1) the last sales priceof our Common Stock as reported on the NYSE Alternext on the date of grantrounded to the next highest dime or 2) $1.30. The options were exchanged on a two for one basis.  The new options effectively restarted the tenyear termination date, re-started a one-year vesting period, reduced the numberof shares eligible for purchase by one half and reduced the exercise price to$1.30.

 

 

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OUTSTANDINGEQUITY AWARDS AT 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, 2008.

 
| **Outstanding Equity Awards at 2008 Fiscal Year End** |
|-------------------------------------------------------|
| ** **                                            | ** ** | **Option Awards** |
| **Name**                                              | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Unexercisable** | ** ** | **Equity  Incentive  Plan Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options**

**(#)****(1)** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** |
|                                                  |   |   |   |   |   |   |   |   |
| Thomas  J. Shaw                                       |   |   |   |   |   |   |   |   |
| President, CEO                                        |   | — |   | — |   | — |   | — |
| (principal executive officer)                         |   |   |   |   |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |
| Douglas  W. Cowan                                     |   | 11,091 |   | 90,909 |   | 1.30 |   | 11/18/18 |
| Vice President, CFO                                   |   |   |   |   |   |   |   |   |
| (principal financial officer)                         |   |   |   |   |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |
| Steven  R. Wisner                                     |   | 9,791 |   | 90,909 |   | 1.30 |   | 11/18/18 |
| Executive Vice President,                             |   |   |   |   |   |   |   |   |
| Engineering and Production                            |   |   |   |   |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |
| Michele  M. Larios                                    |   | 6,141 |   | 90,909 |   | 1.30 |   | 11/18/18 |
| Vice President,                                       |   |   |   |   |   |   |   |   |
| General Counsel                                       |   |   |   |   |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |
| Russell  B. Kuhlman                                   |   | — |   | 63,450 |   | 1.30 |   | 11/18/18 |
| Vice President, Sales                                 |   |   |   |   |   |   |   |   |

 

1)     These optionswill vest on November 18, 2009, assuming the recipient is still employedby us.

 

PENSIONBENEFITS

 

We do not have a pension plan other than the 401(k) planwhich is available to all employees the first of the month after 90 days ofservice.

 

**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 90% of their compensation, or thestatutory prescribed limit, if less.  Wemay, at our discretion, match employee contributions.  We made matching contributions ofapproximately $122,000 and $111,000 in 2008 and 2007, respectively.  There were no matching contributions in2006.  $21,095 and $19,600 of thesematching contributions were to executive officers in 2008 and 2007,respectively.

 

POTENTIALPAYMENTS UPON TERMINATION 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.

 

**SUMMARY OF PAYMENTS UPON TERMINATION OR CHANGE INCONTROL**

**ASSUMING OCCURRENCE AS OF DECEMBER 31, 2008****(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                              |       | 833,096                                             |       | —                                       |       | 833,096                       |
|                                               |       |                                      |       |                                            |       |                           |       |                                                |       |                                         |       |                          |
| Termination With Cause                             |       | x                                         |       | —                                          |       | x                              |       | —                                              |       | —                                       |       | —                        |
|                                               |       |                                      |       |                                            |       |                           |       |                                                |       |                                         |       |                          |
| Termination Without Cause                          |       | x                                         |       | x                                               |       | x                              |       | 833,096                                             |       | —                                       |       | 833,096                       |
|                                               |       |                                      |       |                                            |       |                           |       |                                                |       |                                         |       |                          |
| Resignation (Other Than After a Change in Control) |       | x                                         |       | x                                               |       | x                              |       | —                                              |       | 102,710                                      |       | 102,710                       |
|                                               |       |                                      |       |                                            |       |                           |       |                                                |       |                                         |       |                          |
| Resignation (After a Change in Control)            |       | x                                         |       | x                                               |       | x                              |       | 833,096                                             |       | —                                       |       | 833,096                       |

 

 

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(1)           The above payments would be paidunder Mr. Shaw’s agreement at certain times.  Any payments arising as a result ofdisability or resignation would be paid not sooner than six months and one dayfrom the termination date but not later than seven months from the terminationdate.  Any payments arising as a resultof death would be paid no later than the 90th day following the death.  Payments arising as a result of terminationwith cause or termination without cause would be paid not later than 30th day following the date oftermination except that any amount due in excess of an amount equal to thelesser of two times annual compensation or two times the limit on compensationunder section 401(17) of the Internal Revenue Code of 1986 such amount inexcess shall be paid no earlier than six months and one day after the date oftermination but in no event later than seven months after the date oftermination.

 

(2)           Mr. Shaw participates in ourbenefit plans which do not discriminate in scope, terms, or operation in favorof executive 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, 2008.  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 Code.

 

COMPENSATIONOF DIRECTORS

 

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

 

**DIRECTOR COMPENSATION TABLE FOR 2008**

 
| **Name****(1)**  | ** ** | **Fees Earned  or Paid in  Cash  ($)** | ** ** | **Option Awards  ($)****(2)** | ** ** | **All Other  Compensation ($)** | ** ** | **Total  ($)** | ** ** |
|------------------|------------|-------------------------------------------------------|------------|------------------------------------|------------|-------------------------------------------|------------|----------------|------------|
| Marco Laterza    |       | $3,500                                                |       | —                             |       | —                                    |       | $3,500         |       |
| Amy Mack         |       | $3,000                                                |       | —                             |       | $20,875                                   | (5)        | $23,875        |       |
| Marwan Saker     |       | $1,500                                                |       | $30,780                            | (3)        | —                                    |       | $32,280        |       |
| Clarence Zierhut |       | $3,500                                                |       | $9,500                             | (4)        | —                                    |       | $13,000        |       |

 

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

 

(2)           These options were issued in exchangefor older stock options pursuant to the Exchange Offer.  The incremental fair value of such options asof the exchange date was $29,858 and $8,590 for Marwan Saker and ClarenceZierhut, respectively.  After theexchange of options under this offer the aggregate number of option awards andawards outstanding for Messrs. Saker and Zierhut as of December 31, 2008,was 40,500 and 12,500, respectively. Such awards authorized the purchase of 40,500 an 12,500 shares of CommonStock for Messrs. Saker and Zierhut, respectively.

 

(3)           The grant date fair value of theseoptions is $0.76 for each option.  Mr. Sakerhas options for the purchase of 40,500 shares of Common Stock outstanding as ofDecember 31, 2008.

 

(4)           The grant date fair value of theseoptions is $0.76 for each option.  Mr. Zierhuthas options for the purchase of 12,500 shares of Common Stock outstanding as ofDecember 31, 2008.

 

(5)           Ms. Mack’s company was paidthese funds for participating in clinical trials in 2008.

 

**Narrative Explanation of Director Compensation Tablefor 2008**

 

In2008 we paid each non-employee Director a fee of $500 per meeting andreimbursed travel expenses.  In the past,we have granted to each Director (except Mr. Shaw) stock options forCommon Stock.  Mr. Laterza and 

 

 

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Ms. Mackhave also not yet been granted options. We do not pay any additional amounts for committee participation orspecial 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 the **Compensation Pursuant to Employment Agreement**, set forth abovefor an in depth summary of the terms of such agreement.

 

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 at the time of their service on the committee and nonehave 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 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 402, has recommended to the Board of Directors that the COMPENSATIONDISCUSSION AND ANALYSIS be included in this report.

 
|   |   | CLARENCE ZIERHUT |
|--------|--------|------------------|
|   |   | MARCO LATERZA    |
|   |   | AMY MACK         |

 

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

 

EQUITYCOMPENSATION PLAN INFORMATION

 

Thefollowing table sets forth information relating to our equity compensationplans as of December 31, 2008:

 

**Equity Compensation Plan Information**

 
|                                                         | ** ** |                        |       |                     |       | **Number of securities**     |
|--------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|------------------------------|
| ** **                                                   | ** ** |                        |       |                     |       | **remaining available  for** |
| ** **                                                   | ** ** |                        |       |                     |       | **future issuance under**    |
| ** **                                                   | ** ** | **Number of securities to** | ** ** | **Weighted average**     | ** ** | **equity compensation**      |
| ** **                                                   | ** ** | **be issued upon exercise** | ** ** | **exercise price of**    | ** ** | **plans (excluding**         |
| ** **                                                   | ** ** | **of outstanding options,** | ** ** | **outstanding options,** | ** ** | **securities reflected**     |
| ** **                                                   | ** ** | **warrants and rights**     | ** ** | **warrants and rights**  | ** ** | **in column(a))**            |
| **Plan category**                                            |       | (a)                         |       | (b)                      |       | (c)                          |
| Equity compensation plans approved by security holders       |       | 1,286,963                   |       | $3.40                    |       | 2,037,317                    |
|                                                         |       |                        |       |                     |       |                         |
| Equity compensation plans not approved by security  holders* |       | 225,000                     |       | $6.90                    |       | —                       |
|                                                         |       |                        |       |                     |       |                         |
| Total                                                        |       | 1,511,963                   |       | $3.92                    |       | 2,037,317                    |

 

 

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Weauthorized the issuance of an individual option plan for the purchase of200,000 shares of Common Stock to Jimmie Shiu, M.D., for his past services inintroducing us to purchasers of various series of Preferred Stock as well asfor introducing us to Mr. Jack Jackson, who controlled KatiePetroleum.  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.

 

Inconnection with a Consulting Agreement with International Export andConsulting, we issued an individual option plan for the purchase of 61,000shares of Common Stock to Marwan Saker. The option was exercisable at $10.00 and would have expired in2010.  This option was exchanged foroptions issued under the 2008 Stock Option Plan which was approved by theshareholders.

 

SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS

 

Thefollowing table sets forth certain information regarding the beneficial ownershipof our capital stock as of March 2, 2009, for each person known by us toown beneficially 5 percent or more of the voting capital stock.  Except pursuant to applicable communityproperty laws, each shareholder identified in the table possesses sole votingand investment power with respect to his or her shares, except as noted below.

** **
| **Title of Class**  | ** ** | **Name and Address of****Beneficial Owner**                                                   | ** ** | **Amount and  Nature of****Beneficial  Ownership** | ** ** | **Percent of****Class****(1)** |   |
|---------------------|------------|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------|--------|
| Common  Stock       |       |                                                                                          |       |                                               |       |                           |   |
|                |       | Thomas  J. Shaw(2)  511 Lobo Lane  P.O. Box 9 Little Elm, TX 75068-0009                  |       | 11,380,000                                         |       | 47.6%                          | (2)    |
|                |       |                                                                                          |       |                                               |       |                           |   |
|                |       | Suzanne  M. August(3) 5310 Buena Vista Drive Frisco, TX 75034                                 |       | 2,800,000                                          |       | 11.7%                          | (3)    |
|                |       |                                                                                          |       |                                               |       |                           |   |
|                |       | Lillian  E. Salerno(4) 432 Edwards Lewisville, TX 75067                                       |       | 2,243,500                                          |       | 9.4%                           |   |
|                |       |                                                                                          |       |                                               |       |                           |   |
|                |       | Signia  Capital Management, LLC(5) 108 N. Washington St., Ste. 305  Spokane, Washington 99201 |       | 1,941,861                                          |       | 8.1%                           |   |
|                |       |                                                                                          |       |                                               |       |                           |   |
|                |       | Lloyd  I. Miller, III(6)  4550 Gordon Drive  Naples, FL 34102                            |       | 1,273,600                                          |       | 5.3%                           |   |
|                |       |                                                                                          |       |                                               |       |                           |   |
| Class B  Stock |       |                                                                                          |       |                                               |       |                           |   |
|                |       | Thomas  J. Shaw                                                                               |       | 80,000                                             |       | 3.5%                           |   |
|                |       | Lillian  E. Salerno                                                                           |       | 12,500                                             |       | 1%                             |   |

 

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

 

 

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(2)           80,000 of the shares identified asCommon Stock are preferred shares which are eligible for conversion into CommonStock within 60 days of this report. 2,800,000 of the shares are owned by Ms. Suzanne August (seefootnote 3) but are controlled by Mr. Shaw, pursuant to a VotingAgreement.  These shares are permanentlycontrolled by Mr. Shaw until such time as they are sold by Ms. August.  These shares are included in calculating Mr. Shaw’sCommon Stock equivalents and percentages in the above table.

 

(3)           Ms. August’s 2,800,000 sharesare controlled by Mr. Thomas J. Shaw, pursuant to a Voting Agreement.  See footnote 2 for a more detailedexplanation.  Accordingly, they are alsoincluded in the Common Stock equivalents and percentages for Thomas Shaw in theabove table.

 

(4)           12,500 of the shares identified asCommon Stock are Class B preferred shares which are eligible forconversion into Common Stock within 60 days of this report.

 

(5)           The number of shares held by thisentity was obtained from a Schedule 13G/A filed on February 13, 2009.  Pursuant to the Schedule 13G/A, SigniaCapital Management, LLC has sole voting power for 512,122 of the shares andsole dispositive power for a total of 1,941,861 shares (inclusive of the solevoting power shares).

 

(6)           The number of shares held by thisentity was obtained from a Schedule 13G filed on January 30, 2009.  Pursuant to the Schedule 13G, Lloyd I. Millerhas sole voting and dispositive power for 208,300 of the shares, and shared votingand dispositive power for 1,065,300 shares.

 

SECURITYOWNERSHIP OF MANAGEMENT AND DIRECTORS

 

Thefollowing table sets forth certain information regarding the beneficialownership of our capital stock as of March 2, 2009, for each NamedExecutive Officer (i.e., our CEO, CFO, and three other highest paid officers)and Director of the Company.  Exceptpursuant to applicable community property laws or as otherwise discussed below,each shareholder identified in the table possesses sole voting and investmentpower with respect to 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 |       | 12,188,200                                           |       | 49.4%                          |
| As  Individuals     |       | Thomas  J. Shaw(2)                      |       | 11,380,000                                           |       | 46.2%                          |
|                |       | Marwan  Saker(3)                        |       | 395,500                                              |       | 1.6%                           |
|                |       | Clarence  Zierhut(4)                    |       | 22,500                                               |       | <1%                         |
|                |       | Douglas  W. Cowan(5)                    |       | 102,000                                              |       | <1%                         |
|                |       | Steven  R. Wisner(6)                    |       | 105,700                                              |       | <1%                         |
|                |       | Russell  B. Kuhlman(7)                  |       | 64,450                                               |       | <1%                         |
|                |       | Michele  M. Larios(8)                   |       | 108,050                                              |       | <1%                         |
|                |       | Marco  Laterza                          |       | 10,000                                               |       | <1%                         |
|                |       |                                    |       |                                                 |       |                           |
| Class B  Stock |       |                                    |       |                                                 |       |                           |
| As  a Group         |       | Officers  and Directors                 |       | 435,000                                              |       | 19.0%                          |
| As  Individuals     |       | Thomas  J. Shaw                         |       | 80,000                                               |       | 3.5%                           |
|                |       | Marwan  Saker                           |       | 355,000                                              |       | 15.5%                          |

 

(1)           The percentages of Common Stock arebased on 24,651,264 shares of Common Stock equivalents consisting of 23,800,064shares of Common Stock outstanding; 435,000 shares of Preferred Stockconvertible by the above persons and options for the purchase of 416,200 sharesof Common Stock obtainable by the above persons within 60 days of this report.  The percentages of Class B stock arebased on 2,285,266 shares of Class B Stock outstanding.

 

 

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(2)           80,000 of the shares identified asCommon Stock are preferred shares which are eligible for conversion into CommonStock within 60 days of this report. 2,800,000 of the shares are Common Stockshares 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 sharesare included in calculating Mr. Shaw’s Common Stock equivalents andpercentages in the above table.

 

(3)           355,000 shares identified as CommonStock are preferred shares which are eligible for conversion into Common Stockwithin 60 days of this report.  Theshares are held as follows:  SakerInvestments holds 15,500 shares of Series IV Class B ConvertiblePreferred Stock and 25,000 shares of Series V Class B ConvertiblePreferred Stock, Sovana Cayman Islands, Inc. holds 300,000 shares of Series IVClass B Convertible Preferred Stock, and My Investments holds 14,500shares of Series IV Class B Convertible Preferred Stock.  Mr. Saker is an Officer or Director andshareholder for each of these companies. The remaining 40,500 shares identified as Common Stock are sharesobtainable through the exercise of options held by Mr. Saker within 60days of this report.

 

(4)           12,500 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options within 60days of this report.

 

(5)           These shares identified as CommonStock are shares acquirable by the exercise of stock options within 60 days ofthis report.

 

(6)           100,700 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options within 60days of this report.

 

(7)           63,450 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options within 60days of this report.

 

(8)           97,050 of these shares identified asCommon Stock are shares acquirable by the exercise of stock options within 60days of this report.

 

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

 

# **Item 13. Certain Relationships And RelatedTransactions, and Director Independence**

# ** **

RelatedParty Transactions

 

We believe that all of the transactions set forthbelow were made on terms no less favorable to us than could have been obtainedfrom unaffiliated third parties.  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 who beneficially owned 35.7 percent of the outstanding Common Stock(and controlled another 11.8 percent pursuant to a Voting Agreement with Ms. SuzanneAugust) as of July 28, 2008, was paid a licensing fee of $500,000(amortized over 17 years) by us for the exclusive worldwide licensing rights tomanufacture, market, sell, and distribute retractable medical safetyproducts.  In addition, Mr. Shaw andMs. August, together, receive an aggregate 5 percent royalty on grosssales of all licensed products sold to customers over the life of theTechnology Licensing Agreement.  Aroyalty of $2,166,585 and $1,471,046 was paid in 2008 and 2007,respectively.  Royalties of $620,987 werepaid through February 10, 2009.

 

We have an oral consulting agreement with MediTradeInternational Corporation, a company controlled by Ms. Lillian Salerno, ashareholder who ceased to be a 10% shareholder in 2008.  It is paid $7,500 per month plusexpenses.  In 2008 and 2007, it was paidaggregate consideration of $98,401 and $129,618, respectively.

 

 

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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 Alternext. Our current independent Directors are Messrs. Clarence Zierhut,Marwan Saker, and Marco Laterza, and Ms. Amy Mack.

 

The Board of Directors, in reviewing theindependence of its members, further considered the fact that we paid Ms. Mack’scompany $4,500 in 2007 and $20,875 in 2008 for conducting clinical trials.  The Board of Directors determined that herindependence was not compromised by such transactions.

 

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

 

AUDITFEES

 

The aggregate fees billed by CF & Co. forprofessional services rendered for the audit of our annual financial statementsfor 2008 and 2007 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 $195,700 and$174,583, respectively.

 

AUDITRELATED FEES

 

The aggregate fees billed by CF & Co. forprofessional services rendered for the audit of our 401(k) plan for 2008and 2007 were $11,500 and $13,500, respectively.

 

TAXFEES

 

The aggregate fees billed by CF & Co. forpreparation of federal and state income tax returns and tax consulting costsrelated to notices from taxing authorities for 2008 and 2007 were $91,520 and$149,291, respectively.

 

PRE-APPROVALPOLICIES AND PROCEDURES

 

The engagement of CF & Co. was entered intopursuant to the approval policies and procedures of the Audit Committee.  Before CF & Co. was engaged torender services the engagement was approved by the Audit Committee.  The engagement is for audit and tax serviceswhich were detailed separately.  TheAudit Committee implemented its approval procedures, i.e., they were notdelegated to any other party.  All of theservices provided were pre-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, 2008, 2007, and 2006: |

 
| ** **                | ** ** | **Balance at   beginning   of period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at   end of period** | ** ** |
|---------------------------|------------|------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------------------------------------------|------------|
| Provision for Inventories |       |                                                       |       |          |       |           |       |                                               |       |
| Fiscal year ended 2006    |       | $                                                          | 111,296    |          | $          | —         |       | $                                                  | 61,296     |   | $ | 50,000 |   |
|                           |            |                                                            |            |               |            |                |            |                                                    |            |  |  |  |  |

 

 

45

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| ** **                          | ** ** | **Balance at   beginning   of period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at   end of period** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------------------------------------------|------------|
| Fiscal year ended 2007              |       | $                                                          | 50,000     |          | $          | 155,600        |       | $                                                  | —     |   | $ | 205,600 |   |
| Fiscal year ended 2008              |       | $                                                          | 205,600    |          | $          | —         |       | $                                                  | —     |   | $ | 205,600 |   |
|                                |       |                                                       |       |          |       |           |       |                                               |       |
| Provision  for Accounts Receivables |       |                                                       |       |          |       |           |       |                                               |       |
| Fiscal year ended 2006              |       | $                                                          | 267,174    |          | $          | —         |       | $                                                  | 180,144    |   | $ | 87,030 |   |
| Fiscal year ended 2007              |       | $                                                          | 87,030     |          | $          | 166,978        |       | $                                                  | —     |   | $ | 254,008 |   |
| Fiscal year ended 2008              |       | $                                                          | 254,008    |          | $          | 245,958        |       | $                                                  | —     |   | $ | 499,966 |   |
|                                |       |                                                       |       |          |       |           |       |                                               |       |
| Deferred Tax  Valuation             |       |                                                       |       |          |       |           |       |                                               |       |
| Fiscal year ended 2006              |       | $                                                          | 99,280     |          | $          | 541,143        |       | $                                                  | —     |   | $ | 640,423 |   |
| 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 |   |
|                                |       |                                                       |       |          |       |           |       |                                               |       |
| Provision for Rebates               | ** ** | ** **                                                 | ** ** | **(A)**       |       | **(B)**        |       |                                               |       |
| Fiscal year ended 2006              |       | $                                                          | 2,443,960  |          | $          | 20,329,974     |       | $                                                  | 20,061,184 |   | $ | 2,712,750 |   |
| Fiscal year ended 2007              |       | $                                                          | 2,712,750  |          | $          | 15,329,840     |       | $                                                  | 13,404,097 |   | $ | 4,638,493 |   |
| Fiscal year ended 2008              |       | $                                                          | 4,638,493  |          | $          | 13,625,257     |       | $                                                  | 14,395,904 |   | $ | 3,867,846 |   |

 
| (A)                                                                                                                   | Represents  estimated rebates deducted from gross revenues |
|----------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------|
|                                                                                                                       |                                                       |
| (B)                                                                                                                   | Represents  rebates credited to the distributor            |
|                                                                                                                       |
| (3)                                                                                                                        | Exhibits:                                                  |
|                                                                                                                       |
| The  following exhibits are filed herewith or incorporated herein by reference to  exhibits previously filed with the SEC. |
|                                                                                                                       |
| (b)                                                                                                                        | Exhibits                                                   |
|                                                                                                                            |                                                            |  |  |

 
| **Exhibit   No.** | ** ** | **Description of Document**                                                                                                                                       |
|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3(i)                   |       | Third Amended and Restated Articles of Incorporation of RTI filed on  November 1, 2004* as amended by that Statement of Change of Registered  Office/Agent** |
|                   |       |                                                                                                                                                              |
| 3(ii)                  |       | Third  Amended and Restated Bylaws of RTI***                                                                                                                      |
|                   |       |                                                                                                                                                              |
| 10.1                   |       | Sample  United States Distribution Agreement****                                                                                                                  |
|                   |       |                                                                                                                                                              |
| 10.2                   |       | Sample  Foreign Distribution Agreement****                                                                                                                        |
|                   |       |                                                                                                                                                              |
| 10.3                   |       | Employment  Agreement between RTI and Thomas J. Shaw dated as of 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****                                                                                                                            |

 

 

46

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| **Exhibit   No.** | ** ** | **Description of Document**                                                         |
|------------------------|------------|-------------------------------------------------------------------------------------|
|                   |       |                                                                                |
| 10.8                   |       | First  Amendment to 1999 Stock Option Plan†††                        |
|                   |       |                                                                                |
| 10.9                   |       | Retractable  Technologies, Inc. 2008 Stock Option Plan†††† |
|                   |       |                                                                                |
| 23                     |       | Consent  of Independent Registered Public Accounting Firm†                     |
|                   |       |                                                                                |
| 24                     |       | Power  of Attorney†                                                            |
|                   |       |                                                                                |
| 31.1                   |       | Certification  of Principal Executive Officer†                                 |
|                   |       |                                                                                |
| 31.2                   |       | Certification  of Principal Financial Officer†                                 |
|                   |       |                                                                                |
| 32                     |       | Section 1350  Certifications†                                             |

 
| *                        |   | Incorporated  herein by reference to RTI’s Form 10-Q filed on November 14, 2005                         |
|--------------------------|--------|------------------------------------------------------------------------------------------------------------------------|
|                     |   |                                                                                                                   |
| **                       |   | 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 |
|                     |   |                                                                                                                   |
| †                   |   | Filed  herewith                                                                                                        |
|                     |   |                                                                                                                   |
| ††             |   | 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                 |
|                     |   |                                                                                                                   |
| (c)                      |   | Excluded  Financial Statement Schedules: None                                                                          |

 

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |   | RETRACTABLE  TECHNOLOGIES, INC.                                                      |                      |
|--------|--------|--------------------------------------------------------------------------------------|---------------------------|
|   |   | (Registrant)             |                      |
|   |   |                                                                                 |                      |
|   |   | By:                                                                                  | /s/  Thomas J. Shaw       |
|   |   |                                                                                 | THOMAS  J. SHAW           |
|   |   |                                                                                 | CHAIRMAN,  PRESIDENT, AND |
|   |   |                                                                                 | CHIEF  EXECUTIVE OFFICER  |
|   |   |                                                                                 |                      |
|   |   | Date:                                                                                | March 31,  2009      |
|        |        |                                                                                      |                           |  |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
|   |               |                                                                |
|--------|--------------------|---------------------------------------------------------------------|
|   |               | /s/  Steven R. Wisner                                               |
|   |               | Steven  R. Wisner                                                   |
|   |               | Executive  Vice President, Engineering &                   |
|   |               | Production  and Director                                            |
|   |               |                                                                |
|   |               | March 31,  2009                                                |
|   |               |                                                                |
|   |               |                                                                |
|   |               | /s/  Douglas W. Cowan                                               |
|   |               | Douglas  W. Cowan                                                   |
|   |               | Vice  President, Chief Financial Officer, Treasurer, and   Director |
|   |               |                                                                |
|   |               | March 31,  2009                                                |
|   |               |                                                                |
|   |               |                                                                |
|   |               | /s/  Clarence Zierhut                                               |
|   |               | Clarence  Zierhut                                                   |
|   |               | Director                                                            |
|   |               |                                                                |
|   |               | March 31,  2009                                                |
|   |               |                                                                |
|   |               | /s/  Amy Mack                                                       |
|   |               | Amy  Mack                                                           |
|   |               | Director                                                            |
|   |               |                                                                |
|   |               | March 31,  2009                                                |
|   |               |                                                                |
|   |               | /s/  Marco Laterza                                                  |
|   |               | Marco  Laterza                                                      |
|   |               | Director                                                            |
|   |               |                                                                |
|   |               | March 31,  2009                                                |
|   |               |                                                                |
|   |               |                                                                |
|   |               | *                                                                   |
|   |               | Marwan  Saker                                                       |
|   |               | Director                                                            |
|   |               |                                                                |
|   |               | March 31,  2009                                                |
|   |               |                                                                |
|   |               |                                                                |
| *  By: | /s/  Marco Laterza |                                                                |   |
|   | Marco  Laterza     |                                                                |   |
|   | Attorney-in-fact   |                                                                |   |

 

 

48