**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****        ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2008**

 

**or**

 

**o****           ****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE EXCHANGEACT OF 1934**

 

**For thetransition period from                                                                       to**

 

**Commissionfile number 000-30885**

 

**Retractable Technologies, Inc.**

(Exact name of registrant as specified in its charter)

 

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

 

**(972) 294-1010**

(Registrant’s telephone number, including area code)

 

 

(Former name, former address, and former fiscal year, if changed sincelast report)

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated 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 Exchange Act). Yes o    No x

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Sections 12, 13, or 15(d) of the SecuritiesExchange Act of 1934 subsequent to the distribution of securities under a planconfirmed by a court.   Yes o    No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number ofshares outstanding of each of the issuer’s classes of Common Stock, as of thelatest practicable date: 23,800,064 shares of Common Stock, no par value,issued and outstanding on November 3, 2008.

 

 

 

----

 

**RETRACTABLE TECHNOLOGIES, INC.**

**FORM 10-Q**

**For the Quarterly Period Ended September 30, 2008**

 

**TABLE OF CONTENTS**

 
| **PART I—FINANCIAL INFORMATION** |
|--------------------------------------------|
| ** **                                 | ** ** | ** ** |
| **Item 1.**                                | **Financial Statements.** | 1 |
| ** **                                 | ** ** |   |
| ** **                                 | **CONDENSED  BALANCE SHEETS** | 1 |
| ** **                                 | **CONDENSED STATEMENTS OF OPERATIONS** | 2 |
| ** **                                 | **CONDENSED STATEMENTS OF CASH FLOWS** | 3 |
| ** **                                 | **NOTES TO CONDENSED FINANCIAL STATEMENTS** | 4 |
| ** **                                 | ** ** |   |
| **Item 2.**                                | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations.** | 10 |
| ** **                                 | ** ** |   |
| **Item 3.**                                | **Quantitative and Qualitative Disclosures  About Market Risk.** | 15 |
| ** **                                 | ** ** |   |
| **Item 4.**                                | **Controls and Procedures.** | 16 |
| ** **                                 | ** ** |   |
| **PART II—OTHER INFORMATION**    |
| ** **                                 | ** ** |   |
| **Item 1.**                                | **Legal Proceedings.** | 16 |
| ** **                                 | ** ** |   |
| **Item 1A.**                               | **Risk Factors.** | 17 |
| ** **                                 | ** ** |   |
| **Item 2.**                                | **Unregistered Sales of Equity Securities and  Use of Proceeds.** | 20 |
| ** **                                 | ** ** |   |
| **Item 3.**                                | **Defaults Upon Senior Securities.** | 20 |
| ** **                                 | ** ** |   |
| **Item 4.**                                | **Submission of Matters to a Vote of Security  Holders.** | 21 |
| ** **                                 | ** ** |   |
| **Item 5.**                                | **Other Information.** | 22 |
| ** **                                 | ** ** |   |
| **Item 6.**                                | **Exhibits.** | 22 |
| ** **                                 | ** ** |   |
| **SIGNATURES**                             | 23 |
|                                            |  |  |  |

 

 

**PART I—FINANCIALINFORMATION**

 

**Item 1.        Financial Statements.**

 

**RETRACTABLETECHNOLOGIES, INC.**

## **CONDENSED BALANCE SHEETS**

 
|                                            |       | **September 30, 2008** | ** ** | ** **                      |       |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                                            |       | **(unaudited)**                  | ** ** | **December 31, 2007** |       |
|                                            |       | ** **                       | ** ** | ** **                      |       |
| **ASSETS**                                      |       | ** **                       | ** ** | ** **                      |       |
| Current assets:                                 |       |                             |       |                            |       |
| Cash and cash equivalents                       | $          | 35,963,071                       | $          | 40,507,431                      |       |
| Accounts receivable, net                        |       | 3,443,724                        |       | 1,667,636                       |       |
| Inventories, net                                |       | 5,957,811                        |       | 7,037,129                       |       |
| Income taxes receivable                         |       | —                           |       | 2,345,041                       |       |
| Other current assets                            |       | 660,943                          |       | 358,807                         |       |
| Total current assets                            |       | 46,025,549                       |       | 51,916,044                      |       |
|                                            |       |                             |       |                            |       |
| Property, plant, and equipment, net             |       | 12,784,588                       |       | 11,483,423                      |       |
| Intangible assets, net                          |       | 481,785                          |       | 424,560                         |       |
| Other assets                                    |       | 5,212                            |       | 505,899                         |       |
| Total assets                                    | $          | 59,297,134                       | $          | 64,329,926                      |       |
|                                            |       |                             |       |                            |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Current liabilities:                            |       |                             |       |                            |       |
| Accounts payable                                | $          | 4,609,452                        | $          | 5,535,365                       |       |
| Current portion of long-term debt               |       | 500,310                          |       | 387,906                         |       |
| Accrued compensation                            |       | 723,044                          |       | 539,330                         |       |
| Marketing fees payable                          |       | 1,419,760                        |       | 1,419,760                       |       |
| Accrued royalties to shareholders               |       | 651,502                          |       | 619,304                         |       |
| Other accrued liabilities                       |       | 668,842                          |       | 263,339                         |       |
| Current deferred tax liability                  |       | 17,464                           |       | 20,626                          |       |
| Total current liabilities                       |       | 8,590,374                        |       | 8,785,630                       |       |
|                                            |       |                             |       |                            |       |
| Long-term debt, net of current maturities       |       | 4,638,949                        |       | 3,747,259                       |       |
| Long-term deferred tax liability                |       | 23,508                           |       | 36,200                          |       |
| Total liabilities                               |       | 13,252,831                       |       | 12,569,089                      |       |
|                                            |       |                             |       |                            |       |
| Stockholders’ equity:                      |       |                             |       |                            |       |
| Preferred stock $1 par value:                   |       |                             |       |                            |       |
| Series I, Class B                     |       | 144,000                          |       | 144,000                         |       |
| Series II, Class B                    |       | 219,700                          |       | 219,700                         |       |
| Series III, Class B                   |       | 130,245                          |       | 130,245                         |       |
| Series IV, Class B                    |       | 552,500                          |       | 553,500                         |       |
| Series V, Class B                     |       | 1,238,821                        |       | 1,282,471                       |       |
| Common stock, no par value                      |       | —                           |       | —                          |       |
| Additional paid-in capital                      |       | 53,879,491                       |       | 53,818,987                      |       |
| Accumulated deficit                             |       | (10,120,454                      | )          | (4,388,066                      | )          |
| Total stockholders’ equity                 |       | 46,044,303                       |       | 51,760,837                      |       |
| Total liabilities and stockholders’ equity | $          | 59,297,134                       | $          | 64,329,926                      |       |

 

See accompanying notes to condensed financialstatements

 

1

 

**RETRACTABLE TECHNOLOGIES, INC.**

## **CONDENSED STATEMENTS OF OPERATIONS**

**(unaudited)**

 
| ** **                                 | ** ** | **Three Months  Ended  September 30, 2008** | ** ** | **Three Months  Ended  September 30, 2007** | ** ** | **Nine Months  Ended  September 30, 2008** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Sales, net                                 | $          | 8,997,038                                                  | $          | 8,040,127                                                  | $          | 20,786,420                                                | $          | 19,088,932                                                |       |
| Cost of sales                              |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Cost of manufactured product               |       | 6,219,614                                                  |       | 5,228,549                                                  |       | 12,851,542                                                |       | 12,031,550                                                |       |
| Royalty expense to shareholders            |       | 651,502                                                    |       | 624,967                                                    |       | 1,547,281                                                 |       | 1,468,292                                                 |       |
| Total cost of sales                        |       | 6,871,116                                                  |       | 5,853,516                                                  |       | 14,398,823                                                |       | 13,499,842                                                |       |
| Gross profit                               |       | 2,125,922                                                  |       | 2,186,611                                                  |       | 6,387,597                                                 |       | 5,589,090                                                 |       |
|                                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Operating expenses:                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Sales and marketing                        |       | 1,139,052                                                  |       | 1,334,680                                                  |       | 3,607,962                                                 |       | 4,025,682                                                 |       |
| Research and development                   |       | 271,174                                                    |       | 375,264                                                    |       | 804,006                                                   |       | 796,979                                                   |       |
| General and administrative                 |       | 2,896,205                                                  |       | 2,906,156                                                  |       | 8,284,638                                                 |       | 7,894,510                                                 |       |
| Total operating expenses                   |       | 4,306,431                                                  |       | 4,616,100                                                  |       | 12,696,606                                                |       | 12,717,171                                                |       |
| Loss from operations                       |       | (2,180,509                                                 | )          | (2,429,489                                                 | )          | (6,309,009                                                | )          | (7,128,081                                                | )          |
|                                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Interest and other income                  |       | 158,664                                                    |       | 521,226                                                    |       | 653,782                                                   |       | 1,511,121                                                 |       |
| Interest expense, net                      |       | (13,893                                                    | )          | (86,235                                                    | )          | (77,161                                                   | )          | (257,427                                                  | )          |
| Net loss before income taxes               |       | (2,035,738                                                 | )          | (1,994,498                                                 | )          | (5,732,388                                                | )          | (5,874,387                                                | )          |
| Benefit for income taxes                   |       | —                                                     |       | (1,406,360                                                 | )          | —                                                    |       | (1,406,360                                                | )          |
| Net loss                                   |       | (2,035,738                                                 | )          | (588,138                                                   | )          | (5,732,388                                                | )          | (4,468,027                                                | )          |
| Preferred stock dividend requirements      |       | (342,717                                                   | )          | (348,147                                                   | )          | (1,030,302                                                | )          | (1,052,398                                                | )          |
| Loss applicable to common stockholders     | $          | (2,378,455                                            | )          | $                                                          | (936,285   | )                                                         | $          | (6,762,690                                                | )          | $ | (5,520,425 | ) |
|                                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Loss per share – basic and diluted    | $          | (0.10                                                      | )          | $                                                          | (0.04      | )                                                         | $          | (0.28                                                     | )          | $ | (0.23 | ) |
|                                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Weighted average common shares outstanding |       | 23,800,064                                                 |       | 23,745,206                                                 |       | 23,792,733                                                |       | 23,717,845                                                |       |

 

See accompanying notes to condensed financial statements

 

2

 

**RETRACTABLE TECHNOLOGIES, INC.**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(unaudited)**

** **
| ** **                                                                                 | ** ** | **Nine Months  Ended  September 30, 2008** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **Cash flows from operating activities**                                                   |       |                                                      |       |                                                      |       |
| Net loss                                                                                   | $          | (5,732,388                                                | )          | $                                                         | (4,468,027 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used by) operating activities: |       |                                                      |       |                                                      |       |
| Depreciation and amortization                                                              |       | 1,048,773                                                 |       | 1,077,370                                                 |       |
| Capitalized interest                                                                       |       | (153,226                                                  | )          | (132,930                                                  | )          |
| Stock option compensation                                                                  |       | —                                                    |       | 6,478                                                     |       |
| Provisions for doubtful accounts                                                           |       | 143,496                                                   |       | 2,242                                                     |       |
| Accreted interest                                                                          |       | 41,807                                                    |       | 92,103                                                    |       |
| (Increase) decrease in assets                                                              |       |                                                      |       |                                                      |       |
| Inventories                                                                                |       | 1,079,318                                                 |       | (784,702                                                  | )          |
| Accounts receivable                                                                        |       | (1,919,584                                                | )          | (1,284,247                                                | )          |
| Income taxes receivable                                                                    |       | 2,345,041                                                 |       | (1,494,412                                                | )          |
| Other current assets                                                                       |       | (302,136                                                  | )          | (494,227                                                  | )          |
| Increase (decrease) in liabilities                                                         |       |                                                      |       |                                                      |       |
| Accounts payable                                                                           |       | (925,913                                                  | )          | 274,521                                                   |       |
| Other accrued liabilities                                                                  |       | 621,415                                                   |       | 769,501                                                   |       |
| Net cash used by operating activities                                                      |       | (3,753,397                                                | )          | (6,436,330                                                | )          |
|                                                                                       |       |                                                      |       |                                                      |       |
| **Cash flows from investing activities**                                                   |       |                                                      |       |                                                      |       |
| Purchase of property, plant, and equipment                                                 |       | (2,161,789                                                | )          | (321,961                                                  | )          |
| Acquisitions of patents, trademarks,  licenses and intangibles                             |       | (89,152                                                   | )          | (131,400                                                  | )          |
| Investment in LLC                                                                          |       | 497,690                                                   |       | —                                                    |       |
| Net cash used by investing activities                                                      |       | (1,753,251                                                | )          | (453,361                                                  | )          |
|                                                                                       |       |                                                      |       |                                                      |       |
| **Cash flows from financing activities**                                                   |       |                                                      |       |                                                      |       |
| Repayments of long-term debt and notes  payable                                            |       | (366,571                                                  | )          | (278,694                                                  | )          |
| Proceeds from long-term debt                                                               |       | 1,328,859                                                 |       | —                                                    |       |
| Payment of dividends on Series I and  II Class B Convertible Preferred Stock     |       | —                                                    |       | (1,053,544                                                | )          |
| Net cash provided by (used by) financing  activities                                       |       | 962,288                                                   |       | (1,332,238                                                | )          |
|                                                                                       |       |                                                      |       |                                                      |       |
| Net decrease in cash                                                                       |       | (4,544,360                                                | )          | (8,221,929                                                | )          |
|                                                                                       |       |                                                      |       |                                                      |       |
| Cash and cash equivalents at:                                                              |       |                                                      |       |                                                      |       |
| Beginning of period                                                                        |       | 40,507,431                                                |       | 46,814,689                                                |       |
| End of period                                                                              | $          | 35,963,071                                                | $          | 38,592,760                                                |       |
|                                                                                       |       |                                                      |       |                                                      |       |
| Supplemental disclosures of cash flow  information:                                        |       |                                                      |       |                                                      |       |
| Interest paid                                                                              | $          | 188,581                                                   | $          | 298,250                                                   |       |
|                                                                                            |            |                                                           |            |                                                           |            |  |

 

See accompanying notes to condensed financial statements

 

3

 

 

**RETRACTABLE TECHNOLOGIES, INC.**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

**(unaudited)**

 

**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® 0.5 ccinsulin syringe; 1cc tuberculin, insulin, and allergy antigen syringes; the3cc, 5cc, and 10cc syringes; the autodisable syringe; the small diameter tubeadapter; the blood collection tube holder; the allergy tray; the IV safetycatheter; and the Patient SafeTM Syringe.

 

**Basis of presentation**

 

The accompanying condensed financial statements areunaudited and, in the opinion of Management, reflect all adjustments that arenecessary for a fair presentation of the financial position and results ofoperations for the periods presented. All such adjustments are of a normal and recurring nature.  The results of operations for the periodspresented are not necessarily indicative of the results to be expected for theentire year.  The condensed financialstatements should be read in conjunction with the financial statementdisclosures contained in the Company’s audited financial statementsincorporated into its Form 10-K filed on March 31, 2008 for the yearended December 31, 2007.

 

**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 revenuesand expenses 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.

 

4

 

**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.  Gains orlosses from property disposals are included in income.

 

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

 

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

 

**Long-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.

 

**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**

 

Effective January 1, 2008, the Company adoptedStatement of Financial Accounting Standard (“SFAS”) No. 157, *Fair Value Measurements*(“SFAS 157”).  SFAS 157 defines fair value, establishes a frameworkfor measuring fair value in accordance with accounting principles generallyaccepted in the U.S., and expands disclosure requirements about fair valuemeasurements.  In accordance withFinancial Accounting Standards Board (“FASB”) Staff Position FAS 157-2, *Effective Date of FASB Statement No. 157*,the Company will defer the adoption of SFAS 157 for its nonfinancial assets andnonfinancial liabilities, except those items recognized or disclosed at fairvalue on an annual or more frequent recurring basis, until January 1,2009.  The adoption of SFAS 157 did nothave a material impact on the Company’s fair value measurements.

 

The Company estimates the fair market value offinancial instruments through the use of public market prices, quotes from financialinstitutions and other available information. Judgment is required in interpreting data to develop estimates of marketvalue and, accordingly, estimates are not necessarily indicative of the amountsthat could be realized in a current market exchange.  Short-term financial instruments, includingcash and cash equivalents, accounts receivable, accounts payable and otherliabilities, consist primarily of instruments without extended maturities, thefair value of which, based on Management’s estimates, equals their recordedvalues.

 

**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.

 

5

 

Considering the current economic climate, thesituation could change.  As a result, theCompany increased its Provision for doubtful accounts by approximately $144,000this 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 obtainedroughly 71.1% of its finished products in the first nine months of 2008 throughDouble Dove, a Chinese manufacturer.  Inthe event that the Company becomes unable to purchase such product from DoubleDove, the Company would need to find an alternate supplier for its 0.5 ccinsulin syringe, its 5cc and 10cc syringes and its autodisable syringe andincrease domestic production for 1cc and 3cc syringes to avoid a disruption insupply.

 

**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 than0.48% 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 Condensed Statements ofOperations.  No marketing fees have beenaccrued since October 15, 2003, the date the National Marketing andDistribution Agreement with Abbott was terminated.  The Company filed suit against Abbott in August 2005

 

6

 

for breach of contract.  Abbott filed an answer and counterclaim July 15,2008.  See Note 5 **COMMITMENTS AND CONTINGENCIES-**Litigationfor further discussion.

 

**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 andliabilities, based on enacted rates expected to be in effect when suchdifferences reverse in future periods. Deferred tax assets are periodically reviewed for realizability.  The Company had sufficient taxable incomefrom prior carryback years to realize all of its taxable losses through December 31,2006.  Taxable losses for 2007 andthereafter are subject to loss carryforwards. The Company has established a valuation allowance for its net deferredtax asset as future taxable income cannot be reasonably assured.  Penalties and interest on uncertain taxpositions are classified as income taxes in the Condensed Statements ofOperations.

 

**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 for the three and nine monthsended September 30, 2008 and 2007. Accordingly basic loss per share is equal to diluted earnings per share.

 

**Shipping and handling costs**

** **

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

 

**Research and development costs**

** **

Research and development costs are expensed asincurred.

 

**Share-based compensation**

** **

On September 26, 2008,the Company’s shareholders approved the 2008 Stock Option Plan and alsoapproved an Offer to Exchange Stock Options (the “Exchange Offer”) wherebyemployees, including executive officers, and Directors may exchange certainoutstanding underwater options for options issued under the 2008 Stock OptionPlan. See Note 6**SUBSEQUENT EVENTS** for further discussion.

 

The Company has issued options under threestock-based Director, independent contractor and employee compensation plans aswell as several individual option agreements. Two of the plans have terminated; however, the options continue untiltheir expected maturity dates.

 

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:

 

7

 
| ** **                 | ** ** | **Three Months  Ended  September 30, 2008** | ** ** | **Three Months  Ended  September 30, 2007** | ** ** | **Nine Months  Ended  September 30, 2008** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Cost of sales              | $          | —                                                     | $          | —                                                     | $          | —                                                    | $          | 6,648                                                     |       |
|                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Sales and marketing        |       | —                                                     |       | —                                                     |       | —                                                    |       | 3,086                                                     |       |
|                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Research and development   |       | —                                                     |       | —                                                     |       | —                                                    |       | (7,863                                                    | )          |
|                       |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| General and administrative |       | —                                                     |       | —                                                     |       | —                                                    |       | 4,607                                                     |       |
|                       | $          | —                                                     | $          | —                                                     | $          | —                                                    | $          | 6,478                                                     |       |

 

**Accounting Pronouncements**

** **

In April 2008, the Financial AccountingStandards Board (“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:

 
| ** **        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials     |       | $                                | 1,551,250  |                            | $          | 1,743,990 |   |
| Finished goods    |       | 4,612,161                        |       | 5,498,739                       |       |
|              |       | 6,163,411                        |       | 7,242,729                       |       |
| Inventory reserve |       | (205,600                         | )          | (205,600                        | )          |
|              |       | $                                | 5,957,811  |                            | $          | 7,037,129 |   |

 

**4.**                **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.

 

**5.**                **COMMITMENTS ANDCONTINGENCIES**

 

Litigation

 

On August 12, 2005, the Company filed a lawsuitagainst Abbott in the United States District Court in the Eastern District ofTexas, Texarkana Division.  It is alleging fraud and breach of contract inconnection with the National Marketing and Distribution Agreement dated as of May 4,2000, which was terminated on October 15, 2003.  It is seekingdamages which it estimates to be in millions of dollars of lost profits, out ofpocket expenses, and other damages.  In addition, it is seeking punitivedamages, pre- and post-judgment

 

8

 

interest, and attorney’s fees.  FollowingAbbott’s unsuccessful attempt to get the case dismissed and ordered toarbitration, Abbott filed an answer and counterclaim on July 15, 2008,alleging several breaches of contract, breach of implied warranty ofmerchantability, and breach of express warranty, seeking in excess of$6,000,000 in compensatory damages as well as seeking attorneys’ fees. The Company denies the validity of Abbott’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, 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 complaint to seek a declaratory judgmentthat OMI does not infringe Australian Patent No. 701878, again seeking nodamages.  Following a one-day trial in June 2007, the Court held thatone of the two letters written by outside counsel contained a threat of patentinfringement, and awarded costs to OMI in an amount that has not yet beendetermined.  Following a one-day trial in June 2008, the Court issueda declaratory judgment in August 2008 stating that OMI’s syringe does notinfringe the Australian patent no. 701878 but also awarding costs to theCompany.  The amount of costs to beawarded will be determined at a later date.

 

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 droppedthe 5,578,011 patent allegations from the lawsuit.  The Company and an officer, a co-plaintiff,are seeking injunctive relief, unspecified monetary damages and reimbursementof attorneys fees in the suit.  BD counterclaimed for non-infringement andinvalidity of the asserted patents.  In January 2008, the Courtsevered the patent claims from the other claims pending resolution of thepatent dispute, which is set for trial in March 2009. In April 2008,the Company and that same officer sued BD in the United States District Courtfor the Eastern District of Texas, Marshall Division, alleging infringement ofanother recently issued patent (7,351,224), and seeking injunctive relief,unspecified monetary damages (including treble damages) and reimbursement ofattorneys fees.  BD counterclaimed for non-infringement and invalidity ofthe asserted patent.  The Company and officer moved to consolidate thiscase with the other patent case against BD that was pending in Marshall and theCourt granted the Company’s motion, consolidating this case with theabove-stated case filed in June 2007.

 

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 Company counterclaimed for declarations ofnon-infringement, invalidity and unenforceability of the assertedpatents.  The plaintiffs subsequently dropped allegations with regard topatent 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 but has not ruled.  No trial datehas been set.

 

In March 2008, MedSafe Technologies LLC (“MedSafe”)initially sued the Company and BD in the United States District Court for theDistrict of South Carolina, Greenville Division, alleging infringement of aMedSafe patent (6,074,370) and seeking injunctive relief and unspecifiedmonetary damages.  The Company counterclaimed for declarations ofnon-infringement, invalidity, and unenforceability of the assertedpatent.  BD subsequently settled with MedSafe.  The case is set for trial in October 2009.

 

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 allegestheft of confidential information, intentional interference with contracts andengaging in false advertising that wrongfully disparages and mischaracterizes theCompany’s syringe products.  The Company further alleges that OMI madefalse allegations regarding the source of origin of its safety syringe productsbeing 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 the Company, seeking declaratoryjudgments of non-infringement and invalidity of the

 

9

 

asserted patents.  OMI is not seeking monetarydamages.  Trial is set for December 2009 and discovery is commencing.

 

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 was served on October 20, 2008, andno answer has yet been filed.

 

Other Matters

 

The Company has begun expansion of its warehouse(including additional warehouse space, additional office space, and a new CleanRoom).  This expansion is being funded bya construction line of credit from a bank for approximately $4.2 million,secured by a second lien deed to the land and existing buildings.

 

The Company had a licensing agreement with BaiyinTonsun Medical Device Co., Ltd. (“BTMD”) which expired on May 13,2008.  As a result of the expiration ofthe contract, the Company recognized $100,000 of prepaid royalty income asother income in the second quarter of 2008. The Company is in the process of negotiating a new agreement.  Royalties that were expected in 2007 were notreceived due to the time needed to build the factory, assembly equipment, andthe related infrastructure as well as the need of BTMD to meet the requisiteChinese government requirements.  Thefacility has been completed and BTMD is in the process of meeting Chinesegovernmental requirements.  Althoughsuccessful completion of an agreement cannot be assured, the Company stillcontinues to expect royalty payments although it is unable to predict the dateit will begin to receive such royalties. The Company should begin earning royalties once Chinese governmentrequirements are met and BTMD is able to produce and sell products.

 

**6.**                **SUBSEQUENT EVENTS**

 

On September 26, 2008,the Company’s shareholders approved the 2008 Stock Option Plan and alsoapproved an Exchange Offer whereby employees, including executive officers, andDirectors may exchange certain outstanding underwater options for optionsissued under the 2008 Stock Option Plan.

 

The Company filed an Offerto Exchange Stock Options on October 17, 2008, allowing existingemployees, including executive officers, and Directors to exchange underwaterstock options for new options to be granted under the 2008 Stock OptionPlan.  The Exchange Offer will terminateon November 18, 2008, unless extended. Any new options granted pursuant to the Exchange Offer will allow thepurchase of one half the number of shares underlying the underwater options andsuch new options will have exercise prices equal to the higher of: (1) thelast sales price of the Common Stock as reported on the NYSE Alternext US, LLC(“NYSE Alternext”) on the date of grant rounded to the next highest dime or (2) $1.30.  Shares underlying outstanding options, if alleligible options are exchanged, would be reduced by approximately 970,000shares.

 

**Item 2.****          ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

** **

FORWARD-LOOKINGSTATEMENT WARNING

 

Certain statements included by reference in thisfiling containing the words “could,” “may,” “believes,” “anticipates,” “intends,”“expects,” and similar such words constitute forward-looking 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 ability tosuccessfully complete a new license agreement with Baiyin Tonsun Medical DeviceCo., Ltd. (“BTMD”) and our receipt of payments thereunder, 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 market

 

10

 

players,specifically Becton Dickinson & Company (“BD”), in providing devices tothe safety market, and other factors referenced in **Item 1A. Risk Factors**in **Part II**.  Given these uncertainties, undue relianceshould not be placed on forward-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 IVcontamination, entered the market in 2008. Safety syringes comprised 98.6% ofour sales in the first nine months of 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 and internationalmarkets, our volumes are not as high as they should be given the nature andquality of our products, the federal and state legislation requiring the use ofsafe needle devices, and various Senate Subcommittee hearings on GroupPurchasing Organizations.

 

We continue to pursue various strategies to havebetter 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 moreproduct internationally.  Beginning in2004, we were given an award (from PATH) to supply syringes to various Africancountries.  Awards increased significantlyfrom 2004 to 2007.  However, currentlyfunding is uncertain for this program.  Despitethe loss of these orders, thus far we have managed to maintain internationalsales volumes.  Additionally, anAustralian distributor was awarded a one-year contract in March 2007 tosupply our VanishPoint® automated retraction syringes to all ofQueensland Health’s 202 acute care facilities. Queensland Health is a department within the government of Queensland,Australia.  The contract was renewed foran additional two years.  VanishPoint®products are distributed in Australia by Brisbane-based Scientific EducationalSupplies Pty Ltd.  The number ofinternational distributors continues to increase.  

** **

In the event we continue to have only limited marketaccess and the cash provided by the litigation settlements and generated fromoperations becomes insufficient, we would take cost cutting measures to reducecash requirements.  Such measures couldresult in the reduction of units being produced, the reduction of workforce,the reduction of salaries of officers and other nonhourly employees, and thedeferral of royalty payments.

** **

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 the first ninemonths of 2008, approximately 71.1% of the units we produced.  These purchases have improved profit marginsin spite of limited revenues.  The costof production per unit has generally declined as volumes increased.  Double Dove increased the prices in the fourthquarter to us by $0.005 per unit. Product cost reductions could be adversely affected by increasedmaterial and transportation costs.  Webelieve we could make up any long-term disruption in these supplies byutilizing more of the capacity at the Little Elm facility, except for the 0.5cc insulin syringe, the 5cc and 10cc syringes, and the autodisable syringewhich altogether comprised about 1.1% of our third quarter 2008 revenues.

 

We had a Licensing Agreement with BTMD which expiredon May 13, 2008.  As a result of theexpiration of the contract, we recognized $100,000 of prepaid royalty income inthe second quarter of 2008 as other income. We are in the process of negotiating a new agreement.  Royalties that were expected in 2007 were notreceived due to the time needed to build the factory, assembly equipment, andthe related infrastructure as well as the need of BTMD to meet the requisiteChinese government requirements.  Thefacility has been completed and BTMD is in

 

11

 

theprocess of meeting Chinese government requirements.  Although successful completion of anagreement cannot be assured, we still continue to expect royalty payments althoughwe are unable to predict the date we will begin to receive such royalties.  We should begin earning royalties onceChinese government requirements are met and BTMD is able to produce and sellproducts.

 

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

 

With increased volumes, our manufacturing unit costshave 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 begun the expansion of an existingwarehouse.  This expansion will increaseour warehouse area, provide for additional office space, and add a second CleanRoom.  The expansion is expected to becompleted in the first quarter of 2009.

 

**LIQUIDITY AND FUTURE CAPITAL REQUIREMENTS**

** **

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

 

Historical Sources of Liquidity

 

We have historically funded operations primarilyfrom 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 bank loans ofwhich $3,435,000 has been repaid and $475,000 was refinanced with a new notewith Lewisville State Bank, a division of 1st International Bank.  Additionally, we received a Small BusinessAdministration loan of $1,000,000 in 1996 to pay for portions of automatedassembly equipment, multi-cavity molds, and other equipment.  This loan has been repaid.  Furthermore, we borrowed $5,000,000 in 2000under our Credit Agreement with Abbott Laboratories (“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.  In2008, we received a construction line of credit for up to $4,210,000 to fund anexpansion of our warehouse.

 

Internal Sources of Liquidity

 

*Margins and Market Access*

* *

To achieve break even quarters, we need minimalaccess to hospital markets which has been difficult to obtain due to the monopolisticmarketplace which was the subject of our initial lawsuit and now also includedin our second lawsuit against BD. ** **We will continue to attempt to gainaccess to the market through our sales efforts, innovative technology, theintroduction 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

 

12

 

to28.9%) of our products in the U.S.  Thiscould temporarily increase unit costs as we ramp up domestic production.

 

The mix of domestic and international sales affectsthe average sales price of our products. Generally, the higher the ratio of domestic sales to internationalsales, the higher the average sales price will be.  Typically international sales are shippeddirectly from China.  Purchases ofproduct manufactured in China, if available, usually decrease the average costof manufacture for all units as domestic costs, such as indirect labor andoverhead, remain relatively constant. Double Dove has increased their prices to us by $0.005 per unit.  The number of units produced by the Companyversus manufactured in China can have a significant effect on the carryingcosts of inventory as well as Cost of sales. We will continue to evaluate the appropriate mix of productsmanufactured domestically and those manufactured in China to achieve economicbenefits as well as to maintain our domestic manufacturing capability.  Currently, approximately 28.9%****of our products are produced domestically.

 

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

 

*Seasonality*

* *

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

 

*Licensing Agreement*

* *

We had a Licensing Agreement with BTMD which expiredon May 13, 2008.  As a result of theexpiration of the contract, we recognized $100,000 of prepaid royalty income inthe second quarter of 2008 as other income. We are in the process of negotiating a new agreement.  Royalties that were expected in 2007 were notreceived due to the time needed to build the factory, assembly equipment, andthe related infrastructure as well as the need of BTMD to meet the requisiteChinese government requirements.  The facilityhas been completed and BTMD is in the process of meeting Chinese governmentrequirements.  Although successfulcompletion of an agreement cannot be assured, we still continue to expectroyalty payments, although we are unable to predict the date we will begin toreceive such royalties.  We should beginearning royalties once Chinese government requirements are met and BTMD is ableto 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 our inception,which have, together with the proceeds from the sales of equities andlitigation efforts, enabled us to pursue development and production of ourproducts.  Currently we believe we couldobtain additional funds through loans if needed.  Furthermore, the shareholders previouslyauthorized an additional 5,000,000 shares of a Class C Preferred Stockthat could, if necessary, be designated and used to raise funds through thesale of equity.

 

13

 

 

**CAPITAL RESOURCES**

 

Material Commitments for Expenditures

 

We have begun expansion of our warehouse (includingadditional warehouse space, additional office space, and a new CleanRoom).  We are funding this expansionwith a construction line of credit from Lewisville State Bank, a division of 1stInternational Bank, for approximately $4.2 million, secured by a second liendeed on the land and existing buildings. Draws under the construction line of credit will be converted topermanent financing upon completion of the building.  Completion is expected in the first quarterof 2009.

 

Trends in Capital Resources

 

Interest expense will increase due to the recentloan****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.

 

**MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

                The following discussion contains trendinformation and other forward-looking statements that involve a number of risksand uncertainties.  Our actual futureresults could differ materially from our historical results of operations andthose discussed in the forward-looking statements.  Variances have been rounded for ease ofreading.  All period references are tothe periods ended September 30, 2008, or 2007.

 

*Comparison of Three Months Ended*

*September 30, 2008, and September 30, 2007*

 

                Domestic sales accounted for 86.2% and 89.7%of the revenues for the three months ended September 30, 2008 and 2007,respectively.  International salesaccounted for the remaining revenues. Domestic revenues increased 8.8% principally due to higher volumes andhigher average selling prices arising as a result of sales mix  and international revenues increased 36.4%due primarily to higher volumes mitigated somewhat by lower selling pricesarising as a result of sales mix. Overall, unit sales increased 12.8%. Domestic unit sales increased 4.8% and international unit salesincreased 46.2%.  Domestic unit saleswere 75.2% of total unit sales for the three months ended September 30,2008.

 

                Gross profit decreased primarily due tohigher cost of goods sold.  Costs ofmanufactured product increased by 19.0% due to higher volumes and higher unitcost of manufactured product.  Theaverage cost of manufactured product sold per unit increased by 5.5%principally due to lower capitalized unit costs in inventory, therebyincreasing costs of goods sold, and higher period costs.  Profit margins can fluctuate depending upon,among other things, the cost of product manufactured and the capitalized costof product recorded in inventory, as well as product sales mix.  Royalty expense increased 4.2% due to highergross sales.

 

                Operating expenses decreased 6.7%.  The decrease in expense for Sales andmarketing was attributable primarily to travel and entertainment, marketingexpenses, and office expenses.  Thedecrease in Research and development costs was due principally to lowervalidation and engineering expense and lower consulting costs.  General and administrative costs decreaseddue to lower litigation costs and travel costs, mitigated by higher taxes otherthan income taxes, and higher legal expenses other than litigation expenses.Bad debt expense increased.

 

                Loss from operations decreased dueprincipally to lower operating expenses.

 

                Interest expense and interest income declineddue to lower interest rates and lower debt and cash equivalents balances.  In addition to generally declining interestrates, we shifted the bulk of our funds into U.S. Treasury bills and other U.S.government backed securities in April 2008.

 

14

 

                Our effective tax rate on the net loss beforeincome taxes was 0% for the three months ended September 30, 2008 and70.5% (a benefit due to a settlement in our favor of a state tax audit) for thethree months ended September 30, 2007.

 

                The Net loss for 2008 was $1.4 million higherthan the Net loss for 2007 due principally to the benefit for income taxes in2007 of $1.4 million.

 

*Comparison of Nine Months Ended*

*September 30, 2008, and September 30, 2007*

 

                Domestic sales accounted for 84.5% and 83.6%of the revenues for the nine months ended September 30, 2008 and 2007,respectively.  International salesaccounted for the remaining revenues. Domestic revenues increased 11.1% principally due to higher volumes andhigher average selling prices arising as a result of sales mix andinternational revenues decreased 1.7% due primarily to lower average sellingprices arising as a result of sales mix. Overall, unit sales increased 5.0%. Domestic unit sales increased 7.0% and international unit salesincreased 0.2%.  Domestic unit sales were72.0% of total unit sales for the nine months ended September 30, 2008.

 

                Gross profit increased primarily due tohigher revenues and slightly improved profit margins.  Costs of manufactured product increased dueto higher volumes and increased unit costs. The average cost of manufactured product sold per unit increased by1.7%.  Profit margins can fluctuatedepending upon, among other things, the cost of product manufactured and thecapitalized cost of product recorded in inventory, as well as product salesmix.  Royalty expense increased 5.4% dueto higher gross sales.

 

                Operating expenses decreased 0.2%.  The decrease in expense for Sales andmarketing was attributable primarily to lower marketing expenses, travel andentertainment, employee compensation, and office****expenses.  Consultingexpenses increased.  The increase inResearch and development costs was due principally to higher compensationcosts, mitigated by lower validation and consulting costs.  General and administrative costs increaseddue to higher taxes other than income taxes, bad debt accrual, compensationcosts, fees paid to distributors and office expenses.  Decreases in General and administrative costswere attributable to lower travel and entertainment, consulting, and temporaryservices costs.  Other income increased.

 

                Loss from operations decreased dueprincipally to higher gross profits.

 

                Interest expense and interest income declineddue to lower interest rates and lower debt and cash equivalents balances.  In addition to generally declining interestrates, we shifted the bulk of our funds into U.S. Treasury bills and other U.S.government backed securities in April 2008.

 

                The Company’s effective tax rate on the netloss before income taxes was 0% for the nine months ended September 30,2008 and 23.9% (a benefit due to a settlement in our favor of a state taxaudit) for the nine months ended September 30, 2007.

 

                The Net loss for 2008 was $1.3 million higherthan the Net loss for 2007 due principally to the benefit for income taxes in2007 of $1.4 million.

 

                Our balance sheet remains strong with cashmaking up 60.7% of total assets.  Workingcapital was $37.4 million at September 30, 2008, a decrease of $5.7million from December 31, 2007.  Thecurrent ratio was 5.4 at September 30, 2008 and 5.9 at December 31,2007.  The quick ratio was 4.6 at September 30,2008 and 4.8 at December 31, 2007. These indicators continue to demonstrate a strong financial position.

 

                Approximately $3.8 million in cash flow wasused by operating activities.  Theremaining uses of cash were for capital costs incurred for the acquisition ofplant, property and equipment and intangible assets, and the repayment oflong-term debt. ** **We utilized $1,300,000 of a$4,210,000 construction line of credit.

 

**Item 3.****       ****Quantitative and QualitativeDisclosures About Market Risk.**

 

No update

 

15

 

**Item 4.****       ****Controls and Procedures.**

 

                Our Management, including the Chief ExecutiveOfficer (the “CEO”) and Chief Financial Officer (the “CFO”), does not expectthat 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.

 

                Pursuant to paragraph (b) of Rule 13a-15or Rule 15d-15 of the Securities Exchange Act of 1934 and on November 14,2008, Management, with the participation of our President, Chairman, and CEO,Thomas J. Shaw, and our Vice President and CFO, Douglas W. Cowan, acting intheir capacities as our principal executive and financial officers, evaluatedthe effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) orRule 15d-15(e).  The CEO and CFO concludedthat, as of September 30, 2008 (the end of the period covered by thereport), based on the evaluation of these controls and procedures required byparagraph (b) of Rule 13a-15 or Rule 15d-15, there were nosignificant deficiencies in these controls and procedures. The CEO and CFOconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed in our periodic reports is recorded,processed, summarized, and reported within the time periods specified in theU.S. Securities and Exchange Commission (“SEC”) rules and forms.

 

                There have been no changes during the thirdquarter of 2008 or subsequent to September 30, 2008 identified inconnection with the evaluation required by paragraph (d) of Rule 13a-15or 15d-15 in our internal control over financial reporting or in any otherfactor that has materially affected or is reasonably likely to materiallyaffect our internal control over financial reporting.

 

**PART II—OTHERINFORMATION**

 

**Item 1.****       ****Legal Proceedings.**

 

On August 12, 2005, we filed a lawsuit againstAbbott in the United States District Court in the Eastern District of Texas,Texarkana Division.  We are alleging fraud and breach of contract inconnection with the National Marketing and Distribution Agreement dated as of May 4,2000, which was terminated on October 15, 2003.  We are seekingdamages which we estimate to be in millions of dollars of lost profits, out ofpocket expenses, and other damages.  In addition, we are seeking punitivedamages, pre- and post-judgment interest, and attorney’s fees.  FollowingAbbott’s unsuccessful attempt to get the case dismissed and ordered toarbitration, Abbott filed an answer and counterclaim on July 15, 2008,alleging several breaches of contract, breach of implied warranty ofmerchantability, and breach of express warranty, seeking in excess of$6,000,000 in compensatory damages as well as seeking attorneys’ fees.  Wedeny the validity of Abbott’s counterclaims.  Some discovery has alreadytaken place (related to the hearings addressing the prior motion to compelarbitration) 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 Occupationaland Medical Innovations Limited (“OMI”) in Federal Court of Australia, allegingthat two letters written to OMI by outside counsel contained unjustifiedthreats of patent infringement, but seeking no damages.  OMI later amendedits complaint to seek a declaratory judgment that OMI does not infringeAustralian 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 in an amount that has not yet been determined. Following a one-day trial in June 2008, the Court issued a declaratoryjudgment in August 2008 stating that OMI’s syringe does not infringe ourAustralian patent no. 701878 but also awarding costs to us.  The amount of costs to be awarded will bedetermined at a later date.

 

In June 2007, we sued BD in the United StatesDistrict Court for the Eastern District of Texas, Marshall Division, alleginginfringement of three patents (5,578,011; 5,632,733; and 6,090,077) andviolations by BD of the federal and state antitrust laws, and of the LanhamAct.  We subsequently dropped the 5,578,011 patent allegations from thelawsuit.  We and Thomas J. Shaw, aco-plaintiff, are seeking injunctive relief, unspecified monetary damages andreimbursement of attorneys fees in the suit.  BD counterclaimed fornon-infringement and invalidity of the asserted patents.  In January 2008,the Court severed the patent claims from the other claims pending resolution 

 

16

 

ofthe patent dispute, which is set for trial in March 2009. In April 2008,we and Thomas J. Shaw sued BD in the United States District Court for theEastern District of Texas, Marshall Division, alleging infringement of anotherrecently issued patent (7,351,224), and seeking injunctive relief, unspecifiedmonetary damages (including treble damages) and reimbursement of attorneysfees.  BD counterclaimed for non-infringement and invalidity of theasserted patent.  We moved to consolidate this case with the other patentcase against BD that was pending in Marshall and the Court granted our motion,consolidating this case with our above-stated case filed in June 2007.

 

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 for declarations of non-infringement,invalidity and unenforceability of the asserted 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 but has not ruled.  No trial date has been set.

 

In March 2008, MedSafe Technologies LLC (“MedSafe”)initially sued us and BD in the United States District Court for the Districtof South Carolina, Greenville Division, alleging infringement of a MedSafepatent (6,074,370) and seeking injunctive relief and unspecified monetarydamages.  We counterclaimed for declarations of non-infringement,invalidity, and unenforceability of the asserted patent.  BD subsequentlysettled with MedSafe.  The case is setfor trial in October 2009.

 

In April 2008, we sued OMI in the United StatesDistrict Court for the Eastern District of Texas, Tyler Division, alleging thatOMI has infringed two U.S. patents that are not at issue in the Australianlitigation (6,572,584 and 7,351,224).  We also allege theft ofconfidential information, intentional interference with contracts and engagingin false advertising that wrongfully disparages and mischaracterizes oursyringe products.  We further allege that OMI made false allegationsregarding the source of origin of its safety syringe products being offered inthe U.S. We seek injunctive relief, unspecified damages (including trebledamages) and reimbursement of attorneys fees in the suit.  OMI hascounterclaimed against us, seeking declaratory judgments of non-infringementand invalidity of our asserted patents.  OMI is not seeking monetarydamages.  Trial is set for December 2009 and discovery is commencing.

 

                In September 2008, we and Thomas J. Shawsued 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 was served on October 20, 2008, andno answer has yet been filed.

 

**               **We previously reported in our Form 10-Q forthe second quarter of 2008 updates with regard to all of the above legalproceedings with the exception of the new suit against SMI.

 

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

 

                The following is an updated list of riskfactors as set forth in our Form 10-K filed on March 31, 2008.  You should carefully consider the followingmaterial risks facing us.  If any ofthese risks occur, our business, results of operations, or financial conditionand the value of our Common Stock could 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.

 

17

 

Our Cash Position Is Decreasing and Legal ExpensesAre Increasing

 

                Due to our operating losses and currently increasinglegal fees, our cash position declined $4.5 million as of September 30,2008.  Our litigation efforts willcontinue to require a significant amount of cash until the issues areresolved.  Our lawsuit against BD iscurrently scheduled for trial in March 2009.  After conclusion of the trial, legal expensesare expected to decrease significantly despite multiple ongoing cases.

 

                In the event we continue to have only limitedmarket access and the cash provided by the prior litigation settlements and generatedfrom operations becomes insufficient and royalties from BTMD are notforthcoming, we would take cost cutting measures to reduce cash requirements.Such measures could result in reduction of units being produced, reduction ofworkforce, reduction of salaries of officers and other nonhourly employees, anddeferral of royalty payments.

 

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

 

                We have incurred net operating lossesincluding through all fiscal quarters of 2007 and through the third quarter of2008.  We may experience operating lossesin the future. If we are unable to gain sufficient market access and marketshare, we may be unable to continue to finance research and development as wellas support 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.  Eventually, however, our patent protectionmay decrease and we will be vulnerable to other competitors utilizing ourtechnology.

 

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 with a worldwide market share inthe safety syringe market of approximately 50%, Sherwood with approximately26%, and Terumo with a market share of approximately 10%.  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-term contracts withGroup Purchasing Organizations.  Thesecompetitors may be able to use these resources to improve their productsthrough research and acquisitions or develop new products, which may 

 

18

 

compete more effectively with our products.  If our competitors choose to use theirresources to create products superior to ours, we may be unable to sell ourproducts and our ability to continue operations would be weakened.

 

The Majority of Our International Sales Are FilledUsing One Supplier

 

                Most international sales are filled byproduction from Double Dove. In the event that we become unable to purchasesuch product from Double Dove, we would need to find an alternate supplier forthe 0.5 cc insulin syringe and the 5cc and 10cc syringes and increase domesticproduction for the 1cc and 3cc syringes to avoid a disruption in supply.  As of September 30, 2008, approximately71.1% 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 28.9%) of the products in the U.S. This could temporarily increase unit costs as we ramp up domestic production.

 

We Are Controlled by One Shareholder

 

                Thomas J. Shaw, our President and Chairman ofthe Board, and Ms. Suzanne August own 35.3% and 11.8%, respectively,of the outstanding Common Stock as of November 3, 2008.  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 to substantiallyinfluence 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 ofownership, for example, may have the effect of delaying, deferring orpreventing a change in control, impeding a merger, consolidation, takeover orother business combination involving us or discouraging a potential acquirerfrom making a tender offer or otherwise attempting to obtain control of us,which in turn could materially adversely affect the market price of our CommonStock.  Of the 23,800,064 shares ofCommon Stock outstanding as of November 3, 2008, executive officers andDirectors own or control 11,236,000 (47.2%) of the shares of outstanding CommonStock.

 

We Have Limited Access to the Capital Markets

 

                The volume of trading in our Common Stock onthe NYSE Alternext is low.  Accordingly,it is unclear if there is any significant market for our shares.  This may reduce our ability to raise cashthrough public or private offerings in the future.

 

Our Stock Price Sometimes Decreases Below NYSEAlternext Listing Standards

 

                Our share price fluctuates and has fallenbelow $2.00 which is required for listing on the NYSE Alternext under itsalternative listing standards.  The NYSEAlternext may initiate delisting procedures, in its discretion.  Delisting of our shares would greatly affectthe liquidity of our shares and would reduce our ability to raise funds fromthe sale of equity in the future. However, we believe such delisting application to be unlikely.  Furthermore, in the event that we receive adeficiency letter from the NYSE Alternext, we will have the right to appealsuch determination.  In addition,entities that are given such notices were previously (under the American StockExchange standards) given up to 18 months to execute a plan to bring themselvesinto compliance with the listing standards.

 

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 

 

19

 

affect the timing and/or collectability of someaccounts.  The Provision for doubtfulaccounts increased by $143,496 for the nine months ended September 30,2008 which brings the balance to $418,830.

 

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 could result in injury to the patient andcould expose healthcare workers to the risk of blood borne pathogens.  If any of our products prove to be defective,we may be required to recall those products. We do not have recall insurance.

 

                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, we have additional productliability protection under an Umbrella Liability Policy.  This policy provides an additional$10,000,000 per occurrence and aggregate limits in the event claims exceed theprimary commercial general liability policy limit.  We have not had any product liability claims.

 

**Item 2.****   ****Unregistered Sales of Equity Securities and Use ofProceeds.**

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

                Not applicable

 

Working Capital Restrictions and Limitations on the Payment ofDividends

 

                We maintain cash for use as collateral forletters of credit we provide from time to time to enable, among other things,the purchase of goods and services.  Asof September 30, 2008, we had $48,000 held as restricted cash for suchpurposes.  The Board of Directors hasauthorized Management to borrow and incur indebtedness in the form of lettersof credit in an aggregate amount, at any one time, of $5,000,000.

 

                The certificates of designation for each ofthe outstanding series of Class B Convertible Preferred Stock each providethat, if a dividend upon any shares of Preferred Stock is in arrears, nodividends may be paid or declared or any other distribution made upon any stockranking junior to such stock and generally no such junior stock may beredeemed.

 

**Item 3.****   ****Defaults Upon Senior Securities.**

 

Series I Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2008,the amount of dividends in arrears was $54,000 and the total arrearage was $90,000.

 

Series II Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2008,the amount of dividends in arrears was $165,000 and the total arrearage was$276,000.

 

Series III Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2008,the amount of dividends in arrears was $98,000 and the total arrearage was$3,083,000.

 

20

 

Series IV Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2008,the amount of dividends in arrears was $414,000 and the total arrearage was$6,892,000.

 

Series V Class B Convertible Preferred Stock

 

As of the nine months ended September 30, 2008,the amount of dividends in arrears was $299,000 and the total arrearage was$3,198,000.

 

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

 

**               **The 2008 Annual Meeting of Stockholders (the “AnnualMeeting”) was held on September 26, 2008, at 10:00 a.m., CST.  The purposes of the meeting were to: 1) electfive Class 2 Directors; 2) approve the 2008 Stock Option Plan; 3) approvethe Option Exchange Plan; and 4) approve the Third Amended and Restated Bylaws.

 

                Of the 23,800,064 shares of Common Stockentitled to vote, at least 21,533,483 were represented in person or by proxy atthe Annual Meeting, which is more than the 11,900,032 required to constitute aquorum.

 

                1) The election of five Class 2Directors was put to a vote and the results were as follows:

 
| **Nominees** | ** **       | **For** | ** ** | **Withheld** | ** ** |
|--------------|------------------|---------|------------|--------------|------------|
|         |             |    |       |         |       |
|         | Thomas J. Shaw   |    | 20,832,963 |         | 700,520    |   |
|         | Douglas W. Cowan |    | 20,974,579 |         | 558,904    |   |
|         | Marwan Saker     |    | 19,976,280 |         | 1,557,203  |   |
|         | Steven R. Wisner |    | 21,025,491 |         | 507,992    |   |
|         | Clarence Zierhut |    | 20,763,206 |         | 770,277    |   |

 

                Accordingly, Messrs Shaw, Cowan, Saker,Wisner, and Zierhut were elected as Class 2 Directors to serve until our2010 Annual Meeting.  As of theadjournment of the Annual Meeting, the Board of Directors consisted of thefollowing members:

 

| Thomas  J. Shaw   |   | Class 2  Director |
|-------------------|--------|------------------------|
| Douglas  W. Cowan |   | Class 2  Director |
| Marco  Laterza    |   | Class 1  Director |
| Amy  Mack         |   | Class 1  Director |
| Marwan  Saker     |   | Class 2  Director |
| Steven  R. Wisner |   | Class 2  Director |
| Clarence  Zierhut |   | Class 2  Director |

 

                2) The approval of the 2008 Stock Option Planwas put to a vote and the results were as follows:

 

| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-votes** |
|------------|------------|-------------|------------|-------------|------------|-----------------------|
| 16,031,282 |       | 1,645,169   |       | 84,812      |       | 3,772,220             |

 

                3) The approval of the Option Exchange Planwas put to a vote and the results were as follows:

 

| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-votes** |
|------------|------------|-------------|------------|-------------|------------|-----------------------|
| 15,569,793 |       | 2,179,019   |       | 12,450      |       | 3,772,221             |

 

                4) The approval of the Third Amended andRestated Bylaws was put to a vote and the results were as follows:

 

| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-votes** |
|------------|------------|-------------|------------|-------------|------------|-----------------------|
| 17,170,998 |       | 472,395     |       | 117,870     |       | 3,772,220             |

 

21

 

**Item 5.****       ****Other Information.**

 

                We filed an Exchange Offer on October 17,2008, allowing existing employees, including executive officers, and Directorsto exchange underwater stock options for new options to be granted under the2008 Stock Option Plan.  The ExchangeOffer will terminate on November 18, 2008, unless extended.  Any new options granted will allow thepurchase of one half the number of shares underlying the underwater options andsuch new options will have exercise prices equal to the higher of: (1) thelast sales price of our Common Stock as reported on the NYSE Alternext on thedate of grant rounded to the next highest dime or (2) $1.30.

 

                We have amended our Audit Committee Charterprimarily to better track the language of various applicable rules and regulations.  The amendments also change the nature of thereports due to the Audit Committee from the independent accountants to requireonly those required for companies listed on the NYSE Alternext.  The amendments also delete the requirementthat members of the committee be elected annually.  A copy of this charter is attached hereto as Exhibit no.99.1 to this Form 10-Q.

 

                We have amended our Nominating CommitteeCharter primarily to incorporate the shareholder nominating rules set outin our bylaws for ease of reference by shareholders and to clarify that thecommittee makes recommendations to the Board regarding committee members andchairpersons only upon request of the Board. A copy of this charter is attached hereto as Exhibit no. 99.2 tothis Form 10-Q.

 

                We have amended our Compensation and BenefitsCommittee charter primarily, among other things, to reduce the independencerequirements for committee members and to clarify that the committee serves asthe grantor and administrator of our compensation plans in the absence ofaction by the full Board of Directors. Previously, the independence requirements included satisfyinginapplicable and unnecessarily restrictive standards such as those for theAudit Committee members (no related party transactions at all) as well aslesser requirements such as those for the definition of “non-employee director”under Rule 16b-3 and “outside director” for purposes of Section 162(m) ofthe Internal Revenue Code.  The charterhas been amended to require that the Directors fulfill the independencerequirements for independent Directors as determined by the NYSEAlternext.  A copy of this amendedcharter is incorporated herein by reference as Exhibit No. 99.3.

 

                The Employment Agreement between us and Mr. ThomasJ. Shaw has been modified to avoid adverse tax consequences to Mr. Shawcreated by the passage of the American Jobs Creation Act of2004.   The agreement also reflectspast salary increases to Thomas J. Shaw. A copy of this Employment Agreement is attached hereto as Exhibit no.10 to this Form 10-Q.

 

# **Item 6.****       ****Exhibits.**

 
| Exhibit No. |   | Description  of Document                                                               |
|------------------|--------|----------------------------------------------------------------------------------------|
| 3(ii)            |   | Third Amended and Restated Bylaws*                                                     |
|             |   |                                                                                   |
| 10               |   | Employment Agreement between RTI and Thomas J. Shaw dated as of  January 1, 2008* |
|             |   |                                                                                   |
| 31.1             |   | Certification of Principal Executive Officer*                                          |
|             |   |                                                                                   |
| 31.2             |   | Certification of Principal Financial Officer*                                          |
|             |   |                                                                                   |
| 32               |   | Certification Pursuant to 18 U.S.C. Section 1350*                                 |
|             |   |                                                                                   |
| 99.1             |   | Audit Committee Charter*                                                               |
|             |   |                                                                                   |
| 99.2             |   | Nominating Committee Charter*                                                          |
|             |   |                                                                                   |
| 99.3             |   | Compensation and Benefits Committee Charter**                                          |

 
| * |   | Attached hereto |
|---|--------|-----------------|

 

22

 
| ** |   | Incorporated herein by reference to Appendix A of our definitive  Schedule 14A, filed with the SEC on August 19, 2008 |
|----|--------|----------------------------------------------------------------------------------------------------------------------------|

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| DATE:    November 14, 2008 | RETRACTABLE  TECHNOLOGIES, INC. |
|------------------------------------------------|---------------------------------|
|                                           | (Registrant)                    |
|                                           |                            |
|                                           |                            |
|                                           | BY:                             | /s/  Douglas W. Cowan |   |
|                                           |                            | DOUGLAS  W. COWANVICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) |

 

23