**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-K/A**


Amendment
      No. 1





x
            
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2007




**OR**





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




FOR
      THE
      TRANSITION PERIOD FROM ___________ TO ____________




COMMISSION
      FILE NUMBER: 001-09727





**PATIENT
      SAFETY TECHNOLOGIES, INC.**


**(Exact
      name of registrant as specified in its charter)**





**Delaware**
            
            **13-3419202****(State
                of Incorporation)**
            
            **(I.R.S.
                Employer Identification Number)****43460
                Ridge Park Drive, Suite 140, Temecula, CA
                92590****(Address
                of principal executive offices) (Zip
                Code)**





**Registrant’s
      telephone number, including area code: (951) 587-6201**




**Securities
      registered pursuant to Section 12(b) of the Act:** None





**Securities
      registered pursuant to Section 12(g) of the Act:**





**Title
                of each class**
              Common
                Stock, par value $0.33 per share
            **Name
                of each exchange on which registered**
              OTC
                Bulletin Board





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





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.  ̈





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




Indicate
      by check mark, if disclosure of delinquent filers in response to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx





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




As
      of
      April 11, 12,079,602 shares of the issuer's Common Stock were outstanding.
      The
      aggregate market value of the voting stock held by non-affiliates on April
      11,
      2008 was approximately $9,303,000 based on the average of the bid and asked
      prices of the issuer's common stock in the over-the-counter market on such
      date
      as reported by the OTC Bulletin Board.











**EXPLANATORY
      NOTE**


Patient
        Safety Technologies, Inc. (the “Company”) is filing this Amendment No. 1 on Form
        10-K/A (this “Amendment”) to its Annual Report on Form 10-K for the fiscal year
        ended December 31, 2007, which was originally filed on April 15, 2008 (the
        “Original Filing”).
 
 The
        purpose of this Amendment is to correct a typographical error in footnote
        20 of
        Item 8 of Part II of Form 10-K.  This Amendment amends and restates in
        their entirety only the cover page and Item 8 of Part II.  This Amendment
        does not affect any other parts of or exhibits to the Original Filing, and
        those
        unaffected parts or exhibits are not included in this Amendment.
 
 Except
        as
        expressly stated herein, this Amendment continues to speak as of the date
        of the
        Original Filing and the Company has not updated the disclosure contained
        herein
        to reflect events that have occurred since the filing of the Original
        Filing.  Accordingly, this Amendment should be read in conjunction with the
        Company’s other filings, if any, made with the Securities and Exchange
        Commission subsequent to the filing of the Original Filing, including any
        amendments to those filings, if any.







**PART
        II**
  FORM
        10-K
 FOR
        PATIENT SAFETY TECHNOLOGIES,
        INC
 FOR
        THE YEAR ENDED DECEMBER 31,
        2007


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




**PATIENT
      SAFETY TECHNOLOGIES, INC.**


**INDEX
      TO FINANCIAL STATEMENTS**





Report
                of Squar, Milner, Peterson, Miranda & Williamson, LLP
            
            2Report
                of Rothstein, Kass & Company, P.C.
            
            3Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            
            4Consolidated
                Statements of Operations and Comprehensive loss for the years ended
                December 31, 2007, 2006 and 2005
            
            5Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005
            
            6
                -
                7Consolidated
                Statements of Stockholders' Equity for the years ended December 31,
                2007,
                2006 and 2005
            
            8Notes
                to Financial Statements
            
            9
                -
                33





The
      schedules for which provision is made in the applicable regulation of the
      Securities and Exchange Commission are not required under the related
      instruction or are inapplicable and, therefore, have been omitted




-
          1 -




***Report
      of Independent Registered Public Accounting Firm***




To
      the
      Board of Directors and Stockholders of


Patient
      Safety Technologies, Inc.





We
      have
      audited the accompanying balance sheet of Patient Safety Technologies, Inc.
      (the
“Company”) as of December 31, 2007 and 2006, and the related statements of
      operations and comprehensive loss, stockholders' equity, and cash flows for
      the
      years then ended. These financial statements are the responsibility of the
      Company's management. Our responsibility is to express an opinion on these
      financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States).  Those standards require that
      we plan and perform the audit to obtain reasonable assurance about whether
      the
      financial statements are free of material misstatement *.*  The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our audits included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An
      audit also includes examining, on a test basis, evidence supporting the amounts
      and disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation.  We believe that our audit
      provides a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Patient Safety Technologies, Inc.
      as of December 31, 2007 and 2006, and the results of its operations and its
      cash
      flows for the years then ended, in conformity with accounting principles
      generally accepted in the United States of America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has reported recurring losses from operations through
      December 31, 2007 and has a significant accumulated deficit and a significant
      working capital deficit at December 31, 2007. These factors raise substantial
      doubt about the Company’s ability to continue as a going concern. Management’s
      plans as to these matters are described in Note 1. The accompanying financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.





/s/ Squar,
      Milner, Peterson, Miranda & Williamson, LLP





San
      Diego, California


April
      15,
      2008




-
          2 -




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of


Patient
      Safety Technologies, Inc. and Subsidiaries





We
      have
      audited the accompanying consolidated balance sheets of Patient Safety
      Technologies, Inc. (formerly known as Franklin Capital Corporation) and
      Subsidiaries (collectively the, “Company”) as of December 31, 2005, and the
      related consolidated statements of operations and comprehensive loss,
      stockholders’ equity, and cash flows for the year then ended. These consolidated
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Patient Safety Technologies,
      Inc. as of December 31, 2005, and the results of their operations and their
      cash
      flows for the year then ended, in conformity with accounting principles
      generally accepted in the United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1, the
      Company has a significant accumulated deficit and working capital deficit,
      and
      has incurred a significant net loss from operations. Further, the Company has
      yet to generate revenues from its medical products and healthcare solutions
      segments. These matters raise substantial doubt about the Company’s ability to
      continue as a going concern. Management’s plans in regard to these matters are
      also described in Note 1. The accompanying consolidated financial statements
      do
      not include any adjustments that might result from the outcome of this
      uncertainty.






/s/
      Rothstein, Kass & Company, P.C.




Roseland,
      New Jersey


April
      10,
      2006




-
          3 -




**PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Balance Sheets**
  **December
                  31,**
              
              **December
                  31,****2007**
              
              **2006****ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              405,413
              
              $
              3,775Accounts
                  receivable
              
              
              71,840
              
              
              65,933Inventories
              
              
              —
              
              
              42,825Prepaid
                  expenses
              
              
              104,723
              
              
              78,834Other
                  current assets
              
              
              19,174
              
              
              13,125**TOTAL
                  CURRENT ASSETS**
              
              
              601,150
              
              
              204,492Restricted
                  certificate of deposit
              
              
              87,500
              
              
              87,500Notes
                  receivable
              
              
              153,545
              
              
              153,668Property
                  and equipment, net
              
              
              663,391
              
              
              328,202Assets
                  held for sale, net
              
              
              405,986
              
              
              3,189,674Goodwill
              
              
              1,832,027
              
              
              1,687,527Patents,
                  net
              
              
              3,763,908
              
              
              4,088,850Long-term
                  investments
              
              
              666,667
              
              
              1,441,533**TOTAL
                  ASSETS**
              
              $
              8,174,174
              
              $
              11,181,446**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Notes
                  payable, current portion - net
              
              $
              1,172,380
              
              $
              3,517,149Accounts
                  payable
              
              
              708,593
              
              
              1,295,849Accrued
                  liabilities
              
              
              520,749
              
              
              824,466**TOTAL
                  CURRENT LIABILITIES**
              
              
              2,401,722
              
              
              5,637,464Notes
                  payable, less current portion - net
              
              
              2,530,558
              
              
              2,527,562Deferred
                  tax liabilities
              
              
              1,499,329
              
              
              1,473,066**COMMITMENTS
                  AND CONTINGENCIES (Note 18)****STOCKHOLDERS'
                  EQUITY**Convertible
                  preferred stock, $1.00 par value, cumulative 7% dividend:1,000,000
                  shares authorized; 10,950 issued and outstandingat
                  December 31, 2007 and December 31, 2006(Liquidation
                  preference of $1,229,138 at December 31, 2007 and $1,190,813
                  atDecember
                  31, 2006)
              
              
              10,950
              
              
              10,950Common
                  stock, $0.33 par value: 25,000,000 shares authorized;12,054,602
                  shares issued and outstanding as of December 31, 2007;
                  7,489,026shares
                  issued and 6,874,889 shares outstanding at December 31,
                  2006
              
              
              3,978,019
              
              
              2,471,379Additional
                  paid-in capital
              
              
              34,320,134
              
              
              29,654,341Accumulated
                  deficit
              
              
              (36,566,538
              )
              
              (29,483,910
              )1,742,565
              
              
              2,652,760Less:
                  614,137 shares of treasury stock, at cost, at December 31,
                  2006
              
              
              —
              
              
              (1,109,406
              )**TOTAL
                  STOCKHOLDERS' EQUITY**
              
              
              1,742,565
              
              
              1,543,354**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              8,174,174
              
              $
              11,181,446
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
 -
            4 -
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
          Statements of Operations and Comprehensive Loss**
 **For
                    The Year Ended December 31,****2007**
                
                **2006**
                
                **2005****REVENUES**
                
                $
                1,089,001
                
                $
                244,529
                
                $
                562,374**COST
                    OF SALES**
                
                
                716,292
                
                
                158,902
                
                
                —**Gross
                    margin**
                
                
                372,709
                
                
                85,627
                
                
                562,374**OPERATING
                    EXPENSES**Salaries
                    and employee benefits
                
                
                2,737,235
                
                
                3,722,822
                
                
                4,182,466Professional
                    fees
                
                
                843,207
                
                
                2,161,044
                
                
                2,523,035Rent
                
                
                78,937
                
                
                131,129
                
                
                88,368Insurance
                
                
                88,327
                
                
                87,674
                
                
                113,921Taxes
                    other than income taxes
                
                
                66,309
                
                
                101,536
                
                
                104,238Amortization
                    of patents
                
                
                324,942
                
                
                324,942
                
                
                270,785General
                    and administrative
                
                
                1,388,327
                
                
                1,162,041
                
                
                1,101,712**Total
                    operating expenses**
                
                
                5,527,284
                
                
                7,691,188
                
                
                8,384,525**Operating
                    loss**
                
                
                (5,154,575
                )
                
                (7,605,561
                )
                
                (7,822,151
                )**OTHER
                    INCOME (EXPENSES)**Interest,
                    dividend income and other
                
                
                4,287
                
                
                2,251
                
                
                42,476Liquidated
                    damages
                
                
                (193,346
                )
                
                —
                
                
                —Equity
                    in loss of investee
                
                
                —
                
                
                —
                
                
                (74,660
                )Realized
                    gain (loss) on investments, net
                
                
                22,394
                
                
                (1,541,506
                )
                
                2,014,369Gain
                    on debt extinguishment
                
                
                —
                
                
                190,922
                
                
                —Interest
                    expense
                
                
                (1,468,045
                )
                
                (3,155,853
                )
                
                (135,414
                )Unrealized
                    (loss) gain on marketable securities, net
                
                
                (24,578
                )
                
                16,901
                
                
                32,335**Loss
                    from continuing operations before income taxes**
                
                
                (6,813,863
                )
                
                (12,092,846
                )
                
                (5,943,045
                )**Income
                    tax expense (benefit)**
                
                
                (26,264
                )
                
                116,979
                
                
                97,482**Loss
                    from continuing operations**
                
                
                (6,840,127
                )
                
                (11,975,867
                )
                
                (5,845,563
                )**Loss
                    from discontinued operations**
                
                
                (165,851
                )
                
                (1,647,285
                )
                
                (61,960
                )**Net
                    loss**
                
                
                (7,005,978
                )
                
                (13,623,152
                )
                
                (5,907,523
                )**Preferred
                    dividends**
                
                
                (76,650
                )
                
                (76,650
                )
                
                (75,700
                )**Loss
                    applicable to common shareholders**
                
                $
                (7,082,628
                )
                $
                (13,699,802
                )
                $
                (5,983,223
                )**Basic
                    and diluted net loss per common share****Continuing
                    operations**
                
                $
                (0.68
                )
                $
                (1.89
                )
                $
                (1.10
                )**Discontinued
                    operations**
                
                $
                (0.02
                )
                $
                (0.26
                )
                $
                (0.01
                )**Net
                    loss**
                
                $
                (0.70
                )
                $
                (2.15
                )
                $
                (1.11
                )**Weighted
                    average common shares outstanding - basic and
                    diluted**
                
                
                10,066,940
                
                
                6,362,195
                
                
                5,373,318**Comprehensive
                    loss:****Net
                    loss**
                
                $
                (7,005,978
                )
                $
                (13,623,152
                )
                $
                (5,907,523
                )**Other
                    comprehensive (loss) gain, unrealized gain (loss)
                    on****available-for-sale
                    investments**
                
                
                —
                
                
                (2,374,858
                )
                
                2,374,858.00**Total
                    comprehensive loss**
                
                $
                (7,005,978
                )
                $
                (15,998,010
                )
                $
                (3,532,665
                )
  The
            accompanying notes are an integral part of these consolidated financial
            statements.
 -
            5 -
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
            Statements of Cash Flows**
 **For
                    The Year Ended December 31,****2007**
                
                **2006**
                
                **2005**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (7,005,978
                )
                $
                (13,623,152
                )
                $
                (5,907,523
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                
                
                205,673
                
                
                136,056
                
                
                14,943Amortization
                    of patents
                
                
                324,942
                
                
                324,942
                
                
                270,785Non-cash
                    interest
                
                
                1,083,813
                
                
                2,983,417
                
                
                —Goodwill
                    impairment
                
                
                —
                
                
                971,036
                
                
                —Realized
                    (gain) loss on investments, net
                
                
                (32,561
                )
                
                1,541,506
                
                
                (2,014,369
                )Gain
                    on debt extinguishment
                
                
                —
                
                
                (190,922
                )
                
                —Unrealized
                    gain on marketable securities
                
                
                24,578
                
                
                (16,901
                )
                
                (32,335
                )Stock-based
                    compensation to employees and directors
                
                
                1,097,123
                
                
                2,403,173
                
                
                3,116,674Stock-based
                    compensation to consultants
                
                
                57,249
                
                
                898,294
                
                
                1,387,612Stock-based
                    compensation for liquidated damages
                
                
                193,346
                
                
                —
                
                
                —Stock
                    received for services
                
                
                —
                
                
                —
                
                
                (666,249
                )Loss
                    on investee
                
                
                —
                
                
                —
                
                
                74,660Income
                    tax expense (benefit)
                
                
                26,264
                
                
                (116,979
                )
                
                (97,482
                )Minority
                    interest
                
                
                —
                
                
                —
                
                
                (47,008
                )Changes
                    in operating assets and liabilities:Restricted
                    cash
                
                
                —
                
                
                —
                
                
                (87,500
                )Accounts
                    receivable
                
                
                (5,907
                )
                
                (65,933
                )
                
                —Receivables
                    from investments
                
                
                —
                
                
                934,031
                
                
                (934,031
                )Marketable
                    securities, net
                
                
                —
                
                
                809,260
                
                
                2,439,665Inventories
                
                
                42,825
                
                
                34,656
                
                
                (77,481
                )Prepaid
                    expenses
                
                
                474,111
                
                
                33,900
                
                
                43,278Other
                    current assets
                
                
                (6,049
                )
                
                105,269
                
                
                (38,896
                )Notes
                    receivable
                
                
                123
                
                
                (32,603
                )
                
                —Assets
                    held for sale, net
                
                
                21,818
                
                
                —
                
                
                —Accounts
                    payable
                
                
                (587,256
                )
                
                878,372
                
                
                494,918Accrued
                    liabilities
                
                
                320,770Due
                    to broker
                
                
                —
                
                
                (801,863
                )
                
                341,087Net
                    cash used in operating activities
                
                
                (3,765,116
                )
                
                (2,794,441
                )
                
                (1,719,252
                )Cash
                    flows from investing activities:Purchase
                    of property and equipment
                
                
                (561,068
                )
                
                (2,305,657
                )
                
                (829,537
                )Purchase
                    of SurgiCount
                
                
                —
                
                
                —
                
                
                (432,398
                )Proceeds
                    from sale of property and equipment
                
                
                42,600
                
                
                —
                
                
                —Proceeds
                    from sale of assets held for sale, net
                
                
                3,178,023
                
                
                —
                
                
                —Proceeds
                    from sale of long-term investments
                
                
                333,333
                
                
                289,409
                
                
                1,371,522Purchases
                    of long-term investments
                
                
                —
                
                
                —
                
                
                (903,173
                )Net
                    cash provided by (used in) investing activities
                
                
                2,992,888
                
                
                (2,016,248
                )
                
                (793,586
                )Cash
                    flows from financing activities:Proceeds
                    from issuance of common stock and warrants
                
                
                4,484,406
                
                
                527,850
                
                
                250,000Proceeds
                    from exercise of stock options
                
                
                —
                
                
                —
                
                
                26,250Purchases
                    of treasury stock
                
                
                —
                
                
                —
                
                
                (36,931
                )Proceeds
                    from notes payable
                
                
                100,000
                
                
                7,549,683
                
                
                1,621,627Payments
                    and decrease on notes payable
                
                
                (3,372,215
                )
                
                (3,342,442
                )
                
                (95,976
                )Payments
                    of preferred dividends
                
                
                (38,325
                )
                
                —
                
                
                (19,163
                )Net
                    cash provided by financing activities
                
                
                1,173,866
                
                
                4,735,091
                
                
                1,745,807Net
                    increase (decrease) in cash
                
                
                401,638
                
                
                (75,598
                )
                
                (767,031
                )Cash
                    at beginning of period
                
                
                3,775
                
                
                79,373
                
                
                846,404Cash
                    at end of period
                
                $
                405,413
                
                $
                3,775
                
                $
                79,373
  The
            accompanying notes are an integral part of these consolidated financial
            statements.
 -
            6 -
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
            Statements of Cash Flows (continued)**
 **For
                    The Year Ended December 31,****2007**
                
                **2006**
                
                **2005**Supplemental
                    disclosures of cash flow information:Cash
                    paid during the period for interest
                
                $
                255,245
                
                $
                216,779
                
                $
                61,593Supplemental
                    schedule of non cash investing and financing activities:Dividends
                    accrued
                
                $
                38,325
                
                $
                76,650
                
                $
                75,700Issuance
                    of common stock and warrants in connection with Surgicount
                    acquisition
                
                $
                144,500
                
                $
                —
                
                $
                4,232,178Issuance
                    of common stock in payment of notes payable and accrued
                    interest
                
                $
                695,732
                
                $
                —
                
                $
                —Issuance
                    of common stock for inventory
                
                $
                500,000
                
                $
                —
                
                $
                —Payment
                    of accrued liability with long-term investments
                
                $
                10,969
                
                $
                —
                
                $
                —Reclassification
                    of accrued interest to notes payable, less current portion -
                    net
                
                $
                348,614
                
                $
                —
                
                $
                —Reclassification
                    of long term investments to assets held for sale
                
                $
                430,564
                
                $
                —
                
                $
                —Issuance
                    of common stock in connection with asset purchase
                    agreement
                
                $
                —
                
                $
                —
                
                $
                66,895Issuance
                    of common stock in connection with land acquisition
                
                $
                —
                
                $
                —
                
                $
                85,619Issuance
                    of common stock in connection with purchase of marketable
                    securities
                
                $
                —
                
                $
                —
                
                $
                101,640Issuance
                    of common stock in connection with prepaid legal services
                
                $
                —
                
                $
                50,000
                
                $
                —Accrued
                    purchase price of investment
                
                $
                —
                
                $
                —
                
                $
                (165,240
                )Assumption
                    of accrued liabilities
                
                $
                —
                
                $
                —
                
                $
                15,000Capitalized
                    interest
                
                $
                —
                
                $
                —
                
                $
                28,840Reclassification
                    of other current asset to purchase of Surgicount
                
                $
                —
                
                $
                —
                
                $
                20,000Purchase
                    of the remaining 50% interest in ASG, through issuance of common
                    stock,
                    resulting in the following asset acquired and liabilities assumed
                    during
                    the quarter ended March 31, 2006 as follows:ASGGoodwill
                
                $
                357,008Common
                    stock issued
                
                $
                (610,000
                )Minority
                    interest
                
                $
                252,992In
                    connection with the Company's acquisitons of Surgicount and ASG,
                    equity
                    instruments were issued and liabilities assumed during 2005 as
                    follows:Surgicount
                
                
                
                
                
                ASGFair
                    value of assets acquired
                
                $
                6,372,103
                
                $
                1,095,211Cash
                    paid
                
                
                (452,398
                )
                
                (300,000
                )Equity
                    instruments issued
                
                
                (4,232,178
                )Minority
                    interest
                
                
                
                
                
                (300,000
                )Liabilities
                    assumed
                
                $
                1,687,527
                
                $
                495,211
  The
            accompanying notes are an integral part of these consolidated interim
            financial
            statements.
 -
            7 -
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Stockholders' Equity**
 **For
          the Three Years Ended December 31, 2007**
 **Total****Preferred
                    Stock**
                
                **Common
                    Stock Issued**
                
                **Paid-In**
                
                **Other**
                  **Comprehensive**
                
                **Accumulated**
                
                **Treasury
                    Stock**
                
                **Shareholders’****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Capital**
                
                **Income**
                
                **Deficit**
                
                **Shares**
                
                **Amount**
                
                **Equity**BALANCES,
                    December 31, 2004
                
                
                10,950
                
                $
                10,950
                
                
                6,128,067
                
                $
                2,022,262
                
                $
                13,950,774
                
                $
                —
                
                $
                (9,800,885
                )
                
                (1,457,364
                )
                $
                (2,616,832
                )
                $
                3,566,269Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (5,907,523
                )
                
                —
                
                
                —
                
                
                (5,907,523
                )Other
                    comprehensive income
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                2,374,858
                
                
                —
                
                
                —
                
                
                —
                
                
                2,374,858Preferred
                    Dividends
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (75,700
                )
                
                —
                
                
                —
                
                
                (75,700
                )Issuance
                    of common stock for:Cash
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                129,904
                
                
                —
                
                
                —
                
                
                65,319
                
                
                120,096
                
                
                250,000Purchase
                    of investments/Surgicount acquisition
                
                
                —
                
                
                —
                
                
                600,000
                
                
                198,000
                
                
                3,579,916
                
                
                —
                
                
                —
                
                
                58,444
                
                
                104,943
                
                
                3,882,859Exercise
                    of stock options
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                16,150
                
                
                —
                
                
                —
                
                
                5,625
                
                
                10,100
                
                
                26,250Services
                
                
                —
                
                
                —
                
                
                96,961
                
                
                31,998
                
                
                408,220
                
                
                —
                
                
                —
                
                
                15,756
                
                
                29,268
                
                
                469,486Compensation
                    expense due to warrant issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                918,132
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                918,132Compensation
                    expense due to restricted stock issuances
                
                
                —
                
                
                —
                
                
                170,248
                
                
                56,181
                
                
                1,463,666
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,519,847Compensation
                    expense due to stock option issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,596,825
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,596,825Warrants
                    issued in purchase of Surgicount
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                536,578
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                536,578Repurchases
                    of common stock
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (10,611
                )
                
                (36,931
                )
                
                (36,931
                )BALANCES,
                    December 31, 2005
                
                
                10,950
                
                $
                10,950
                
                
                6,995,276
                
                $
                2,308,441
                
                $
                22,600,165
                
                $
                2,374,858
                
                $
                (15,784,108
                )
                
                (1,322,831
                )
                $
                (2,389,356
                )
                $
                9,120,950Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (13,623,152
                )
                
                —
                
                
                —
                
                
                (13,623,152
                )Other
                    comprehensive income
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,374,858
                )
                
                —
                
                
                —
                
                
                —
                
                
                (2,374,858
                )Preferred
                    Dividends
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (76,650
                )
                
                —
                
                
                —
                
                
                (76,650
                )Issuance
                    of common stock for:Cash
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (263,178
                )
                
                —
                
                
                —
                
                
                438,000
                
                
                791,028
                
                
                527,850Purchase
                    of ASG
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                248,751
                
                
                —
                
                
                —
                
                
                200,000
                
                
                361,249
                
                
                610,000Services
                
                
                —
                
                
                —
                
                
                79,144
                
                
                26,118
                
                
                331,288
                
                
                —
                
                
                —
                
                
                70,694
                
                
                127,673
                
                
                485,079Compensation
                    expense due to warrant issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                593,215
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                593,215Compensation
                    expense due to restricted stock issuances
                
                
                —
                
                
                —
                
                
                414,606
                
                
                136,820
                
                
                968,565
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,105,385Compensation
                    expense due to stock option issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,117,788
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,117,788Warrants
                    issued in connection with debt financings
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                4,057,747
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                4,057,747BALANCES,
                    December 31, 2006
                
                
                10,950
                
                $
                10,950
                
                
                7,489,026
                
                $
                2,471,379
                
                $
                29,654,341
                
                $
                —
                
                $
                (29,483,910
                )
                
                (614,137
                )
                $
                (1,109,406
                )
                $
                1,543,354Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (7,005,978
                )
                
                —
                
                
                —
                
                
                (7,005,978
                )Preferred
                    Dividends
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (76,650
                )
                
                —
                
                
                —
                
                
                (76,650
                )Issuance
                    of common stock for:Cash
                
                
                —
                
                
                —
                
                
                3,639,863
                
                
                1,201,155
                
                
                2,828,026
                
                
                —
                
                
                —
                
                
                584,137
                
                
                1,055,226
                
                
                5,084,407Contingent
                    payment due to SurgiCount acquisition
                
                
                —
                
                
                —
                
                
                100,000
                
                
                33,000
                
                
                111,500
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                144,500Services
                
                
                —
                
                
                —
                
                
                33,000
                
                
                10,890
                
                
                38,610
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                49,500Payment
                    of debt
                
                
                
                
                
                
                
                
                551,197
                
                
                181,895
                
                
                513,836
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                695,731Compensation
                    expense due to warrant issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                210,578
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                210,578Compensation
                    expense due to restricted stock issuances
                
                
                —
                
                
                —
                
                
                241,516
                
                
                79,700
                
                
                289,054
                
                
                —
                
                
                —
                
                
                30,000
                
                
                54,180
                
                
                422,934Compensation
                    expense due to stock option issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                674,189
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                674,18910,950
                
                $
                10,950
                
                
                12,054,602
                
                $
                3,978,019
                
                $
                34,320,134
                
                $
                —
                
                $
                (36,566,538
                )
                
                —
                
                $
                —
                
                
                1,742,565
  The
            accompanying notes are an integral part of these consolidated interim
            financial
            statements.
 -
            8 -




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2007**




**1.
      DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION**





Patient
      Safety Technologies, Inc. ( ***"PST"*** or the ***"Company"*** )
      is a
      Delaware corporation. The Company’s operations are conducted at its wholly-owned
      operating subsidiary, SurgiCount Medical, Inc. ( ***“SurgiCount”*** ),
      a
      California corporation.





The
      Company’s primary focus is development, manufacturing and distribution of
      products and services focused primarily in the health care and medical products
      field, particularly the patient safety markets. SurgiCount is a developer and
      manufacturer of patient safety products and services. The SurgiCount
      Safety-Sponge  System
      is
      a patented turn-key array of modified surgical sponges, line-of-sight scanning
      SurgiCounters, and printPAD printers integrated together to form a comprehensive
      counting and documentation system.





Until
      June 29, 2007, the Company also operated a car wash through Automotive Services
      Group, Inc. ( ***“Automotive
      Services Group”*** ),
      which
      held the Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
      its
      wholly-owned subsidiary. As discussed in Note 4, during the fourth quarter
      of
      2006 the Company began marketing the assets held in ASG for sale and on June
      29,
      2007, the sale of ASG’s one operating car wash was completed. In addition, the
      Company holds various other unrelated investments including investments in
      real
      estate and in a financial services company, which it is in the process of
      liquidating as part of a strategic plan adopted during 2006 to dispose of all
      of
      the Company’s non patient safety related assets.





**2.
      LIQUIDITY AND GOING CONCERN**





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. At December 31, 2007, the Company
      has an accumulated deficit of approximately $36.6 million and a working capital
      deficit of approximately $1.8 million. For the year ended December 31, 2007,
      the
      Company incurred a loss of approximately $7.1 million and has used approximately
      $3.8 million in cash in its operations. Further, as of December 31, 2007 the
      Company has only generated minimal revenues from its medical products and
      healthcare solutions segments. These conditions raise substantial doubt about
      the Company’s ability to continue as a going concern. The Company has relied on
      liquidating investments and short-term debt financings to fund a large portion
      of its operations. In order to ensure the continued viability of the Company,
      equity financing must be obtained and profitable operations must be achieved
      in
      order to repay the existing short-term debt and to provide a sufficient source
      of operating capital. Although the Company has received equity financing during
      the year ended December 31, 2007, the Company is currently seeking additional
      financing and believes that it will be successful. However, no assurances can
      be
      made that it will be successful obtaining a sufficient amount of equity
      financing to continue to fund its operations or that the Company will achieve
      profitable operations and positive cash flow from its medical products segment.
      The consolidated financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.





**3.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Principles
      of Consolidation**





The
      accompanying consolidated financial statements for 20 07
      include the accounts of the
      Company and its subsidiaries. All significant intercompany balances and
      transactions have been eliminated in consolidation.





**Use
      of Estimates**





The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America
      (“GAAP”). The preparation of financial statements in conformity with GAAP
      requires management to make estimates and assumptions that affect the amounts
      reported in the financial statements and accompanying notes. These estimates
      are
      based on knowledge of current events and anticipated future events and
      accordingly, actual results may differ from those estimates.




-
          9 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**


**Cash
      and Cash Equivalents**





The
      Company considers only highly-liquid investments such as money market funds
      and
      commercial paper with maturities of three months or less at the date of their
      acquisition as cash and cash equivalents.





**Concentration
      of Credit Risk**





From
      time
      to time, the Company maintains its cash balances at a financial institution
      that
      exceeds the Federal Deposit Insurance Corporation coverage of $100,000. The
      Company has not experienced any losses in such accounts and believes it is
      not
      exposed to any significant credit risk on cash.





**Shipping
      and Handling Costs**





Shipping
      and handling costs are classified as cost of sales.





**Accounts
      Receivable**





Accounts
      receivable are recorded at the invoice amount and do not bear interest. Account
      balances are reviewed individually for collectibility. Historically, the Company
      has not incurred any credit losses on extended credits. An allowance for bad
      debts has not been recorded and is not considered necessary due to the nature
      of
      the Company's customer base and the lack of historical write offs.





**Inventories**





Inventories,
      consisting primarily of hand held scanners at December 31, 2006, are stated
      at
      the lower of cost or market on the first-in, first-out basis. There was no
      inventory recorded as of December 31, 2007.





**Investments
      - Debt and Equity Securities**





The
      Company complies with accounting and reporting requirements of Statement of
      Financial Accounting Standards ( ***“SFAS”*** )
      No.
      115, *Accounting
      for Certain Investments in Debt and Equity Securities* ( ***“SFAS
      No. 115”*** ).
      SFAS
      No. 115 requires that certain debt and equity securities be classified into
      one
      of three categories: held-to-maturity, available-for-sale or trading securities.





*Trading
      Securities.* The
      Company’s investment in marketable securities that are bought and held
      principally for the purpose of selling them in the near-term are classified
      as
      trading securities. Trading securities are recorded at fair value on the balance
      sheet in current assets, with the change in fair value during the period
      included in earnings in the statement of operations.





*Available-for-Sale
      Investments.* Investments
      designated as available-for-sale include both marketable equity and debt
      (including redeemable preferred stock) securities. Investments that are
      designated as available-for-sale are reported at fair value, with unrealized
      gains and losses recorded in stockholders’ equity. Realized gains and losses on
      the sale or exchange of equity securities and declines in value judged to be
      other than temporary are recorded in realized gains (losses) on investments,
      net. During the year ended December 31, 2006, $2,375,000 of other comprehensive
      income was reclassified into earnings.





**Investments**





The
      Company complies with Accounting Principles Board ( ***“APB”*** )
      Opinion
      No. 18, *The
      Equity Method of Accounting for Investments in Common Stock* .
      Investments are accounted for using the equity method of accounting if the
      investment provided the Company the ability to exercise significant influence,
      but not control, over an investee. Significant influence is generally deemed
      to
      exist if the Company has an ownership interest in the voting stock of the
      investee of between 20% and 50%, although other factors, such as representation
      on the investee's board of directors, are considered in determining whether
      the
      equity method of accounting is appropriate. The Company records its investments
      in equity method investees meeting these characteristics under Long-Term
      Investments in the accompanying consolidated financial statements. These
      investments are carried at cost, adjusted for the Company’s proportionate share
      of their undistributed earnings or losses. The Company’s proportionate share of
      income or losses are recorded in equity in income (loss) of investee in the
      statements of operations.




-
          10 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**
  Other
        investments that the Company has less than 20% ownership of common stock
        of the
        investee is accounted for under the cost method of accounting.





*Valuation
      of Investments.* Security
      investments which are publicly traded on a national exchange or Nasdaq Stock
      Market are stated at the last reported sales price on the day of valuation
      or,
      if no sale was reported on that date, then the securities are stated at the
      last
      quoted bid price. The Company may determine, if appropriate, to discount the
      value where there is an impediment to the marketability of the securities
      held.





Investments
      for which there is no ready market are initially valued at cost and, thereafter,
      at fair value. To determine fair value, an impairment analysis is performed
      based upon the financial condition and operating results of the issuer and
      other
      pertinent factors. Other pertinent factors taken into consideration to determine
      the fair value of an investment includes, but are not limited to, assumptions
      related to future results of operations and growth of the investee company,
      the
      nature and value of any collateral, the investee company’s ability to make
      payments, the markets in which the investee company does business, comparison
      to
      valuations of publicly traded companies, comparisons to recent sales of
      comparable companies, the discounted value of the cash flows of the portfolio
      company and other relevant factors. The financial condition and operating
      results have been derived utilizing both audited and unaudited data. In the
      absence of a ready market for an investment, numerous assumptions are inherent
      in the valuation process. Some or all of these assumptions may not materialize.
      Unanticipated events and circumstances may occur subsequent to the date of
      the
      valuation and values may change due to future events. Therefore, the actual
      amounts eventually realized from each investment may vary from the valuations
      shown and the differences may be material.





The
      Company complies with the FASB's Emerging Issues Task Force ( ***“EITF”*** )
      Issue
      No. 03-1, *The
      Meaning of Other-Than-Temporary Impairment and It's Application to Certain
      Investments* ,
      to
      determine whether certain investments are considered impaired, whether that
      impairment is other-than-temporary, and the measurement and recognition of
      an
      impairment loss. The EITF Issue No. 03-1 also provides guidance on accounting
      considerations subsequent to the recognition of an other-than-temporary
      impairment and requires certain disclosures about unrealized losses that have
      been recognized as other-than-temporary impairments.




Investments
      identified as having an indicator of impairment are subject to further analysis
      to determine if the investment is other than temporarily impaired, in which
      case
      the investment is written down to its impaired value. When an investee company
      is not considered viable from a financial or technological point of view, the
      entire investment is written down since we consider the estimated fair market
      value to be nominal. If an investee company obtains additional funding at a
      valuation lower than the Company’s carrying amount or requires a new round of
      equity funding to stay in operation and the new funding does not appear
      imminent, a presumption is made that the investment is other than temporarily
      impaired, unless specific facts and circumstances indicate otherwise. No
      impairment charges were recognized during the year ended December 31, 2007.
      During the years ended December 31, 2006 and 2005, included in realized gain
      (loss) on investments, net, is a $1,458,000 impairment charge from the Company’s
      investment in Ipex, Inc. and a $50,000 impairment charge from the Company’s
      investment China Nurse, LLC, respectively.





**Gains
      (Losses) on Sale of Investments**





Amounts
      reported as realized gains (losses) are measured by the difference between
      the
      proceeds of sale or exchange and the cost basis of the investment. Gains
      (losses) are considered realized when sales or dissolution of investments are
      consummated.




-
          11 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**


**Fair
      Value of Financial Instruments**





The
      fair
      value of the Company’s assets and liabilities, which qualify as financial
      instruments under SFAS No. 107, *Disclosures
      About Fair Value of Financial Instruments* ,
      approximate the carrying amounts presented in the accompanying Consolidated
      Balance Sheets.





**Revenue
      Recognition**




The
      Company complies with SEC Staff Accounting Bulletin ( ***“SAB”*** )
      101, *Revenue
      Recognition in Financial Statements* ,
      amended
      by SAB 104, *Revenue
      Recognition* .
      Consulting service contract revenue is recognized when the service is performed.
      Consequently, the recognition of such consulting service contract revenue is
      deferred until each phase of the contract is complete. Revenues generated by
      the
      Company’s previously owned automated car wash subsidiary, Automotive Services
      Group were recognized at the time of service. Revenues from sales of the
      Safety-Sponge  System
      are recorded upon shipment.





**Goodwill
      and Intangible Assets**





In
      accordance with SFAS No. 142, *Goodwill
      and Intangible Assets* ,
      goodwill is tested for impairment at the reporting unit level (operating segment
      or one level below an operating segment) on an annual basis in the Company’s
      fourth fiscal quarter or more frequently if indicators of impairment
      exist.  The performance of the test involves a two-step process.  The
      first step of the impairment test involves comparing the fair value of the
      Company’s reporting units with each respective reporting unit’s carrying amount,
      including goodwill.  The fair value of reporting units is generally
      determined using the income approach.  If the carrying amount of a
      reporting unit exceeds the reporting unit’s fair value, the second step of the goodwill impairmenttest is
      performed to determine the amount of any impairment loss.  The second step
      of the goodwill impairmenttest
      involves comparing the implied fair value of the reporting unit’s goodwill with
      the carrying amount of that goodwill.





**Long-Lived
      Assets**


The
      Company evaluates long-lived assets for impairment in accordance with SFAS
      No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets,* which
      requires impairment evaluation on long-lived assets used in operations when
      indicators of impairment are present.  Reviews are performed to determine
      whether the carrying value of an asset is impaired, based on a comparison to
      undiscounted expected future cash flows.  If this comparison indicates that
      there is impairment, the impaired asset is written down to fair value, which
      is
      typically calculated using discounted expected future cash flows and a discount
      rate based upon the Company’s weighted average cost of capital adjusted for
      risks associated with the related operations.  Impairment is based on the
      excess of the carrying amount over the fair value of those assets.





**Stock-Based
      Compensation**





The
      Company adopted SFAS No. 123(R), *Share-Based
      Payment* ,
      as of
      January 1, 2005 using the modified retrospective application method as provided
      by SFAS 123(R) and accordingly, financial statement amounts for the prior
      periods in which the Company granted employee stock options have been restated
      to reflect the fair value method of expensing prescribed by SFAS 123(R). During
      the years ended December 31, 2007, 2006 and 2005, the Company had stock-based
      compensation expense, related to issuances to the Company’s employee and
      directors, included in reported net loss, of $1,097,000, $2,223,000 and
      $3,117,000, respectively. The total amount of stock-based compensation for
      the
      year ended December 31, 2007 of $1,097,000, included restricted stock grants
      valued at $423,000 and stock options valued at $674,000. The total amount of
      stock-based compensation for the year ended December 31, 2006 of $2,223,000,
      included restricted stock grants valued at $1,105,000 and stock options valued
      at $1,118,000. The total amount of stock based compensation for the year ended
      December 31, 2005 of $3,117,000, included restricted stock grants valued at
      $1,520,000 and stock options valued at $1,597,000.





During
      the years ended December 31, 2007, 2006 and 2005, the Company had stock-based
      compensation expense, from issuances of restricted stock and warrants to
      consultants of the Company of $57,000, $898,000 and $1,388,000, respectively.




-
          12 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**


**Property
      and Equipment**





Property
      and equipment are stated at cost and are depreciated on the straight-line method
      over the estimated useful lives of the assets as follows:





**Estimated****Useful
                Lives**Furniture
                and fixtures
            
            
            5-7
                YearsComputer
                software and equipment
            
            
            3-5
                Years





Maintenance
      and repairs are charged to operations, while betterments and improvements are
      capitalized.





**Beneficial
      Conversion Feature of Convertible Notes Payable**





The
      convertible feature of certain notes payable provides for a rate of conversion
      that is below market value. Such feature is normally characterized as a
      Beneficial Conversion Feature ( ***“BCF”*** ).
      Pursuant to EITF Issue No. 98-5, *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratio,* EITF No.
      00-27, *Application
      of EITF Issue No. 98-5 To Certain Convertible Instruments* and APB
      14, *Accounting
      for Convertible Debt and Debt Issued with Stock Purchase
      Warrants* ,
      the
      estimated fair value of the BCF is recorded in the consolidated financial
      statements as a discount from the face amount of the notes. Such discounts
      are
      amortized to accretion of convertible debt discount over the term of the notes
      (or conversion of the notes, if sooner).





**Income
      Taxes**





The
      Company accounts for income taxes in accordance with the provisions of SFAS
      No.
      109, *Accounting
      for Income Taxes* .
      The
      significant components of deferred tax assets and liabilities are principally
      related to the Company's net operating loss carryforward and its unrealized
      appreciation of investments.





Deferred
      income taxes are provided in amounts sufficient to give effect to temporary
      differences between financial and tax reporting, principally related to net
      operating loss carryforwards. Valuation allowances are provided to the extent
      realization of recorded tax assets is not considered likely.





**Earnings
      per Common Share**





Loss
      per
      common share is based on the weighted average number of common shares
      outstanding. The Company complies with SFAS No. 128, *Earnings
      Per Share,* which
      requires dual presentation of basic and diluted earnings per share on the face
      of the consolidated statements of operations. Basic loss per common share
      excludes dilution and is computed by dividing income (loss) available to common
      stockholders by the weighted-average common shares outstanding for the period.
      Diluted loss per common share reflects the potential dilution that could occur
      if convertible preferred stock or debentures, options and warrants were to
      be
      exercised or converted or otherwise resulted in the issuance of common stock
      that then shared in the earnings of the entity.





Since
      the
      effects of outstanding options, warrants and the conversion of convertible
      preferred stock and convertible debt are anti-dilutive in all periods presented,
      shares of common stock underlying these instruments have been excluded from
      the
      computation of loss per common share.




-
          13 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**


**Treasury
      Stock**





Shares
      of
      common stock repurchased by the Company are recorded at cost as treasury stock
      and result in a reduction of stockholders' equity in the accompany consolidated
      balance sheets. When shares are reissued, the Company uses the weighted average
      cost method for determining cost. The difference between the cost of the shares
      and the issuance price is added or deducted from additional paid-in
      capital.





**Comprehensive
      Income (Loss)**





The
      Company applies SFAS No. 130, *Reporting
      Comprehensive Income.* Comprehensive
      income (loss) consists of the after tax net change in unrealized gains and
      losses on securities classified as available-for-sale that have been excluded
      from net loss and reflected instead in stockholders’ equity. At December 31,
      2005, the only investments designated as available-for-sale were the Company’s
      restricted holdings in IPEX, Inc. **(** ***“IPEX”*** **)** and its
      investment in Digicorp and Alacra Corporation **(** ***“Alacra”*** **)** .
      During
      the year ended December 31, 2006, the Company sold its investment in Digicorp
      and recorded an impairment charge for the entire amount of its investment in
      IPEX leaving Alacra as the only remaining investment designated as
      available-for-sale as of December 31, 2007.





**Recent
      Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board ( ***“FASB”*** ) issued
      Statement of Financial Accounting Standards No. 157, *Fair
      Value Measurements* ( ***“SFAS
      157”*** ).
      SFAS
      157 does not require new fair value measurements but rather defines fair value,
      establishes a framework for measuring fair value and expands disclosure of
      fair
      value measurements. SFAS 157 is effective for fiscal years beginning after
      November 15, 2007 and interim periods within those fiscal years. We are
      currently assessing the impact of SFAS 157 on our consolidated financial
      position and results of operations.





On
      January 1, 2007, we adopted Emerging Issues Task Force Issue No. 06-2, *Accounting
      for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement
      No. 43* ( ***“EITF
      06-2”*** ).
      EITF
      06-2 requires companies to accrue the costs of compensated absences under a
      sabbatical or similar benefit arrangement over the requisite service period.
      Upon adoption, no liability for unrecognized compensated absences was
      recognized.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      amendment to FASB Statement No. 115* ( ***“SFAS
      159”*** ).
      This
      statement permits companies to choose to measure many financial instruments
      and
      other items at fair value. The objective is to improve financial reporting
      by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. This statement is expected
      to expand the use of fair value measurement of accounting for financial
      instruments. The fair value option established by this statement permits all
      entities to measure eligible items at fair value at specified election dates.
      This statement is effective as of the beginning of an entity’s first fiscal year
      that begins after November 15, 2007. We are currently assessing the impact
      adoption of SFAS No. 159 will have on our consolidated financial
      statements.





In
      December 2007, the FASB issued Statement
      of Financial Accounting Standards No.
      141(R), *Business
      Combinations*  ( ***“SFAS
      141(R)”*** ).
      This
      statement requires
      the acquiring entity in a business combination to record all assets acquired
      and
      liabilities assumed at their respective acquisition-date fair values, changes
      the recognition of assets acquired and liabilities assumed arising from
      contingencies, changes the recognition and measurement of contingent
      consideration, and requires the expensing of acquisition-related costs as
      incurred. SFAS 141(R) also requires additional disclosure of information
      surrounding a business combination, such that users of the entity's financial
      statements can fully understand the nature and financial impact of the business
      combination. We will implement SFAS No. 141(R) on January 1, 2009 and
      will
      apply prospectively to business combinations completed on or after that
      date .




-
          14 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**


In
      December 2007, the FASB issued Statement
      of Financial Accounting Standards No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements* *an
      amendment of ARB 51*  ( ***“SFAS
      160”*** ).
      SFAS
      160 establishes
      accounting and reporting standards for ownership interests in subsidiaries
      held
      by parties other than the parent, the amount of consolidated net income
      attributable to the parent and to the noncontrolling interest, changes in a
      parent's ownership interest and the valuation of retained noncontrolling equity
      investments when a subsidiary is deconsolidated. SFAS 160 also established
      reporting requirements that provide sufficient disclosures that clearly identify
      and distinguish between the interests of the parent and the interests of the
      noncontrolling owner. We will implement SFAS No. 160 on January 1, 2009. We
      do
      not expect the adoption of this standard to have a material impact on our income
      statement, financial position or cash flows.





**4.
      DISCONTINUED OPERATIONS**





As
      part
      of a strategic plan to dispose of all the Company’s non-patient safety related
      assets, during the fourth quarter of 2006 the Company began marketing for
      sale the assets of ASG, located
      in Alabama. The Company completed the sale of one operating car wash on June
      29,
      2007 and two parcels of undeveloped land during the three months ended September
      30, 2007. The assets of ASG met the
“held for sale” and “discontinued operations” criteria in accordance with SFAS
      144.




The
      following sets forth the discontinued operations for the years ended December
      31, 2007, 2006 and 2005 related to the held for sale assets of
      Automotive Services Group :




**Years
                Ended December 31,****2007**
            
            
            **2006**
            
            
            **2005**Operating
                revenues
            
            $
            309,455
            
            $
            343,431
            
            $
            —Operating
                expenses
            
            
            262,323
            
            
            530,285
            
            
            61,960Depreciation
                and amortization
            
            
            21,819
            
            
            31,529
            
            
            —Goodwill
                impairment
            
            
            —
            
            
            971,036
            
            
            —Interest
                expense
            
            
            201,331
            
            
            457,866Gain
                (loss) on sale of assets
            
            
            10,167
            
            
            —
            
            
            —Loss
                from discontinued operations
            
            $
            (165,851
            )
            $
            (1,647,285
            )
            $
            (61,960
            )





The
      following sets forth the assets that are held for sale that are related to
      the
      discontinued operations:




**December
                  31,**
                  **2007**
            
            
            **December
                  31,**
                  **2006**Property
                and equipment, net
            
            $
            —
            
            $
            3,189,674Goodwill
            
            
            —
            
            
            —Other
                assets
            
            
            —
            
            
            —Total
                assets of discontinued operations
            
            $
            —
            
            $
            3,189,674





**5.
      RESTRICTED CERTIFICATE OF DEPOSIT**





At
      December 31, 2007, the Company had a restricted certificate of deposit of
      $87,500 held by a financial institution securing a letter of credit. This
      restricted certificate of deposit is held to cover a portion of the security
      deposit for the Company’s prior corporate offices that it occupied with Ault
      Glazer & Company Investment Management LLC ( ***"Ault
      Glazer"*** ),
      a
      related party. Ault Glazer provided an additional certificate of deposit, in
      the
      amount of $262,500, required to be held at the financial institution under
      the
      terms of the non-cancelable operating lease. (see Operating Lease, Note
      19)




-
          15 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**




**6.
      PROPERTY AND EQUIPMENT**





Property
      and equipment at December 31, 2007 and 2006 are comprised of the
      following:




**December
                  31,**
                  **2007**
            
            
            **December
                  31,**
                  **2006**Computer
                software and equipment
            
            $
            767,004
            
            $
            356,642Furniture
                and equipment
            
            
            215,423
            
            
            71,687Other
            
            
            —
            
            
            20,206Property
                and equipment, gross
            
            
            982,427
            
            
            448,535Less:
                accumulated depreciation
            
            
            (319,036
            )
            
            (120,333
            )Property
                and equipment, net
            
            $
            663,391
            
            $
            328,202





Depreciation
      expense for the years ended December 31, 2007, 2006 and 2005 was $205,673,
      $136,056 and $14,943, respectively.





**7.
      ACQUISITIONS**





*Surgicount
      Medical, Inc.*





In
      February 2005, the Company invested $4,035,600, excluding acquisition costs,
      to
      acquire 100% of the common stock of SurgiCount. The Company acquired SurgiCount
      for its patents related to the Safety-Sponge  System,
      an innovation which the Company believes will allow it to capture a significant
      portion of the United States and European surgical sponge sales. SurgiCount’s
      operating results from the closing date of the acquisition, February 25, 2005,
      through December 31, 2007, are included in the consolidated financial
      statements.





At
      closing, the purchase price, including acquisition costs was determined to
      be
      $4,684,576, comprised of $340,000 in cash payments and 600,000 shares of the
      Company’s common stock valued at $3,695,600 issued to SurgiCount’s equity
      holders. Additionally, the Company incurred approximately $112,398 in direct
      costs and issued 150,000 warrants, valued at $536,578, to purchase the common
      stock of the Company to consultants providing advisory services for the
      acquisition. The value assigned to the stock portion of the purchase price
      is
      $6.16 per share based on the average closing price of the Company’s common stock
      for the five days beginning two days prior to and ending two days after February
      4, 2005, the date of the Agreement and Plan of Merger and Reorganization (the
      “Merger”). In addition, since the cumulative gross revenues of SurgiCount
      exceeded $1,000,000 prior to the fifth anniversary of the closing of the Merger,
      the Company issued a total of an additional 100,000 shares of the Company’s
      common stock, of which 50,000 shares were issued on June 29, 2007 and 50,000
      shares were issued on December 31, 2007, valued at $144,500, to certain
      SurgiCount shareholders. Such amount is not included in the aggregate closing
      purchase price but rather was recorded upon issuance as an increase to goodwill.





The
      acquisition of Surgicount was accounted for under the purchase method of
      accounting in accordance with SFAS No. 141, *Business
      Combinations* .
      Under
      the purchase method, assets acquired and liabilities assumed are recorded at
      their estimated fair values. Fair value of the patents was determined by an
      independent appraisal. Goodwill is recorded to the extent the purchase price,
      including acquisition costs, exceeds fair value of the net identifiable tangible
      and intangible assets acquired less liabilities assumed at the date of
      acquisition.




-
          16 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**




The
      components of the initial purchase price are allocated as follows:





Patents
            
            $
            4,684,576Deferred
                tax liability
            
            
            (1,687,527
            )Net
                assets acquired
            
            
            2,997,049Goodwill
            
            
            1,687,527$
            4,684,576




The
      patents are being amortized for book purposes over their estimated useful life
      of 14.4 years. Approximate annual amortization expense for patents is expected
      to be $325,000.





The
      following pro forma data summarizes the results of operations for the periods
      indicated as if the Surgicount acquisition had been completed as of the
      beginning of each period presented. The pro forma data gives effect to actual
      operating results prior to the acquisition, adjusted to include the pro forma
      effect of amortization of intangibles. These pro forma amounts do not purport
      to
      be indicative of the results that would have actually been obtained if the
      acquisition occurred as of the beginning of each period presented or that may
      be
      obtained in future periods:









**Year
                  ended**December 31, 2005Revenue
            
            $
            562,374Net
                loss
            
            $
            (6,013,000
            )Basic
                and diluted net loss per common share
            
            $
            (1.12
            )





*Automotive
      Services Group, LLC*





In
      July
      2005, the Company purchased 50% of the outstanding equity interests of
      Automotive Services Group, LLC ( ***“ASG”*** ),
      an
      Alabama limited liability company, from an unrelated party for $300,000. ASG
      was
      formed to develop and operate automated car wash sites under the trade name
      “Bubba’s Express Wash” . ASG’s
      first site, developed in Birmingham, Alabama, had its grand opening on March
      8,
      2006 .
      From
      the Company’s initial purchase through November 2005, the Company accounted for
      its 50% investment in ASG under the equity method of accounting. However, as
      a
      result of negotiations which commenced during the 4 th quarter
      of 2005, and ultimately resulted in the Company’s acquisition of the remaining
      50% equity interest of ASG on March 15, 2006, the Company determined that it
      became the primary beneficiary of ASG, a Variable Interest Entity as determined
      by Financial Accounting Standards Board ( ***“FASB”*** ) In terpretation
      No. 46R, *“Consolidation
      of Variable Interest Entities”* ( ***“FIN
      46R”*** ). Accordingly, the Company has consolidated the accounts of ASG since the
      4 th quarter
      of 2005.





On
      March
      15, 2006, the Company entered into a Unit Purchase Agreement (the ***“Agreement”*** )
      for
      Automotive Services Group to purchase the remaining 50% equity interest (the ***“Membership
      Interest”*** )
      in ASG.
      After completing the transaction, Automotive Services Group owned 100% of the
      outstanding equity interests in ASG. As consideration for the Membership
      Interest, the Company issued 200,000 shares of the Company’s common stock valued
      at $610,000, based on the closing stock price at March 15, 2006.





The
      Company has not provided pro forma data summarizing the results of operations
      for the periods indicated as if the ASG acquisition had been completed as of
      the
      beginning of each period presented since the effects were considered immaterial
      to actual operating results.




-
          17 -




**Patient
      Safety Technologies, Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements (continued)**


Upon
      initial measurement, components of the purchase price were as
      follows:





Land
            
            $
            480,211Furniture
                and equipment
            
            
            972Notes
                payable
            
            
            (495,211
            )Net
                liabilities assumed
            
            
            (14,028
            )Goodwill
            
            
            614,028Minority
                interest
            
            
            (300,000
            )Purchase
                price
            
            $
            300,000





In
      March
      2006, upon the purchase of the remaining 50% interest, components of the
      purchase price were as follows:





Goodwill
            
            $
            357,008Minority
                interest
            
            
            252,992Purchase
                price
            
            $
            610,000





As
      discussed in Note 10, all goodwill previously recorded in connection with the
      acquisition of ASG was written off during the quarters ended June 30, 2006
      and
      September 30, 2006.





**8.
      GOODWILL AND PATENTS**





The
      Company’s goodwill relates to the Medical Products reporting segment.
      During the year ended December 31, 2007, cumulative gross revenues of SurgiCount
      exceeded $1,000,000 and as such the Company issued 100,000 shares of common
      stock to the SurgiCount founders. The Company recorded $144,500 of goodwill
      as a
      result of these issuances, based on the estimated fair value of the
      shares.


During
      the year ended December 31, 2006, the Company recognized a goodwill impairment
      charge of $971,000. As
      discussed in Note 1, the Company has both a significant accumulated deficit and
      a
      working capital deficit. These financial constraints prevented the Company
      from continuing
      the planned build-out of the additional car wash facilities. In response to
      these financial constraints, coupled with the Company’s emphasis on the patient
      safety markets, the
      Company elected to divest the car wash services segment. Recognizing that
      revenues and cash flows would be lower than expected from the car wash services
      segment, the Company determined that a triggering event had occurred and
      conducted an interim goodwill impairment analysis in the quarters ended June
      30,
      2006 and September 30, 2006 which resulted in the recording of total
      goodwill impairmentcharges
      during 2006 of $971,000 in the car wash services operating segment.  This impairmentrelated
      to goodwill that resulted from the Company’s acquisition of ASG





The
      change in goodwill for year ended December 31, 2007, is as follows:





**Goodwill**Balance
                as of December 31, 2006
            
            $
            1,687,527Issuance
                of contingent payment for SurgiCount
            
            
            144,500Balance
                as of December 31, 2007
            
            $
            1,832,027





Patents,
      net, as of December 31, 2007 are composed of the following:





Patents
            
            $
            4,684,576Accumulated amortization
            
            
            (920,668
            )$
            3,763,908




-
          18 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**




The patents
      are subject to amortization over their estimated useful life of 14.4
      years. The following table presents estimated amortization expense for each
      of
      the succeeding five calendar years and thereafter.





2008
            
            $
            325,0002009
            
            
            325,0002010
            
            
            325,0002011
            
            
            325,0002012
            
            
            325,000Thereafter
            
            
            2,138,908$
            3,763,908





**9.
      LONG-TERM INVESTMENTS AND ASSETS HELD FOR SALE**





Long-term
      investments at December 31, 2007 and December 31, 2006 are comprised of the
      following:




**December
                31, 2007**
            
            
            **December
                31, 2006**Alacra
                Corporation
            
            $
            666,667
            
            $
            1,000,000Investments
                in Real Estate
            
            
            —
            
            
            430,563Digicorp
            
            
            —
            
            
            10,970$
            666,667
            
            $
            1,441,533





*Alacra
      Corporation*





At
      December 31, 2007, the Company had an investment in shares of Series F
      convertible preferred stock of Alacra Corporation ( ***“Alacra”*** ),
      recorded at its cost of $666,667, and classified as an available-for-sale
      investment. The Company has the right, to the extent that Alacra has sufficient
      available capital, to have the Series F convertible preferred stock redeemed
      by
      Alacra for face value plus accrued dividends beginning on December 31, 2006.
      During the year ended December 31, 2007, Alacra redeemed one-third of the Series
      F convertible preferred stock. Alacra, based in New York, is a global provider

      of business and financial information.





*Investments
      in Real Estate*





At
      December 31, 2006, the Company’s real estate investments consisted of
      approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
      0.61
      acres of undeveloped land in Springfield, Tennessee, which were recorded at
      their cost of $430,563. At December 31, 2007, these real estates investments
      met
      the “held for sale” criteria in accordance with SFAS 144 and were classified as
      such.




-
          19 -





**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**




**10.
      NOTES PAYABLE**





Notes
      payable at December 31, 2007 and 2006 are comprised of the
      following:




**December
                31, 2007**
            
            
            **December
                31, 2006**Note
                payable to Winstar Radio Networks, LLC (a)
            
            $
            —
            
            $
            450,000Notes
                payable to Ault Glazer Capital Partners, LLC (b)
            
            
            2,530,558
            
            
            2,575,528Note
                payable to Steven J. Caspi (c)
            
            
            —
            
            
            1,000,000Note
                payable to Steven J. Caspi (d)
            
            
            —
            
            
            1,495,281Notes
                payable to Herb Langsam (e)
            
            
            600,000
            
            
            600,000Note
                payable to Charles Kalina III (f)
            
            
            400,000
            
            
            400,000Other
                notes payable
            
            
            172,380
            
            
            598,232Total
                notes payable
            
            
            3,702,938
            
            
            7,119,041Less:
                debt discount on beneficial conversion feature
            
            
            —
            
            
            (1,074,330
            )3,702,938
            
            
            6,044,711Less:
                current portion
            
            
            (1,172,380
            )
            
            (3,517,149
            )Notes
                payable - long-term portion
            
            $
            2,530,558
            
            $
            2,527,562





Aggregate
      future required principal payments on these notes during the twelve month period
      subsequent to December 31, 2007 are as follows:





2007
            
            $
            1,172,3802008
            
            
            —2009
            
            
            —2010
            
            
            2,530,558$
            3,702,938





(a)
            On
                August 28, 2001, the Company made an investment in Excelsior Radio
                Networks, Inc. (***“Excelsior”***)
                which was completely liquidated during 2005. As part of the purchase
                price
                paid by the Company for its investment in Excelsior, the Company
                issued a
                $1,000,000 note to Winstar Radio Networks, LLC, a Delaware limited
                liability company (***“Winstar”***).
                This note was due February 28, 2002 with interest at 3.54% per annum
                but
                in accordance with the agreement the Company had a right of offset
                against
                certain representations and warranties made by Winstar. The Company
                applied offsets of $215,000 against the principal balance of the
                note
                relating to legal fees attributed to our defense of certain lawsuits
                filed
                against us. The Company has consistently asserted that the due date
                of the
                note was extended until the lawsuit discussed in Note 13 is settled.
                However, on February 3, 2006, Winstar Global Media, Inc. (***“WGM”***)
                filed a lawsuit against the Company in an attempt to collect upon
                the
                $1,000,000 note between the Company and Winstar. On September 5,
                2006, the
                Company reached a settlement agreement with WGM whereas the Company
                agreed
                to pay Winstar $750,000, pursuant to an agreed upon payment schedule,
                on
                or before July 2, 2007. On November 7, 2006, The United States Bankruptcy
                Court for the District of Delaware approved the Company’s settlement
                agreement with WGM. Pursuant to the settlement agreement, the Company
                made
                payments of $300,000 during 2006 and the remaining $450,000 during
                the
                three months ended March 31, 2007. The Company recorded a gain during
                2006
                of $191,000 on the elimination of principal and interest in excess
                of the
                settlement amount which is included in gain on debt extinguishment
                in the
                accompanying statement of
                operations.




-
          20 -


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**


(b)
            On
                February 8, 2006, Ault Glazer Capital Partners, LLC (formerly AGB
                Acquisition Fund) (the***“Fund”***),
                a related party, loaned $687,000 to ASG. As consideration for the
                loan,
                ASG issued the Fund a secured promissory note in the principal amount
                of
                $687,000 (the***“ASG
                Note”***)
                and granted a real estate mortgage in favor of the Fund relating
                to
                certain real property located in Jefferson County, Alabama (the***“ASG
                Property”***).
                The ASG Note, as amended, had an interest rate of 10% per annum and
                was
                due on September 15, 2006. The Fund received warrants to purchase
                20,608
                shares of the Company’s common stock at an exercise price of $3.86 per
                share as additional consideration for entering into the loan agreement.
                The Company recorded debt discount in the amount of $44,000 as the
                estimated value of the warrants. The debt discount was amortized
                as
                non-cash interest expense over the initial term of the debt using
                the
                effective interest method. The entire amount of the debt discount
                was
                amortized as interest expense. As security for the performance of
                ASG’s
                obligations pursuant to the ASG Note, ASG had granted the Fund a
                security
                interest in all personal property and fixtures located at the ASG
                Property. During the year ended December 31, 2007 and 2006, the Company
                incurred interest expense, excluding amortization of debt discount,
                of
                $28,000 and $61,000, respectively, on the ASG
                Note.





As
      of
      December 31, 2006, the Fund loaned $1,495,000 to ASG in addition to the ASG
      Note. The loans were advanced to ASG, pursuant to the terms of a Real Estate
      Note dated July 27, 2005, as amended (the ***"Real
      Estate Note"*** ).
      The
      Real Estate Note had an interest rate of 3% above the Prime Rate as published
      in
      the Wall Street Journal. All unpaid principal, interest and charges under the
      Real Estate Note were due in full on July 31, 2010. The Real Estate Note was
      collateralized by a mortgage on certain real estate owned by ASG pursuant to
      the
      terms of a Future Advance Mortgage Assignment of Rents and Leases and Security
      Agreement dated July 27, 2005 between ASG and the Fund. During the year ended
      December 31, 2007 and 2006, the Company incurred interest expense of $70,000
      and
      $160,000, respectively, on the Real Estate Note.





Effective
      June 1, 2007, the entire unpaid principal and interest under the ASG Note and
      Real Estate Note were restructured into a new Convertible Secured Promissory
      Note (the ***"AG
      Partners Convertible Note"*** ) in
      the
      principal amount of $2,530,558 with an effective date of June 1, 2007. The
      AG
      Partners Convertible Note bears interest at the rate of 7% per annum and is
      due
      on the earlier of December 31, 2010, or the occurrence of an event of default.
      In the event that the average closing price of the Company’s common stock is in
      excess of $5.00 per share for thirty (30) consecutive trading days, the Company
      will have the right to redeem the promissory note in shares or in cash. In
      the
      event of redemption in shares, the principal is convertible into shares of
      the
      Company’s common stock at a conversion price of $2.50. The promissory note is
      secured by all of the Company’s assets. Should the Company raise up to
      $2,000,000 in a new credit facility, including any replacement credit
      facilities, the Fund is required to subordinate its security interest in favor
      of the new credit facility. During the year ended December 31, 2007, the Company
      incurred interest expense of $103,000 on the AG Partners Convertible
      Note.





From
      March 7, 2006 through October 16, 2006, the Fund loaned the Company a total
      of
      $524,000, of which $130,000 was repaid during 2006. The loans were advanced
      to
      the Company pursuant to a Revolving Line of Credit Agreement (the ***“Revolving
      Line of Credit”*** )
      entered
      into with the Fund on March 7, 2006. The Revolving Line of Credit allowed the
      Company to request advances of up to $500,000 from the Fund. Each advance under
      the Revolving Line of Credit was evidenced by a secured promissory note and
      a
      security agreement. The secured promissory notes issued pursuant to the
      Revolving Line of Credit required repayment with interest at the Prime Rate
      plus
      1% within 60 days from issuance. The outstanding principal balance of $394,000
      and accrued interest of $28,000, which
      was
      in default, was converted into 337,439 shares of the Company’s common stock at a
      conversion price of $1.25 per share. During
      the year ended December 31, 2007 and 2006, the Company incurred interest expense
      of $15,000 and $16,000, respectively, on the Revolving Line of Credit.





(c)
            On
                January 12, 2006, Steven J. Caspi loaned $1,000,000 to ASG. As
                consideration for the loan, ASG issued Mr. Caspi a promissory note
                in the
                principal amount of $1,000,000 (the***“Caspi
                Note”***)
                and granted Mr. Caspi a mortgage on certain real estate owned by
                ASG and a
                security interest on all personal property and fixtures located on
                such
                real estate as security for the obligations under the Caspi Note.
                In
                addition, the Company entered into an agreement guaranteeing ASG’s
                obligations pursuant to the Caspi Note and Mr. Caspi received warrants
                to
                purchase 30,000 shares of the Company’s common stock at an exercise price
                of $4.50 per share. The Company recorded debt discount in the amount
                of
                $92,000 based on the estimated fair value of the warrants. The debt
                discount was amortized as non-cash interest expense over the initial
                term
                of the debt using the effective interest method. The entire amount
                of the
                debt discount was amortized as interest expense. The Caspi Note initially
                accrued interest at the rate of 10% per annum, which together with
                principal, was due to be repaid on July 13, 2006. The Caspi Note
                was not
                repaid until June 29, 2007. During the period of time that the Caspi
                Note
                was in default interest accrued at the rate of 18% per annum. During
                the
                year ended December 31, 2007 and 2006, the Company incurred interest
                expense of $89,000 and $130,000, respectively, on the Caspi Note.




-
          21 -


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**


(d)
            From
                September 8, 2006 through September 19, 2006, Mr. Caspi loaned the
                Company
                a total of $1,495,281. As consideration for the loan, the Company
                issued
                Mr. Caspi a Convertible Promissory Note in the principal amount of
                $1,495,281 (the***“Second
                Caspi Note”***).
                The Second Caspi Note accrued interest at the rate of 12% per annum
                and
                was due upon the earlier of March 31, 2008 or, the occurrence of
                an event
                of default. As security for the performance of the Company’s obligations
                pursuant to the Second Caspi Note, the Company granted Mr. Caspi
                a
                security interest in certain real property. Mr. Caspi received warrants
                to
                purchase 250,000 shares of the Company’s common stock at an exercise price
                of $1.25 per share as additional consideration for entering into
                the loan
                agreement. The Second Caspi Note was repaid on August 13, 2007. During
                the
                year ended December 31, 2007 and 2006, the Company incurred interest
                expense, excluding amortization of debt discount, of $109,000 and
                $56,000,
                respectively, on the Second Caspi
                Note.





As
      the
      effective conversion price of the Second Caspi Note on the date of issuance
      was
      below the fair market value of the underlying common stock, the Company recorded
      debt discount in the amount of $769,000 based on the intrinsic value of the
      beneficial conversion feature of the note.





The
      warrant issued to Mr. Caspi in conjunction with the Second Caspi Note will
      expire after September 8, 2011. The Company recorded debt discount in the amount
      of $231,000 based on the estimated fair value of the warrants. The debt discount
      as a result of the beneficial conversion feature of the note and the estimated
      fair value of the warrants was amortized as non-cash interest expense over
      the
      term of the debt using the effective interest method. During the year ended
      December 31, 2007 and 2006, interest expense of $877,000 and $123,000 has been
      recorded from the debt discount amortization.





(e)
            On
                May 1, 2006, Herbert Langsam, a Class II Director of the Company,
                loaned
                the Company $500,000. The loan is documented by a $500,000 Secured
                Promissory Note (the***“Langsam
                Note”***)
                payable to the Herbert Langsam Irrevocable Trust. The Langsam Note
                accrues
                interest at the rate of 12% per annum and had a maturity date of
                November
                1, 2006. This note was not repaid by the scheduled maturity and to
                date
                has not been extended, therefore the Langsam Note is recorded in
                current
                liabilities. Accordingly, the note is currently in default and therefore
                accruing interest at the rate of 16% per annum. Pursuant to the terms
                of a
                Security Agreement dated May 1, 2006, the Company granted the Herbert
                Langsam Revocable Trust a security interest in all of the Company’s assets
                as collateral for the satisfaction and performance of the Company’s
                obligations pursuant to the Langsam
                Note.





On
      November 13, 2006, Mr. Langsam, loaned the Company an additional $100,000.
      The
      loan is documented by a $100,000 Secured Promissory Note (the ***“Second
      Langsam Note”*** )
      payable
      to the Herbert Langsam Irrevocable Trust. The Second Langsam Note accrues
      interest at the rate of 12% per annum and has a maturity date of May 13, 2007.
      Mr. Langsam received warrants to purchase 50,000 shares of the Company’s common
      stock at an exercise price of $1.25 per share as additional consideration for
      entering into the loan agreement. The Company recorded debt discount in the
      amount of $17,000 as the estimated value of the warrants. The debt discount
      was
      amortized as non-cash interest expense over the term of the debt using the
      effective interest method. During the year ended December 31, 2007 and 2006,
      interest expense of $12,000 and 5,000, respectively, has been recorded from
      the
      debt discount amortization. Pursuant to the terms of a Security Agreement dated
      November 13, 2006, the Company granted the Herbert Langsam Revocable Trust
      a
      security interest in all of the Company’s assets as collateral for the
      satisfaction and performance of the Company’s obligations pursuant to the Second
      Langsam Note.




-
          22 -


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**


During
      the year ended December 31, 2007 and 2006, the Company incurred interest
      expense, excluding amortization of debt discount, of $88,000 and $50,000,
      respectively, on the Langsam Notes. At December 31, 2007 and 2006, accrued
      interest on the Langsam Notes totaled $138,000 and $50,000,
      respectively.





(f)
            On
                July 12, 2006 the Company, executed a Convertible Promissory Note
                in the
                principal amount of $250,000 (the***“Kalina
                Note”***)
                and a warrant for the purchase of 85,000 Shares of the Company’s common
                stock (the***“Kalina
                Warrant”***)
                in favor of Charles J. Kalina, III, an existing shareholder of the
                Company. The Kalina Note accrued interest at the rate of 12% per
                annum
                throughout the term of the loan. The principal amount of the Kalina
                Note
                and any accrued but unpaid interest was due to be paid on October
                10,
                2006. Principal and interest on the Kalina Note was convertible into
                shares of the Company’s common stock at a conversion price of $3.00 per
                share.





The
      Kalina Warrant has an exercise price of $ 2.69 per share and will expire on
      July
      11, 2011. The Company recorded debt discount in the amount of $161,000 based
      on
      the estimated fair value of the Kalina Warrants. The debt discount was amortized
      as non-cash interest expense over the initial term of the debt using the
      effective interest method.





On
                November 3, 2006 the balance due under the Kalina Note was added
                to a new
                Convertible Promissory Note in the principal amount of $400,000 (the***“Second
                Kalina Note”***),
                pursuant to which the Company received proceeds of approximately
                $150,000.
                The Second Kalina Note bears interest at the rate of 12% per annum
                and is
                due on January 31, 2008 or, the occurrence of an event of default.
                Mr.
                Kalina received warrants to purchase 250,000 shares of the Company’s
                common stock at an exercise price of $1.25 per share as additional
                consideration for entering into the loan agreement. During the year
                ended
                December 31, 2007 and 2006, the Company incurred interest expense,
                excluding amortization of debt discount of $46,000 and $20,000,
                respectively, on the Second Kalina Note. At December 31, 2007 and
                2006,
                accrued interest on the Second Kalina Note totaled $8,000 and $10,000,
                respectively.





As
      the
      effective conversion price of the Second Kalina Note on the date of issuance
      was
      below the fair market value of the underlying common stock, the Company recorded
      debt discount in the amount of $77,000 based on the intrinsic value of the
      beneficial conversion feature of the note.





The
      warrant issued to Mr. Kalina in conjunction with the Second Kalina Note will
      expire after November 3, 2011. The Company recorded debt discount in the amount
      of $29,000 based on the estimated fair value of the warrants. The debt discount
      as a result of the beneficial conversion feature of the note and the estimated
      fair value of the warrants was amortized as non-cash interest expense over
      the
      term of the debt using the effective interest method. During the year ended
      December 31, 2007 and 2006, interest expense of $91,000 and $15,000,
      respectively, has been recorded from the debt discount
      amortization.




-
          23 -


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**


**11.
      ACCRUED LIABILITIES**





Accrued
      liabilities at December 31, 2007 and 2006 are comprised of the
      following:




**December
                31, 2007**
            
            **December
                31, 2006**Accrued
                interest
            
            $
            168,449
            
            $
            520,114Accrued
                professional fees
            
            
            —
            
            
            10,000Accrued
                dividends on preferred stock
            
            
            134,138
            
            
            95,812Accrued
                salaries
            
            
            212,000
            
            
            197,495Other
            
            
            6,162
            
            
            1,045$
            520,749
            
            $
            824,466





**12.
      EQUITY TRANSACTIONS**





On
      March
      30, 2005, stockholders’ approval was obtained to (i) decrease the authorized
      number of shares of common stock from 50,000,000 shares to 25,000,000 shares,
      (ii) decrease the authorized number of shares of preferred stock from 10,000,000
      shares to 1,000,000 shares and (iii) to reduce the par value of the common
      stock
      from $1.00 per share to $0.33 per share and effect a three-for-one split of
      the
      common stock. Stockholders’ equity has been restated to give retroactive
      recognition to the stock split for all periods presented. In addition, all
      per
      share and weighted average share amounts have been restated to reflect this
      stock split.





The
      convertible preferred stock has a cumulative 7% quarterly dividend and is
      convertible into the number of shares of common stock by dividing the purchase
      price for the convertible preferred stock by conversion price in effect,
      currently $4.44. The convertible preferred stock has anti-dilution provisions,
      which can change the conversion price in certain circumstances. In the event
      the
      Company subdivides its outstanding shares of common stock into a greater number
      of shares of common stock the conversion price in effect would be reduced,
      thereby increasing the total number of shares of common stock that the
      convertible preferred stock is convertible into. The holder has the right to
      convert the shares of convertible preferred stock at any time until February
      22,
      2010 into common stock. Upon liquidation, dissolution or winding up of the
      Company, the stockholders of the convertible preferred stock are entitled to
      receive $100 per share plus any accrued and unpaid dividends before
      distributions to any holder of the Company’s common stock.





During
      the year ended December 31, 2005, the Company issued 5,625 shares of common
      stock held in treasury upon exercise of options under the Company’s 1997 Stock
      Incentive Plan and 20,444 shares of common stock held in treasury to purchase
      0.61 acres of vacant land in Springfield, Tennessee.





On
      April
      5, 2005, the Company entered into a consulting agreement with Health West
      Marketing Incorporated, a California corporation ("Health West"). Under the
      agreement, Health West agreed to help the Company establish a comprehensive
      manufacturing and distribution strategy for the Company's Safety-Sponge System
      worldwide. The initial term of the agreement is for a period of two years.
      After
      the initial two-year term, the agreement will terminate unless extended by
      the
      parties for one or more additional one-year periods.





In
      consideration for Health West's services, the Company agreed to issue Health
      West 42,017 shares of the Company's common stock, to be issued as follows:
      (a)
      10,505 shares, valued at $62,505, were issued upon signing the agreement; (b)
      an
      additional 15,756 shares, valued at $93,748, of the Company’s common stock held
      in treasury were issued as a result of Health West’s assistance in structuring a
      comprehensive manufacturing agreement with A Plus International Inc.
      ( ***“A
      Plus”*** ),
      which
      was entered into on August 17, 2005; and (c) during 2007 the Company issued
      the
      remaining 15,756 shares for Health West’s services in developing a regional
      distribution network to integrate the Safety-SpongeTM System into the existing
      acute care supply chain. As an additional incentive, in 2005 the Company granted
      Health West warrants to purchase a total of 175,000 shares of the Company’s
      common stock as discussed in Note 13.




-
          24 -


**Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements (continued)**


On
      April
      22, 2005, the Company entered into a subscription agreement pursuant to which
      the Company sold to an investor shares of the Company's common stock held in
      treasury and warrants to purchase an additional 20,000 shares of the Company's
      common stock. The warrants are exercisable for a period of five years, have
      an
      exercise price equal to $6.05, and 50% of the warrants are callable. In the
      event the closing sale price of the Company's common stock equals or exceeds
      $7.50 for at least five consecutive trading days, the Company, upon 30 days
      prior written notice, may call the callable warrants at a redemption price
      equal
      to $0.01 per share of common stock then purchasable pursuant to such warrants.
      Notwithstanding such notice, the warrant holder may exercise the callable
      warrant prior to the end of the 30-day notice period. The Company received
      gross
      proceeds of $100,000 from the sale of stock and warrants.





On
      July
      19, 2005, the Company entered into a stock purchase agreement pursuant to which
      the Company sold to an investor 38,000 shares of the Company's common stock
      held
      in treasury. As consideration, the Company received 12,000 shares of Tuxis
      Corporation **(** ***“Tuxis”*** **)** common
      stock valued at approximately $102,000.





On
      October 19, 2005, the Company entered into a subscription agreement with an
      accredited investor, pursuant to which the Company sold shares of the Company's
      common stock held in treasury at a price of $3.00 per share. The Company
      received gross proceeds of $50,000 from the sale of the stock.





On
      November 3, 2005, the Company entered into a subscription agreement with Herbert
      Langsam, a current director of the Company, pursuant to which the Company sold
      shares of the Company's common stock held in treasury at a price of $3.49 per
      share. The Company received gross proceeds of $100,000 from the sale of the
      stock.





In
      August
      2006, the Company entered into subscription agreements pursuant to which the
      Company sold to investors shares of the Company's common stock held in treasury
      at a price of $1.25 per share. The Company received gross proceeds of $250,000
      from the sale of stock.





Between
      November 30, 2006 and December 15, 2006, the Company entered into a subscription
      agreement with several accredited investors in a private placement exempt from
      the registration requirements of the Securities Act of 1933, as amended (the ***“Securities
      Act”*** ).
      The
      Company issued and sold to these accredited investors an aggregate of 238,000
      shares of its common stock and warrants to purchase an additional 119,000 shares
      of its common stock. The warrants are exercisable for a period of three years,
      have an exercise price equal to $2.00, and 50% of the warrants are callable
      upon
      the occurrence of any one of a number of specified events when, after any such
      specified occurrence, the average closing price of the Company’s common stock
      during any period of five consecutive trading days exceeds $4.00 per share.
      These issuances resulted in aggregate gross proceeds to the Company of
      $297,500.





On
      January 29, 2007, the Company entered into a subscription agreement with A
      Plus,
      pursuant to which the Company sold to A Plus 800,000 shares of its common stock
      and warrants to purchase an additional 300,000 shares of its common stock.
      The
      Company received gross proceeds of $500,000 in cash and during the year ended
      December 31, 2007, received $500,000 in product. The warrants have a term of
      five (5) years and an exercise price equal to $2.00 per share.





Between
      January 29, 2007 and June 7, 2007, the Company entered into a subscription
      agreement with several accredited investors in a private placement exempt from
      the registration requirements of the Securities Act of 1933, as amended (the ***“Securities
      Act”*** ).
      The
      Company issued and sold to the investors an aggregate of 2,152,000 shares of
      its
      common stock and warrants to purchase an additional 1,076,000 shares of its
      common stock. The warrants are exercisable for a period of three to five years,
      have an exercise price equal to $2.00, and 50% of the warrants are callable
      upon
      the occurrence of any one of a number of specified events when, after any such
      specified occurrence, the average closing price of the Company’s common stock
      during any period of five consecutive trading days exceeds $4.00 per share.
      These issuances resulted in aggregate gross proceeds to the Company of
      $2,690,000. The Company was required to file a registration statement within
      120
      days after April 5, 2007 covering the resale of 2,000,000 shares of our Common
      Stock purchased in these private placements. The registration statement was
      not
      filed until November 16, 2007 and we therefore issued, as liquidated damages,
      warrants with a term of five years and an exercise price of $2.00 per share
      to
      purchase 200,000 shares of our Common Stock. We recognized $193,000 in expense
      as a result of these liquidated damages.




-
          25 -


**Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements (continued)**


Pursuant
      to the Merger between the Company and SurgiCount, in the event that prior to
      the
      fifth anniversary of the closing of the Merger the cumulative gross revenues
      of
      SurgiCount exceed $1,000,000, the Company is obligated to issue an additional
      100,000 shares of the Company’s common stock to certain SurgiCount founders. As
      discussed in Note 7, cumulative gross revenues of SurgiCount exceeded $1,000,000
      and therefore the Company issued an additional 100,000 shares of the Company’s
      common stock, valued at $144,500. The Company recorded $144,500 of goodwill
      as a
      result of these issuances, based on the estimated fair value of the shares.





On
      October 17, 2007, the Company sold, in a private placement exempt from the
      registration requirements of the Securities Act, 1,270,000 shares of the
      Company’s common stock at $1.25 price per share and issued five-year warrants to
      purchase 763,000 shares of common stock at an exercise price of $1.40 per share,
      pursuant to a Securities Purchase Agreement entered into with Francis Capital
      Management, LLC, ( ***“Francis
      Capital”)*** an
      accredited investor. The investor paid $1,500,000 in cash and agreed to
      extinguish $90,000 in existing debt owed to it by the Company.





**13.
      WARRANTS**





During
      the year ended December 31, 2007, a total of 2,872,120 warrants, at an average
      exercise price of $1.75 per share were issued primarily in connection with
      the
      various subscription agreements entered into by the Company as well as payment
      for services and accrued interest. The warrants were valued using the
      Black-Scholes valuation model assuming expected dividend yield, risk-free
      interest rate, expected life and volatility of 0%, 4.50%, five years and 63%
      -
      101%, respectively. Warrants granted during the year ended December 31, 2006
      were valued using an expected dividend yield, risk-free interest rate, expected
      life and volatility of 0%, 3.75% - 4.50%, three to five years and 63% - 88%,
      respectively. As of December 31, 2007, a total of 6,114,521 warrants, at
      exercise prices ranging from $1.25 to $6.05 remain outstanding.





**14.
      STOCK REPURCHASE PROGRAM**





In
      May
      2005, the Board of Directors authorized a stock repurchase program under which
      up to 150,000 shares of the Company’s common stock could be repurchased from
      time to time with available funds. The primary purpose of the stock repurchase
      program is to allow the Company the flexibility to repurchase its common stock
      to potentially reduce stock dilution and seek to improve its long-term earnings
      per share. Repurchases may be made in the open market or in privately negotiated
      transactions, subject to regulatory considerations, and may be discontinued
      at
      any time. The only repurchases made by the Company during the last three years
      occurred during the year ended December 31, 2005 when the Company repurchased
      10,611 shares of common stock for $36,931. Although the Company’s stock
      repurchase program remains in place, the Company does not currently intend
      to
      make a material amount of repurchases. Future repurchases, if any, will depend
      on subsequent developments, corporate needs and market conditions. If subsequent
      developments occur or corporate needs and market conditions change that might
      cause the Company to make one or more repurchases, the Company would not
      necessarily make a public announcement about it at that time.





**15.
      STOCK OPTION PLANS**





In
      September 2005, the Board of Directors of the Company approved the Amended
      and
      Restated 2005 Stock Option and Restricted Stock Plan (the ***“2005
      SOP”*** )
      and the
      Company’s stockholders approved the Plan in November 2005. The Plan reserves
      2,500,000 shares of common stock for grants of incentive stock options,
      nonqualified stock options, warrants and restricted stock awards to employees,
      non-employee directors and consultants performing services for the Company.
      Options granted under the Plan have an exercise price equal to or greater than
      the fair market value of the underlying common stock at the date of grant and
      become exercisable based on a vesting schedule determined at the date of
      grant. The options expire 10 years from the date of grant. Restricted stock
      awards granted under the Plan are subject to a vesting period determined at
      the
      date of grant.




-
          26 -


**Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements (continued)**


A
      summary
      of stock option activity for the year ended December 31, 2007 is presented
      below:




**Outstanding
                Options****Shares
                Available for Grant**
            
            **Number
                of**
              **Shares**
            
            **Weighted**
              **Average
                Exercise Price**
            
            **Weighted
                Average Remaining Contractual Life (years)**
            
            **Aggregate**
              **Intrinsic
                Value****December
                31, 2004**
            
            
            **56,250**
            
            
            **5,625**
            
            **$**
            **4.67**
            
            
            **5.08**Adoption
                of Amended 2005 SOP
            
            
            2,500,000Exercises
            
            
            
            
            
            (5,625
            )
            $
            4.67
            
            
            5.00Restricted
                Stock Awards
            
            
            (438,046
            )Grants
            
            
            (1,044,000
            )
            
            1,044,000
            
            $
            5.02
            
            
            9.39**December
                31, 2005**
            
            
            **1,074,204**
            
            
            **1,044,000**
            
            **$**
            **5.02**
            
            
            **9.39**Cancellation
                of 1997 Plans
            
            
            (56,250
            )Restricted
                Stock Awards
            
            
            (331,928
            )Grants
            
            
            (785,000
            )
            
            785,000
            
            $
            3.80
            
            
            9.21Cancellations
            
            
            125,000
            
            
            (125,000
            )
            $
            4.51
            
            
            8.87**December
                31, 2006**
            
            
            **26,026**
            
            
            **1,704,000**
            
            **$**
            **4.50**
            
            
            **8.73**
            
            **$**
            **—**Restricted
                Stock Awards
            
            
            (79,036
            )Grants
            
            
            (545,000
            )
            
            545,000
            
            $
            1.53
            
            
            9.76Cancellations
            
            
            599,000
            
            
            (599,000
            )
            $
            4.59
            
            
            8.25**December
                31, 2007**
            
            
            **990**
            
            
            **1,650,000**
            
            **$**
            **3.49**
            
            
            **8.43**
            
            **$**
            **—**Options
                exercisable at:December
                31, 2005
            
            
            
            
            
            220,125
            
            $
            5.27
            
            
            9.25
            
            $
            —December
                31, 2006
            
            
            
            
            
            832,625
            
            $
            4.90
            
            
            8.54
            
            $
            —December
                31, 2007
            
            
            
            
            
            782,500
            
            $
            4.40
            
            
            7.83
            
            $
            —





The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (i.e., the difference between our closing stock price on
      December 31, 2007 and the exercise price, times the number of shares) that
      would have been received by the option holders had all option holders exercised
      their options on December 31, 2007. There have been 5,625 options exercised
      during the year ended December 31, 2005.




-
          27 -


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**


A
      summary
      of the changes in the Company’s nonvested options during the year ended December
      31, 2007 is as follows:





**Nonvested
                Shares**
            
            **Shares**
            
            **Weighted
                Average Grant Date Fair Value**Nonvested
                at December 31, 2006
            
            
            871,375
            
            $
            2.31Granted
            
            
            545,000
            
            $
            1.16Vested
            
            
            (330,125
            )
            $
            2.07Cancelled
                and forfeited
            
            
            (218,750
            )
            $
            2.02Nonvested
                at December 31, 2007
            
            
            867,500
            
            $
            1.75





All
      options that the Company granted during 2005 through 2007 were granted at the
      per share fair market value on the grant date. Vesting of options differs based
      on the terms of each option. The Company utilized the Black-Scholes option
      pricing model and the assumptions used for each period are as
      follows:




**Year
                ended December 31,****2007**
            
            
            **2006**
            
            
            **2005**Weighted
                average risk free interest rate
            
            
            4.50
            %
            
            3.75
            %
            
            3.75
            %Weighted
                average life (in years)
            
            
            5.00
            
            
            4.16
            
            
            3.0Volatility
            
            
            98
                - 101
            %
            
            89
            %
            
            83
            %Expected
                dividend yield
            
            
            0
            %
            
            0
            %
            
            0
            %Weighted
                average grant-date fair value per share of options granted
            
            $
            1.16
            
            $
            2.50
            
            $
            2.48





During
      the year ended December 31, 2007, the Company recorded compensation costs
      related to stock options of $674,189. As of December 31, 2007, total
      unrecognized compensation cost related to unvested stock options was $899,000.
      The cost is expected to be recognized over a weighted average period of 1.43
      years.





**16.
      RELATED PARTY TRANSACTIONS**





*Due
      from Related Parties*





During
      the three months ended March 31, 2007 and year ended December 31, 2006, the
      Company paid approximately 25% of the base rent on the corporate offices and
      The
      Ault Glazer Group, Inc. ( ***"Ault
      Glazer"*** )
      paid
      the remaining base rent based upon their respective usage of the facilities.
      Together, Milton “Todd” Ault III, our former Chairman and Chief Executive
      Officer of the Company, and Louis Glazer, a Class I Director of the Company,
      and
      Melanie Glazer, the former Manager of our real estate segment, (together, the ***“Glazers”*** )
      own a
      controlling interest in the outstanding capital stock of Ault Glazer. As of
      December 31, 2007 and 2006, Ault Glazer, Mr. Ault and the Glazers indirectly
      beneficially own or control approximately 10% of the outstanding common stock
      of
      the Company and beneficially own approximately 98% of the outstanding preferred
      stock of the Company.





*IPEX,
      Inc.*





During
      the years ended December 31, 2007, 2006 and 2005, the Company recognized revenue
      of nil, $104,000 and $552,000, respectively, in connection with consulting
      services provided to IPEX. The Company’s former Chairman and Chief Executive
      Officer and significant beneficial owner of the Company served as a director
      of
      IPEX during that period. Further, the former Chief Executive Officer of ASG
      served as an IPEX director and member of IPEX’s Audit Committee from August 2005
      through January 2006.




-
          28 -


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**


*Digicorp*





At
      December 31, 2006, the Company had an investment in Digicorp recorded in
      long-term investments. The Company’s Chief Executive Officer and Chief Financial
      Officer was also Chief Financial Officer of Digicorp and remains a director
      of
      the Company. Further, certain Company officers and directors, both past and
      present, served in various management and director roles at Digicorp.





*Loans*





During
      the year ended December 31, 2007 and 2006, the Company received loans from
      Ault
      Gazer Capital Partners, LLC (the ***“Fund”*** ).
      Ault
      Glazer & Company Investment Management, LLC ( ***“AG
      & Company IM”*** )
      is the
      managing member of the Fund. The managing member of AG & Company IM is Ault
      Glazer. Mr. Ault is Chairman, Chief Executive Officer and President of Ault
      Glazer. Until June 8, 2006, the Company’s current Chief Executive Officer and
      Chief Financial Officer was also Chief Financial Officer of Ault
      Glazer.





*ASG*





During
      the period from June 29, 2007 to August 13, 2007, Automotive Services Group
      sold
      its express car wash and underlying
      real estate and a parcel of undeveloped land located in Birmingham, Alabama
      to Charles
      H. Dellaccio and Darrell Grimsley. Mr. Grimsley is the Chairman of the Board
      and
      Chief Executive Officer of Automotive Services Group.





*A
      Plus International, Inc.*





During
      the years ended December 31, 2007, 2006 and 2005, the Company recognized cost
      of
      goods sold of 467,000, $44,000 and nil, respectively, in connection with
      surgical sponges provided by A Plus. Wayne Lin, a director and significant
      beneficial owner of the Company is a founder and significant owner of A
      Plus.





**17.
      INCOME TAXES**





In
      June 2006, the FASB  issued
      FASB Interpretation Number 48 ( ***“FIN
      48”*** ), *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109* ,
      which
      clarifies the accounting for uncertainty in income taxes recognized in an
      entity’s financial statements in accordance with SFAS No. 109, *Accounting
      for Income Taxes* ,
      and
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position that an entity takes
      or
      expects to take in a tax return. Under FIN 48, the impact of an uncertain income
      tax position on the income tax return must be recognized at the largest amount
      that is, more-likely-than-not to be sustained upon audit by the relevant taxing
      authority. An uncertain income tax position will not be recognized if it has
      less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
      guidance on de-recognition, classification, interest and penalties, accounting
      in interim periods, disclosure, and transition. FIN 48 was e ffective
      for the Company beginning January 1, 2007.





The
      Company adopted the provisions of FIN 48 on January 1, 2007, and has commenced
      analyzing filing positions in all of the federal and state jurisdictions where
      it is required to file income tax returns, as well as all open tax years in
      these jurisdictions. As a result of adoption, the Company has recorded no
      additional tax liability. As of December 31, 2007, the Company has not yet
      completed its analysis of the deferred tax assets for net operating losses
      of
      $25.5 million. As such, these amounts and the offsetting valuation allowance
      have been removed from the Company’s deferred tax assets. The Company will
      complete a Section 382 analysis regarding the limitation of the net operating
      losses.




-
          29 -


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**


A
      rollforward of the changes in the Company’s unrecognized tax benefits related to FIN48 positions is shown
      below:





Balance
                at January 1, 2007
            
            $
            —Additions
                based on tax positions related to the current year
            
            
            **—**Additions
                for tax positions of prior years
            
            
            **—**Reductions
                for tax positions of prior years
            
            
            **—**Settlements
            
            
            **—**Balance
                at December 31, 2007
            
            $
            —





Due
      to
      the existence of the valuation allowance, future changes in our unrecognized
      tax
      benefits will not impact the Company’s effective tax rate.





The
      Company is subject to taxation in the U.S. and state jurisdictions. The
      Company’s tax years for 2002 and forward are subject to examination by the U.S.
      and California tax authorities due to the carryforward of unutilized net
      operating losses. The Company is currently not under examination by any taxing
      authorities.





The
      Company’s practice is to recognize interest and/or penalties related to income
      tax matters in income tax expense. During the twelve months ended December
      31,
      2007, the Company did not recognize any interest or penalties. Upon adoption
      of
      FIN 48 on January 1, 2007, the Company did not record any interest
      penalties.





The
      adoption of FIN 48 did not impact the Company’s financial condition, results of
      operations or cash flows. At December 31, 2007, the Company had net deferred
      tax
      assets of $2.0 million. Due to uncertainties surrounding the Company’s ability
      to generate future taxable income to realize these assets, a full valuation
      has
      been established to offset the net deferred tax asset. Additionally, the future
      utilization of the Company’s net operating loss to offset future taxable income
      may be subject to an annual limitation as a result of ownership changes that
      may
      have occurred previously or that could occur in the future. The Company has
      not
      yet determined whether such an ownership change has occurred; however the
      Company will be completing a Section 382 analysis regarding the limitation
      of
      the net operating loss. Until this analysis has been completed the Company
      has
      removed the deferred tax assets associated with these carryforwards from its
      deferred tax asset schedule and has recorded a corresponding decrease in its
      valuation allowance. When the Section 382 analysis is completed, the Company
      plans to update its unrecognized tax benefits under FIN 48.





Deferred
      income taxes reflect the net tax effects of temporary differences between
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for tax purposes. Significant components of the Company’s
      deferred tax assets as of December 31, 2007 and 2006 are as
      follows:




**2007**
            
            **2006**Deferred
                tax assets:Federal
                net operating loss carryforward
            
            $
            —
            
            $
            6,931,000State
                net operating loss carryforward
            
            
            **—**
            
            
            1,041,000Stock
                based compensation
            
            
            1,959,000
            
            
            1,840,000Other
            
            
            120,000
            
            
            19,000Total
                deferred tax asset
            
            
            2,079,000
            
            
            9,831,000Deferred
                tax liability:Book
                and tax bases difference arising from purchased patents
            
            
            (1,499,000
            )
            
            (1,473,066
            )Total
                net deferred tax asset
            
            
            580,000
            
            
            8,357,934Less
                valuation allowance
            
            
            (2,079,000
            )
            
            (9,831,000
            )Net
                deferred tax liability
            
            $
            (1,499,000
            )
            $
            (1,473,066
            )




-
          30 -


**Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**


For
      the
      years ended December 31, 2007, 2006 and 2005, a reconciliation of the
      federal statutory tax rate to the Company's effective tax rate is as follows:




**2007**
            
            
            **2006**
            
            
            **2005**Federal
                statutory tax rate
            
            
            (34.00)
            %
            
            (34.00)
            %
            
            (34.00)
            %State
                and local income taxes, net of federal tax Benefit
            
            
            0.08
            
            
            0.01
            
            
            0.01Non
                deductible items
            
            
            6.44
            
            
            8.30
            
            
            1.76Valuation
                allowance
            
            
            27.89
            
            
            24.83
            
            
            30.61Total
                effective tax rate
            
            
            0.41
            %
            
            (0.86
            )
            
            (1.62
            )%





**18.
      COMMITMENTS AND CONTINGENCIES**





*Operating
      Lease*





During
      November 2007, the Company entered into an operating agreement for office space
      for Surgicount.  The lease requires monthly payments of $9,424, subject to
      an annual increase of 3.5% per year, from January 1, 2008 through December
      31,
      2010.  Future minimum annual rent payments of $113,082, $117,040 and
      $121,136 due during the years ended December 31, 2008, 2009 and 2010,
      respectively, represent the remaining obligation under the Company’s existing
      operating lease.





Rent
      expense during the years ended December 31, 2007, 2006 and 2005 was $78,937,
      $131,129 and $88,368, respectively.





*Legal
      Proceedings*





On
      October 15, 2001, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P.
      filed a lawsuit (the ***“Leve
      Lawsuit”*** )
      against
      the Company, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
      and
      four other defendants affiliated with Winstar Communications, Inc. ( ***“Winstar”*** ).
      On
      February 25, 2003, the case against the Company and Sunshine was dismissed,
      however, on October 19, 2004, Jeffrey A. Leve and Jeffrey Leve Family
      Partnership, L.P. exercised their right to appeal. The initial lawsuit alleged
      that the Winstar defendants conspired to commit fraud and breached their
      fiduciary duty to the plaintiffs in connection with the acquisition of the
      plaintiff's radio production and distribution business. The complaint further
      alleged that the Company and Sunshine joined the alleged conspiracy. On June
      1,
      2005, the United States Court of Appeals for the Second Circuit affirmed the
      February 25, 2003 judgment of the district court dismissing the claims against
      the Company.





On
      July
      28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a
      new
      lawsuit (the ***“new
      Leve Lawsuit”*** )
      against
      the Company, Sunshine Wireless, LLC ( ***"Sunshine"*** ),
      and
      four other defendants affiliated with Winstar Communications, Inc. ( ***“Winstar”*** ).
      The
      new Leve Lawsuit attempts to collect a federal default judgment of $5,014,000
      entered against only two entities, i.e., Winstar Radio Networks, LLC and Winstar
      Global Media, Inc., by attempting to enforce the judgment against a number
      of
      additional entities who are not judgment debtors. Further, the new Leve Lawsuit
      attempts to enforce the plaintiffs default judgment against entities who were
      dismissed on the merits from the underlying action in which plaintiffs obtained
      their default judgment. An unfavorable outcome in the lawsuit, may have a
      material adverse effect on the Company's business, financial condition and
      results of operations. The Company believes the lawsuit is without merit and
      intends to vigorously defend itself. These consolidated interim financial
      statements do not include any adjustments for the possible outcome of this
      uncertainty.




-
          31 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**


*Employment
      Agreements*





The
      Company has entered into employment agreements with certain of its executives,
      which provide for annual base compensation plus, in most cases, bonuses and
      other benefits.  As of December 31, 2007, approximate future annual base
      compensation under these agreements are as follows:





**Years
                ended December 31,****2008**
            
            **2009**
            
            **Total**$
            581,250
            
            $
            112,500
            
            $
            693,750





**19.
      SEGMENT REPORTING**





The
      Company reports segment information in accordance with SFAS No. 131, *Disclosures
      about Segments of an Enterprise and Related Information.* The
      segment information previously provided reflected the three distinct lines
      of
      business within the Company’s past organizational structure: medical
      products, financial services and real estate, and
      car
      wash services .
      The
      Company has restructured its operations such that its only continuing operations
      are related to the medical products segment. Accordingly, since the Company
      only
      operates within a single industry, segment information is no longer
      reported.





**20.
      SELECTED QUARTERLY RESULTS (UNAUDITED)**





**March 31**
            
            **June 30**
            
            **September 30**
            
            **December 31****2007
                Quarter Ended**Total
                assets
            
            $
            13,038,354
            
            $
            10,447,051
            
            $
            8,205,147
            
            $
            8,174,174Revenues
            
            $
            307,158
            
            $
            313,461
            
            $
            212,999
            
            $
            255,383Operating
                loss
            
            $
            (1,102,234
            )
            $
            (1,409,279
            )
            $
            (1,139,450
            )
            $
            (1,503,612
            )Net
                loss
            
            $
            (1,425,053
            )
            $
            (1,756,157
            )
            $
            (1,939,542
            )
            $
            (1,885,226
            )Basic
                and diluted net loss per common share
            
            $
            (0.18
            )
            $
            (0.18
            )
            $
            (0.18
            )
            $
            (0.19
            )**2006
                Quarter Ended**Total
                assets
            
            $
            15,925,286
            
            $
            14,036,035
            
            $
            11,654,435
            
            $
            11,181,446Revenues
            
            $
            54,993
            
            $
            48,882
            
            $
            18,514
            
            $
            122,140Operating
                loss
            
            $
            (3,339,629
            )
            $
            (1,486,107
            )
            $
            (1,525,689
            )
            $
            (1,608,125
            )Net
                loss
            
            $
            (3,573,532
            )
            $
            (2,917,733
            )
            $
            (5,618,832
            )
            $
            (1,513,055
            )Basic
                and diluted net loss per common share
            
            $
            (0.60
            )
            $
            (0.47
            )
            $
            (0.87
            )
            $
            (0.23
            )




-
          32 -


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**


**21.
      SUBSEQUENT EVENTS**





Between
      February 28, 2008 and March 20, 2008, Francis Capital, a related party, loaned
      $500,000 to the Company. As consideration for the loan, the Company issued
      Francis Capital promissory notes in the principal amount of $500,000 (the***“Francis
      Capital Note”***).
      Francis Capital beneficially owns 1,272,000 shares of the Company’s common stock
      and warrants for purchase of 763,200 shares of the Company’s common stock. John
      Francis, a director of the Company, has voting and investment control over
      the
      securities held by Francis Capital. The Francis Capital Note has an interest
      rate of 8% per annum and is due on May 31, 2008.





In
      March
      2008, the Company completed the sale of approximately 8.5 acres of undeveloped
      land in Heber Springs, Arkansas for net proceeds of $226,000, which resulted
      in
      a realized loss of $25,000.




-
          33 -




**SIGNATURES**





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


PATIENT
                SAFETY TECHNOLOGIES, INC.Date:
                April 21, 2008
            By:
            /s/
                William B. HorneWilliam
                B. HorneChief
                Executive and Chief Financial Officer and
              Principal
                Accounting Officer





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




**Signature**
            
            **Title**
            
            **Date**/s/
                Steven H. Kane
            
            Chairman
                of the Board
            
            April
                21, 2008Steven
                H. Kane/s/
                Arnold Spangler
            
            Director
            
            April
                21, 2008Arnold
                Spangler/s/
                John Francis
            
            Director
            
            April
                21, 2008John
                Francis/s/
                David Augustine
            
            Director
            
            April
                21, 2008David
                Augustine/s/
                Louis Glazer
            
            Director
            
            April
                21, 2008Louis
                Glazer, M.D., Ph.G./s/
                Herbert Langsam
            
            Director
            
            April
                21, 2008Herbert
                LangsamDirector
            
            April
                21, 2008Wayne
                Lin





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