**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**





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


FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2006




**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)****27555
                Ynez Road, Suite 330, Temecula, CA 92591****(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:**





**Title
                of each class**
              Common
                Stock, par value $0.33 per share
            **Name
                of each exchange on which registered**
              N/A





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





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes o 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. o





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 o .




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. o




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 filero
            A
                ccelerated filero
            Non-accelerated
                filerx





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2) of the Act.


Yes o No x .




As
      of May
      8, 2007, 9,937,059 shares of the issuer's Common Stock were outstanding. The
      aggregate market value of the voting stock held by non-affiliates on May 8,
      2007
      was approximately $10,229,000 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.









**PATIENT
      SAFETY TECHNOLOGIES, INC.**





**FORM
      10-K FOR THE FISCAL YEAR**


**ENDED
      DECEMBER 31, 2006**





**TABLE
      OF CONTENTS**





**Page****PART
                I**Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            13Item
                1B.
            Unresolved
                Staff Comments
            26Item
                2.
            Properties
            26Item
                3.
            Legal
                Proceedings
            26Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            27**PART
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            27Item
                6.
            Selected
                Financial Data
            32Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            32Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            53Item
                8.
            Financial
                Statements and Supplementary Data
            54Item
                9.
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            91Item
                9A.
            Controls
                and Procedures
            91Item
                9B.
            Other
                Information
            91**PART
                III**Item
                10.
            Directors
                and Executive Officers of the Registrant
            91Item
                11.
            Executive
                Compensation
            95Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            103Item
                13.
            Certain
                Relationship and Related Transactions
            106Item
                14.
            Principal
                Accounting Fees and Services
            111**PART
                IV**Item
                15.
            Exhibits,
                Financial Statement Schedules
            112**SIGNATURES**
            118










**"SAFE
      HARBOR" STATEMENT UNDER**


**THE
      PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**





We
      believe that it is important to communicate our plans and expectations about
      the
      future to our stockholders and to the public. Some of the statements in this
      report are forward-looking statements about our plans and expectations of what
      may happen in the future, including in particular the statements about our
      plans
      and expectations under the headings “Item 1. Business” and “Item 7. Management's
      Discussion and Analysis of Financial Condition and Results of Operations.”
Statements that are not historical facts are forward-looking statements. These
      forward-looking statements are made pursuant to the “safe-harbor” provisions of
      the Private Securities Litigation Reform Act of 1995. You can sometimes identify
      forward-looking statements by our use of forward-looking words like “may,”
“should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of these terms and other
      similar expressions.





Although
      we believe that the plans and expectations reflected in or suggested by our
      forward-looking statements are reasonable, those statements are based only
      on
      the current beliefs and assumptions of our management and on information
      currently available to us and, therefore, they involve uncertainties and risks
      as to what may happen in the future. Accordingly, we cannot guarantee you that
      our plans and expectations will be achieved. Our actual results and stockholder
      values could be very different from and worse than those expressed in or implied
      by any forward-looking statement in this report as a result of many known and
      unknown factors, many of which are beyond our ability to predict or control.
      These factors include, but are not limited to, those contained in “Item 1A. Risk
      Factors” and elsewhere in this report. All written and oral forward-looking
      statements attributable to us are expressly qualified in their entirety by
      these
      cautionary statements.





Our
      forward-looking statements speak only as of the date they are made and should
      not be relied upon as representing our plans and expectations as of any
      subsequent date. Although we may elect to update or revise forward-looking
      statements at some time in the future, we specifically disclaim any obligation
      to do so, even if our plans and expectations change.









**PART
      I**




**Item
      1. Business.**





**Organizational
      History**





Patient
      Safety Technologies, Inc. (referred to in this report as the ***“Company,”***  ***“we,”
      “us,”*** and ***“our”*** )
      (formerly known as Franklin Capital Corporation) is a Delaware corporation.
      Currently, the Company has two wholly-owned operating subsidiaries: (1)
      SurgiCount Medical, Inc., a California corporation; and (2) Automotive Services
      Group, Inc. (formerly known as Ault Glazer Bodnar Merchant Capital, Inc.) a
      Delaware corporation.





The
      Company, including SurgiCount Medical Inc. ( ***“SurgiCount”*** ),
      is
      engaged in the acquisition of controlling interests in companies and research
      and development 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.
      Automotive Services Group, Inc. ( ***“Automotive
      Services Group”*** )
      holds
      the Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
      its
      wholly-owned subsidiary. In addition to the assets that are held in Automotive
      Services Group, the Company holds various other unrelated investments which
      it
      is in the process of liquidating. The unrelated investments are included in
      a
      separate segment, financial services and real estate. The Company purchased
      the
      remaining equity interest in ASG in March 2006 and during the fourth quarter
      of
      2006 the Company began marketing for sale the assets held in ASG.





The
      Company was incorporated on March 31, 1987, under the laws of the state of
      Delaware. Beginning in July 1987 until March 31, 2005 we operated as an
      investment company registered pursuant to the Investment Company Act of 1940,
      as
      amended (the ***“1940
      Act”*** ).
      In or
      about August 1997 our Board of Directors determined it would be in the best
      interest of the Company and our stockholders to elect to become a registered
      business development company (a ***“BDC”*** )
      under
      the 1940 Act. On September 9, 1997 our shareholders approved the proposal to
      be
      regulated as a BDC and on November 18, 1997 we filed a notification of election
      to become a BDC with the Securities and Exchange Commission ( ***“SEC”*** ).





On
      March
      30, 2005, stockholder approval was obtained to withdraw our election to be
      treated as a BDC and on March 31, 2005 we filed an election to withdraw our
      election with the Securities and Exchange Commission. At December 31, 2006,
      8.9%
      of our assets, consisting of our investments in Alacra Corporation, on a
      consolidated basis with subsidiaries were comprised of investment securities
      within the meaning of the 1940 Act ( ***“Investment
      Securities”*** ). If
      the
      value of our assets that consist of Investment Securities were to exceed 40%
      of
      our total assets (excluding government securities and cash items) on an
      unconsolidated basis we could be required to re-register as an investment
      company under the 1940 Act unless an exemption or exclusion applies. We continue
      to evaluate ways in which we can dispose of these Investment Securities and
      do
      not believe that the value of our Investment Securities will increase in an
      amount that would require us to re-register as a BDC. Registration as an
      investment company would subject us to restrictions that are inconsistent with
      our fundamental business strategy of equity growth through creating, building
      and operating companies
      in the patient safety medical products industry. Registration under the 1940
      Act
      would also subject us to increased regulatory and compliance costs, and other
      restrictions on the way we operate and would change the method of accounting
      for
      our assets under GAAP.





Our
      operations currently focus on the acquisition of controlling interests in
      companies and research and development of products and services in the health
      care and medical products field, particularly the patient safety markets. In
      the
      past we also focused on the financial services and real estate industries.
      On
      October 2005 our Board of Directors authorized us to evaluate alternative
      strategies for the divesture of our non-healthcare assets. As an extension
      on
      our prior focus on real estate, in March 2006 we acquired the remaining 50%
      equity interest in ASG and upon doing so we entered the business of developing
      properties for the operation of automated express car wash sites. However,
      on
      March 29, 2006, our Board of Directors determined to focus our business
      exclusively on the patient safety medical products field. The Board of Directors
      established a special committee in January 2007 to evaluate potential
      divestiture transactions for ASG and our other real estate assets.




1





SurgiCount
      Medical, Inc., developer of the Safety-Sponge TM System,
      and Automotive Services Group, Inc. (formerly Ault Glazer Bodnar Merchant
      Capital, Inc.), a holding company for ASG, a
      company
      formed to develop properties for the operation of automated car wash
      sites, are
      wholly-owned operating subsidiaries, which were either acquired or created
      to
      enhance our ability to focus our efforts in each targeted industry. Currently,
      we are evaluating ways in which to monetize our non-patient safety related
      assets (the “ ***non-core
      assets*** ”).





SurgiCount’s
      Safety-SpongeTM System helps reduce the number of retained sponges and towels in
      patients during surgical procedures and allows for faster and more accurate
      counting of surgical sponges. The SurgiCount Safety-Sponge TM 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. The Safety-Sponge System works much like
      a
      grocery store checkout process: Every surgical sponge and towel is affixed
      with
      a unique inseparable two-dimensional data matrix bar code and used with a
      SurgiCounter to scan and record the sponges during the initial and final counts.
      Because each sponge is identified with a unique code, a SurgiCounter will not
      allow the same sponge to be counted more than one time. When counts have been
      completed at the end of a procedure, the system will produce a printed report,
      or can be modified to work with a hospital's paperless system. By scanning
      the
      surgical dressings in at the beginning of a surgical procedure and then scanning
      them out at the end of the procedure, the sponges can be counted faster and
      more
      accurately than traditional methods which require two medical personnel manually
      counting the used and un-used sponges. The Safety-Sponge System is the only
      FDA
      510k approved computer assisted sponge counting system.  SurgiCount
      is the first acquisition in our plan to become a leader in the patient safety
      market.





**Investments**





A
      summary
      of our investment portfolio, which is valued at $1,442,000 and represents 12.9%
      of our total assets, is reflected below. Excluding our real estate investments,
      our investment portfolio represents 9.0% of our total assets. The investment
      portfolio is classified as long-term investments.




**December
                31,**
            
            
            **December
                31,****2006**
            
            
            **2005**Alacra
                Corporation
            
            $
            1,000,000
            
            $
            1,000,000Digicorp
            
            
            10,969
            
            
            3,025,398IPEX,
                Inc.
            
            
            —
            
            
            1,243,550Real
                Estate
            
            
            430,564
            
            
            481,033Tuxis
                Corporation
            
            
            —
            
            
            746,580Other
            
            
            —
            
            
            64,170$
            1,441,533
            
            $
            6,560,731





At
      December 31, 2006, our investment in Alacra Corporation represented our only
      significant investment security.





*Alacra
      Corporation*





At
      December 31, 2006, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued at $1,000,000, which represents 8.9% of our total assets. On April 20,
      2000, we purchased $1,000,000 worth of Alacra Series F Convertible Preferred
      Stock. Alacra has recorded revenue growth in every year since the Company’s
      original investment, further, Alacra is forecasting that 2007 revenues will
      be
      approximately $19.2 million, which would represent an increase of 22% over
      2006
      unaudited revenues. At December 31, 2006, Alacra reported in their
      unaudited financial statement, total assets of approximately $4.7 million
      with total liabilities of approximately $7.4 million. Deferred revenue, which
      represents subscription revenues are amortized over the term of the contract,
      which is generally one year, and represented approximately $3.7 million of
      the
      total liabilities. We have the right, subject to Alacra having the available
      cash, to have the preferred stock redeemed by Alacra over a period of three
      years for face value plus accrued dividends beginning on December 31, 2006.
      Pursuant to this right, in December 2006 we informed management of Alacra that
      we were exercising our right to put back one-third of our preferred stock.
      If
      Alacra has a sufficient amount of cash to redeem our preferred stock we would
      expect the redemption to occur in the fourth quarter of 2007. In connection
      with
      this investment, the Company was granted observer rights on Alacra board of
      directors meetings.




2





Alacra,
      a
      privately held company based in New York, is a global provider of business
      and
      financial information. Alacra provides a diverse portfolio of online services
      that allow users to find, analyze, package and present business information.
      Alacra’s customers include more than 750 financial institutions, management
      consulting, law and accounting firms and other corporations throughout the
      world. Currently, Alacra’s largest customer segment is investment and commercial
      banking, followed closely by management consulting, law and multi-national
      corporations.





Alacra’s
      online service allows users to search via a set of tools designed to locate
      and
      extract business information from the Internet and from Alacra’s library of
      content. Alacra’s team of information professionals selects, categorizes and
      indexes more than 45,000 sites on the Web containing the most reliable and
      comprehensive business information. Simultaneously, users can search more than
      100 premium commercial databases that contain financial information, economic
      data, business news, and investment and market research. Alacra provides
      information in the required format, gleaned from such prestigious content
      partners as Thomson FinancialTM, Barra, The Economist Intelligence Unit, Factiva,
      Mergerstat® and many others.





The
      information services industry is intensely competitive and we expect it to
      remain so. Although Alacra has been in operation since 1996 they are
      significantly smaller in terms of revenue than a large number of companies
      offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
      LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
      revenues that range anywhere from $100 million to several billion dollars,
      as
      reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
      range of products and services, greater financial and marketing resources,
      larger customer bases, greater name recognition, greater global reach and more
      established relationships with potential customers than Alacra has. These larger
      and better capitalized competitors may be better able to respond to changes
      in
      the financial services industry, to compete for skilled professionals, to
      finance investment and acquisition opportunities, to fund internal growth and
      to
      compete for market share generally.





*Real
      Estate Investments*





At
      December 31, 2006, we had several real estate investments, valued in the
      aggregate at $431,000, which represents 3.9% of our total assets. In the past
      we
      held our real estate investments in Ault Glazer Bodnar Capital Properties,
      LLC ***(“AGB
      Properties”)*** .
      AGB
      Properties, which was closed during 2006, was a Delaware limited liability
      company and a wholly owned subsidiary. The real estate investments, consisting
      of approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
      0.61 acres of undeveloped land in Springfield, Tennessee, are currently being
      marketed for sale. During the year ended December 31, 2006, we received payment
      on loans that were secured by real estate of $50,000. During the year ended
      December 31, 2005, we liquidated properties with a cost basis of $113,000,
      which
      resulted in a gain of $28,000. We expect that any future gain or loss recognized
      on the liquidation of some or all of our real estate holdings would be
      insignificant primarily due to the short period of time that the properties
      were
      owned combined with the absence of any significant changes in property values
      in
      the real estate markets where the real estate holdings are located.




**The
      Medical Products and Healthcare Solutions Industry**





We
      believe that the healthcare delivery system is under tremendous pressure to
      identify and commercialize simple medical solutions quickly to lower costs,
      control infections, reduce liability and eliminate preventable errors. Increased
      litigation and a renewed focus on patient safety by regulators is spurring
      demand for new innovative medical devices. With the convergence of scientific,
      electronic and digital technologies, new breakthroughs in medical devices will
      play a critical role in solving problems in healthcare and enhancing patient
      safety in the future.




3





The
      medical community recognizes the importance of improving patient safety, not
      only to enhance the quality of care, but also to help manage medical costs
      and
      related litigation costs. We are confident the medical profession and healthcare
      professionals will rise to the occasion and help develop the medical solutions
      to revolutionize health care.





We
      are
      dedicated to leading this effort through the development and introduction of
      ground-breaking patient safety products such as our lead product, the patented
      Safety-SpongeTM System, which management believes will allow us to capture a
      significant portion of the United States and European surgical sponge sales.
      Based upon assumptions by our management that take into consideration factors
      such as the approximate number of hospitals and operating rooms in the United
      States and Europe, the approximate number of surgeries performed annually,
      and
      estimates for the average cost of surgical sponges per surgery, we believe
      that
      the existing market for surgical sponge sales in the United States and Europe
      represents a market opportunity equal to or in excess of $650 million in annual
      sales. Such estimate assumes approximately 61 million surgeries performed
      annually in the United States and Europe, and an average cost of surgical
      sponges of $10.60 per surgery. In addition, we believe that our Safety-SpongeTM
System could save up to an estimated $1.0 billion annually in retained sponge
      litigation. The estimated size of the surgical sponge market and actual savings
      derived from utilizing the Safety-SpongeTM System from retained sponge litigation
      is based on management’s estimates and assumptions made by management. Although
      management took into consideration statistics from research and published
      articles by the American Hospital Association and New England Journal of
      Medicine, as well as various articles located through a search of retained
      sponge verdicts, the specific assumptions are management’s interpretation of
      multiple sources. Further, management believes that a large amount of the
      litigation relating to medical malpractice claims are settled under the terms
      of
      confidential agreements, thus the actual amount of many settlements are never
      disclosed and therefore subject to speculation.





We
      intend
      to target hospitals, physicians, nurses and clinics as our initial source of
      customers. In addition, we plan to develop strategic alliances with
      universities, medical facilities and notable medical researchers around the
      United States that will provide research, development and promotional support
      for our products and services.





***Customers
      and Distribution***




On
      April
      5, 2005, we entered into a consulting agreement with Health West Marketing
      Incorporated, a California corporation ( ***“Health
      West”*** ),
      pursuant to which Health West agreed to help us establish a comprehensive
      manufacturing and distribution strategy for the Safety-SpongeTM System worldwide.
      The initial term of the agreement was for a period of two years, however, the
      agreement was terminated with the appointment of Bill Adams, Health West’s Chief
      Executive Officer, to the position of Chief Executive Officer of SurgiCount
      effective April 21, 2006. In consideration for Health West's services, the
      Company agreed to issue Health West 42,017 shares of the Company's common stock.
      Through December 31, 2006, the Company has issued 26,261 shares, valued at
      $156,000, primarily for 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. The Company has agreed to issue the
      remaining 15,756 shares for Health West’s services in assisting with the
      development of a regional distribution network to integrate the Safety-SpongeTM
System into the existing acute care supply chain. The remaining shares will
      be
      issued during 2007. As an additional incentive, the Company granted Health
      West
      warrants to purchase a total of 175,000 shares of the Company’s common stock
      with an exercise price of $5.95 per share.





On
      November 14, 2006, SurgiCount entered into a Supply Agreement with Cardinal
      Health 200, Inc. ( ***"Cardinal"*** ).
      Pursuant to the agreement, Cardinal shall act as the exclusive distributor
      of
      SurgiCount's products in the United States, with the exception that SurgiCount
      may sell its products to one other specified hospital supply company, solely
      for
      its sale/distribution to its hospital customers. Under the agreement, SurgiCount
      agrees to maintain a specified fill rate on all orders for products. The term
      of
      the agreement is 36 months, unless earlier terminated as set forth therein.
      Otherwise, the agreement automatically renews for successive 12 month
      periods.




4





If
      Cardinal receives an offer from another supplier to purchase any or all of
      the
      products supplied by SurgiCount under the agreement on more favorable terms
      and
      conditions, of better grade or quality, at a more favorable net price or with
      new or improved technology, Cardinal must provide SurgiCount with written notice
      of such offer. SurgiCount will have 15 days following the date of the notice
      to
      notify Cardinal that it agrees to meet or improve upon such offer. If SurgiCount
      fails to so notify Cardinal in writing that it will meet or improve upon such
      offer within such 15 day period, Cardinal may terminate the agreement with
      respect to the product in question upon written notice to SurgiCount, without
      further obligation or liability. SurgiCount's notice to Cardinal that it agrees
      to meet or improve upon such offer shall constitute an amendment to the
      agreement with respect to those products.





SurgiCount
      may not assign its interest under the agreement without Cardinal's prior written
      consent. Further as part of the agreement, SurgiCount executed a Continuing
      Guaranty agreeing, among other things, to indemnify Cardinal for any loss or
      claim a) for property damage on account of any SurgiCount product except as
      may
      be caused by gross negligence or reckless disregard on the part of Cardinal
      or
      any of its employees, or b) arising on account of any infringement by any
      SurgiCount product of any patent, trademark or other proprietary right of any
      other party





In
      addition, the agreement provides that if the Company decides to divest, spin-off
      or otherwise sell SurgiCount or any material assets of SurgiCount (such as
      intellectual property) during the term of the agreement, Cardinal shall have
      a
      right of first refusal to purchase SurgiCount.





***Geographic
      Areas***





We
      intend
      to market and sell our patient safety products and services in the United States
      and in Europe. However, the principal markets, products and methods of
      distribution will vary by country based on a number of factors, including
      healthcare regulations, insurance coverage and customer demographics. Business
      activities in some countries outside the United States are subject to higher
      risks than comparable U.S. activities because the business and commercial
      climate is influenced by restrictive economic policies and political
      uncertainties.





***Product
      Development***





Our
      Safety-Sponge TM System
      allows for faster and more accurate counting of surgical sponges. The
      Safety-Sponge TM System
      is
      a two-part system consisting of a handheld scanner/imager/computer and of
      SurgiCount supplied surgical dressings. Our sponges are unique in that they
      are
      individually labeled with a “bar code” at the point of manufacture. The sponges
      are scanned in by a handheld scanner at the beginning of a surgical procedure,
      and then scanned out at the end of a procedure after their use. Each sponge,
      having a unique bar code, can accurately be accounted for at the end of the
      procedure. Without using our Safety-Sponge TM System,
      in a typical surgical procedure, a nurse and a scrub tech manually count all
      sponges used and un-used. The core of the Safety-Sponge TM System
      is
      the ability to uniquely identify an individual dressing.





SurgiCount
      began developing the Safety-Sponge TM line
      of
      sponges in February 1994 and received confirmation from the U.S. Food and Drug
      Administration ( ***“FDA”*** )
      that,
      due to the minor nature of the change in surgical sponges attributed to the
      Safety-Sponge TM line
      of
      sponges, a new product listing was not warranted and the
      Safety-Sponge TM product
      line was granted 510k exempt status on November 8, 1999. In 2005, SurgiCount
      requested, and received in March 2006, 510(k) clearance to
      market
      and sell its patented Safety-SpongeTM System, which included the Safety-Sponge TM line
      of
      sponges . 
      The Safety-Sponge TM System is
      an
      integrated turn-key program of thermally affixed, data matrix tagged surgical
      sponges, line-of-sight scanning technology, and documentation that offers
      surgeons and hospitals a solution to gossypiboma - the term for surgical sponges
      accidentally left inside a human body after surgery.  The Safety-Sponge TM System is
      the
      first computer-assisted program of counting sponges ever cleared by the
      FDA. The
      Safety-Sponge TM line
      of
      sponges has passed required FDA biocompatibility tests including ISO
      sensitization, cytotoxicity and skin irritation tests. The Center for Devices
      and Radiological Health ( ***“CDRH”*** ) ****** handles
      the premarket notification process for medical devices at the FDA. The CDRH
      requires the biological evaluation of medical devices to determine the potential
      toxicity resulting from contact of the component materials of the device with
      the human body. Evaluation of any new device intended for human use requires
      data from systemic testing to ensure that the benefits provided by the final
      product will exceed any potential risk produced by device materials. CDRH Blue
      Book Memo G95-1 provides guidance for required biocompatibility testing
      procedures for medical devices. SurgiCount requested specific guidance from
      the
      CDRH as to the required biocompatibility tests for the Safety-Sponge TM line
      of
      products. The CDRH specifically guided SurgiCount to three required
      biocompatibility tests for the Safety-Sponge TM line:
      Cytotoxicity, Sensitization and Irritation/Intracutaneous Reactivity. SurgiCount
      has performed and in 2003 passed all three of these required biocompatibility
      tests. Cytotoxicity testing is conducted to determine whether or not the
      materials used in a medical device are harmfully reactive to certain biological
      elements on a cellular level. Sensitization or hypersensitivity reactions
      usually occur as a result of prolonged contact with a chemical substance that
      interacts with the body’s immune system. The tests are used to eliminate the
      possibility that patients will be exposed to strong sensitizing chemicals
      extracted from the medical device.




5





The
      tests
      were completed prior to our acquisition of SurgiCount, which occurred in
      February 2005. At the time the acquisition was completed we focused on
      developing the product for commercialization. Although passing the three
      biocompatibility tests was necessary to satisfy any questions as to whether
      or
      not the product was safe for use in the body it was only a part of the process
      required to commercialize the product. In order to utilize the product as
      designed, investment in specialized software, hardware as well as modification
      of current operating room procedures was needed.





At
      the
      time that we acquired SurgiCount we believed that sales of the
      Safety-Sponge TM System
      would begin to materialize during the first half of 2005, however, this
      expectation did not properly take into account the level of work required on
      software development. Software development, which was initially expected to
      take
      a few months, required approximately nine months for completion. Initially,
      we
      expected that basic modification to existing software would be sufficient;
      however, based upon feedback from third party users and consultants we abandoned
      our plan to modify existing software currently in use and developed our own
      proprietary software for the system. By developing our own proprietary software
      we extended the time required to bring Safety-Sponge TM System
      to
      market by approximately seven months.





We
      also
      did not adequately account for the level of testing that would be performed
      by
      the adopters of our Safety-Sponge TM System.
      Our expectation was that despite the pricing of our sponges, which is on average
      four times the cost of traditional sponges, hospitals would be eager to order
      the Safety-Sponge TM System
      solely because of the anticipated improved level of safety which we believe
      it
      provides patients undergoing surgery. Due to the nature of the medical products
      business, in spite of expectations for improved safety, any change in the
      procedures requires rigorous rounds of testing and review in every
      adopter.  Demonstrations are given to relevant parties and small
“in-service” (an in-hospital teaching of how to use the system to the relevant
      staff members) sessions are performed with the results evaluated.  If the
      results are viewed positively a second larger in-service session is usually
      performed, which results are again reviewed.  Assuming a positive outcome
      of the in-service sessions, the entire staff must then be trained to use the
      system prior to the placement of any order. We currently estimate that the
      rounds of testing by an adopter could range between one to three months before
      a
      final decision is made to purchase our Safety-Sponge TM System.
      We have seen several successful in-service sessions and began receiving orders
      for the Safety-Sponge TM System,
      in limited quantities, during the quarter ended December 31, 2006.





The
      Safety-Sponge TM System
      is
      presently in the optimization and commercialization phase. Development of the
      Safety-Sponge TM System
      has been completed and the system is currently being rolled out into the market
      as a commercial product. As an exhibitor at the 54th Annual AORN Congress
      (Association of Perioperative Nurses) we demonstrated the
      Safety-Sponge TM System
      to
      the Health Care Community and officially began the national rollout of the
      Safety-Sponge TM System.





We
      intend
      to conduct further research and development to advance our products. However,
      we
      expect that any costs associated with R&D on our Safety-Sponge TM product
      will be insignificant and intend to outsource much of the R&D functions so
      that we may focus our direct efforts on optimizing the Safety-Sponge TM product
      and establishing distribution channels with strategic alliances with hospitals
      to deploy the product. We also seek qualified input from professionals in the
      healthcare profession as well as University hospitals such as Harvard and the
      University of California, San Francisco ( ***“UCSF*** ”).
      These
      physicians and researchers maintain medical practices primarily at University
      hospitals and are involved in various research and clinical development
      programs. We meet on an as needed basis to discuss medical, technology and
      development issues. Through direct contracts and sponsorship of studies,
      recommendations from these professionals have improved various aspects of the
      Safety-Sponge TM System.
      Examples where recommendations were utilized include: the ideal location for
      labels, label coarseness and thickness, improved operating room procedures,
      label structure and scanner functionality.




6





In
      the
      past we have relied on the professional advice of Dr. Jeffrey Pearl relating
      to
      operating room procedures and how to best adapt the Safety-Sponge TM for
      use
      in an operating room. Dr. Pearl is the Vice-chair of the Department of Surgery
      at UCSF, as well as the vice dean of the medical school and a highly respected
      medical researcher. In August of 2005, Dr. Pearl accepted a one-year consulting
      contract for continued services relating to operating room procedures and
      integration of the Safety-Sponge TM System.
      Integration of the Safety-Sponge TM System
      covers areas such as teaching nurses to use the system, optimum locations in
      the
      operating room, and optimum procedures for how to perform the count. The
      contract provided for a monthly cash payment of $2,000 and warrants to purchase
      12,500 shares of our common stock.





We
      entered into a clinical trial agreement with Brigham and Women's Hospital,
      the
      teaching affiliate of Harvard Medical School, relating to SurgiCount's
      Safety-Sponge TM System.
      The clinical trial is the result of an on-going collaboration between Harvard
      and SurgiCount to refine the Safety-Sponge TM System
      in a clinical optimization study. Under terms of the agreement, Brigham and
      Women's Hospital collected data on how the Safety-Sponge System saves time,
      reduces costs and increases patient safety in the operating room. The study
      also
      assisted to refine the system's technical processes in the operating room to
      provide clear guidance and instruction to hospitals, easily integrating the
      Safety-Sponge TM System
      into operating rooms. Brigham and Women's Hospital received a non-exclusive
      license to use the Safety-Sponge TM System,
      while we will own all technical innovations and other intellectual properties
      derived from the study. We provided a research grant to Brigham and Women’s
      Hospital over the course of the clinical trial in the aggregate amount of
      $431,000 of which $108,000 was paid in 2005. The clinical trials were completed
      around September 2006.





***Manufacturing***





We
      believe that the raw materials used in our products are readily available and
      can be purchased and/or produced by several different vendors and, therefore,
      we
      do not anticipate being dependent on any one vendor for our raw materials.





In
      order
      to meet the expected demand for bar-coded surgical dressings SurgiCount entered
      into an agreement on August 17, 2005 for A Plus to be the exclusive manufacturer
      and provider of the Safety-SpongeTM products, which includes bar coded gauze
      sponges, bar coded laparotomy sponges, bar coded O.R. towels and bar coded
      specialty sponges. Services to be provided by A Plus include manufacturing,
      packaging, sterilization, logistics and all related quality and regulatory
      compliance. During the term of the agreement, A Plus agreed not to manufacture,
      distribute or otherwise supply any bar coded gauze sponges, bar coded laparotomy
      sponges, bar coded O.R. towels or bar coded specialty sponges manufactured
      in
      China for any third party except for SurgiCount. A Plus was founded in 1988
      and
      is a global manufacturer of surgical dressings, patient drapes and surgical
      gowns. A Plus provides OEM support to the largest healthcare manufacturers
      and
      distributors in the world. A Plus employs over 6,000 people in seven factories
      throughout China and maintains over 200,000 sq. ft. of warehouse space in the
      United States. While we believe the manufacturing capacity of A Plus will be
      sufficient to meet our expected demand, in the event A Plus cannot meet our
      requirements the agreement allows us to retain additional providers of the
      Safety-SpongeTM products. The term of the agreement was for a period of five
      years and automatically renewed for successive three-year periods. Either party
      had the right to terminate the agreement without cause at any time after eight
      years upon delivery of 90 days prior written notice.




On
      January 29, 2007, on behalf of SurgiCount, we entered into an Exclusive License
      and Supply Agreement (the ***“Supply
      Agreement”*** )
      with A
      Plus. Pursuant to the agreement, A Plus agreed to act as the exclusive
      manufacturer for SurgiCount's products. A Plus was previously engaged in the
      manufacturing of SurgiCount's products under a Supply Agreement dated August
      17,
      2005, but was not previously granted the exclusive, world-wide license to
      manufacture and import SurgiCount's products. Pursuant to the Supply Agreement,
      A Plus was granted the exclusive, world-wide license to manufacture and import
      SurgiCount's products, including the right to sublicense to the extent necessary
      to carry out the grant. The Supply Agreement is a requirements contract, with
      projections of the maximum/minimum level of required inventory to be provided
      to
      A Plus on a quarterly basis. The pricing schedule shall remain at its current
      price for the first three (3) years of the Supply Agreement; thereafter, the
      pricing schedule shall be based upon the Cotlook Index and the RMB exchange
      rate. The term of Supply Agreement is eight years.




7





In
      conjunction with entering into the Supply Agreement we also entered into a
      subscription agreement with A Plus, in which we sold to A Plus 800,000 shares
      of
      our Common Stock and a warrant to purchase 300,000 shares of our common stock.
      The Warrant has a term of five (5) years and has an exercise price equal to
      $2.00 per share. We received gross proceeds of $500,000 in cash and will receive
      $500,000 in product over the course of the next twelve (12) months. Pursuant
      to
      the subscription agreement with A Plus, we agreed to appoint Wayne Lin, the
      President and Founder of A Plus, to our Board of Directors.





***Research
      and Development***  **





Research
      and development activities are important to our business. However, at this
      time
      we do not have a research facility but rather focus our efforts on acquisitions
      of companies operating within our target industries that have demonstrated
      product viability through their own research and development activities. We
      intend to outsource much of the research and development activities related
      to
      improving our existing products or expanding our intellectual property to
      similar products or products that have similar characteristics in our target
      industries. We did not incur any costs during the fiscal years ended December
      31, 2006 or 2005 relating to the development of new products, the improvement
      of
      existing products, technical support of products and compliance with
      governmental regulations for the protection of consumers. In the future, these
      costs will be charged directly to income in the year in which they are
      incurred.





***Patents
      and Trademarks***  **





We
      intend
      to make a practice of obtaining patent protection on our products and processes
      where possible. Our patents and trademarks are protected by registration in
      the
      United States and other countries where our products are marketed.





We
      currently own patents issued in the United States and Europe related to the
      Safety-SpongeTM System. This is covered by patent #5,931,824 registered with the
      United States Patent and Trademark Office and patent #1 032 911 B1 registered
      with the European Patent Office, which permits the holder to label or identify
      a
      dressing with a unique identifier. Patent #5,931,824 and #1 032 911 B1 will
      expire in August of 2019 and March of 2017, respectively. U.S Patent Number
      5,931,824 currently underwent a reexamination proceeding in the U.S. Patent
      Office.  During 2007, we received notification from the U. S. Patent Office
      that a reexamination certificate will be granted affirming the validity of
      the
      reexamined patent with certain amendments to the claims.  Our counsel has
      reviewed the amended claims and believes that they will cover the Safety-SpongeTM
System as well as a broad range of commercially equivalent systems.  In
      addition to the reexamined patent and the European patent, we have filed one
      additional U. S. Patent application and one international patent
      application **** covering
      improved methods and systems for the automated counting and tracking of surgical
      articles, that would provide the Company’s Safety-Sponge TM System
      with an additional level of protection to prevent competitors from attempting
      to
      replicate and market a similar version of the Company’s
      Safety-Sponge TM System.





Sales
      of
      the Safety-SpongeTM System in the future are expected to contribute a
      significant part of our total revenue. We consider these patents and trademarks
      in the aggregate to be of material importance in the operation of our business.
      The loss or expiration of any product patent or trademark could result in a
      loss
      of market exclusivity and can result in a significant reduction in
      sales.




8





***Competition***





The
      medical products and healthcare solutions industry is highly competitive. We
      expect that if our business strategy proves to be successful, our current
      competitors in the medical products and healthcare solutions market may
      duplicate our strategy and new competitors may enter the market. We compete
      against other medical products and healthcare solutions companies, some of
      which
      are much larger and have significantly greater financial resources than we
      do.
      We also compete against large companies that seek to license medical products
      and healthcare solutions technologies for themselves. We cannot assure you
      that
      we will be able to successfully compete against these competitors in the
      acquisition, development, or commercialization of any medical products and
      healthcare solutions, funding of medical products and healthcare solutions
      companies or marketing of our products and solutions.





Competition
      in research, involving the development of new products and processes and the
      improvement of existing products and processes, is particularly significant
      and
      results from time to time in product and process obsolescence. The development
      of new and improved products is important to our success in all areas of our
      business. This competitive environment requires substantial investments in
      continuing research, multiple sales forces and strategic alliances. In addition,
      the winning and retention of customer acceptance of our patient safety products
      involves heavy expenditures for health care regulatory compliance, advertising,
      promotion and selling.





Because
      we have only begun selling and generating revenue from our patient safety
      products, our competitive position in the medical products and healthcare
      solutions industry cannot be determined.





***Competitive
      Advantages***





We
      believe that we are well positioned to provide financing and research and
      development resources to medical products and health care-related companies
      for
      the following reasons:





·
            Focus
                on innovative technologies, products and
                services;





·
            Network
                of well respected industry affiliations and medical expertise;
                and





·
            Established
                deal sourcing network.





Though
      by
      the nature of our patents, we can have no direct competition, there are several
      existing individuals/companies that are trying to address the same issues as
      SurgiCount's Safety-Sponge System.  Among these are a medical malpractice
      lawyer named Daniel Ballard and two radio frequency identification ( ***“RFID”*** )-based
      companies, RF Surgical and ClearCount Medical.





Mr.
      Ballard’s invention and patent revolves around imbedding radio-opaque pellets
      (similar to BB’s) into the sponges. These would be read by placing the used
      sponges into a special machine after a surgery that would count the pellets,
      and
      thus the sponges placed in the machine.





The
      RFID
      companies both have similar approaches to solving retained sponges. Their
      approach is to “impregnate” sponges with RFID tags. RFID-reading wands would be
      held over the patients at the end of surgeries to ensure that no sponges are
      left behind. It is our understanding from limited discussions with the
      principals of RF Surgical and ClearCount Medical, and from discussions with
      sponge manufacturers, that the RFID companies are still in the development
      stage
      with their competing products. SurgiCount has received FDA exemption for its
      Safety-Sponge System and its scanner is currently registered in the FDA’s
      database as non-interfering medical equipment. Since SurgiCount’s Safety-Sponge
      System is fully developed and ready for manufacturing and distribution, we
      believe this provides an advantage over the above competing
      products.




9





**Real
      Estate Industry and Express Car Wash Business**





We
      had
      originally intended for our real estate operations to include a mixture of
      commercial properties, residential land development projects and other
      unimproved land, all in various stages of development and all available for
      sale. Performance of this type of real estate operations would largely have
      been
      dependent upon the performance of the operating properties, the current status
      of our development projects and non-recurring gains or losses recognized when
      and if real estate assets are sold. The results of operations for these types
      of
      real estate operations generally are unpredictable and we probably would have
      experienced significant year-over-year fluctuations from such operations. The
      majority of our real estate holdings are owned by ASG, which is wholly owned
      by
      our subsidiary Automotive Services Group. During July 2005 we shifted the focus
      of our real estate operations to the identification of unimproved land for
      ASG
      to develop and operate automated car wash sites under the trade name “Bubba’s
      Express Wash.” ASG’s first express car wash site, developed in Birmingham,
      Alabama, had its grand opening on March 8, 2006. On July 18, 2005 our wholly
      owned subsidiary Automotive Services Group (formerly AGB Merchant Capital,
      Inc.)
      purchased 50% of the outstanding equity interests of ASG from West Highland,
      LLC, an unrelated third party, in exchange for $300,000. The remaining 50%
      interest in ASG was owned by Darrell W. Grimsley until March 15, 2006, when
      Automotive Services Group entered into a Unit Purchase Agreement to acquire
      the
      remaining 50% interest from Mr. Grimsley in exchange for agreeing to issue
      200,000 shares of our common stock to Mr. Grimsley. We have consolidated ASG’s
      operations in our financial statements since we determined that we are the
      primary beneficiary of ASG, a variable interest entity as defined by FIN 46(R).
      Pursuant to ASG’s operating agreement, Mr. Grimsley had exclusive control over
      ASG’s operations from July 18, 2005 until Automotive Services Group purchased
      the remaining 50% interest on March 15, 2006. Automotive Services Group now
      owns
      100% of the outstanding equity interests in ASG and has exclusive control over
      ASG as its sole managing member.





In
      addition to ASG, we had several real estate investments at December 31, 2005
      These investments consisted of approximately 8.5 acres of undeveloped land
      in
      Heber Springs, Arkansas, and 0.61 acres of undeveloped land in Springfield,
      Tennessee. During 2005, we disposed of eight vacant single family buildings
      and
      two multi-unit buildings in Baltimore, Maryland and realized a gain of
      approximately $28,000. Our real estate investments, other than ASG, are
      currently held by the Company. As of March 29, 2006, we have determined to
      dispose of all our real estate holdings, including ASG, in order to focus
      exclusively on patient safety medical products. Our Board of Directors is
      currently evaluating the available alternatives to determine the most beneficial
      method to dispose of our real estate holdings. As of December 31, 2006, we
      had
      not generated any revenue, nor do we expect to generate any recurring revenue
      during 2006, on any of our real estate holdings. In the event that we liquidate
      some or all of our real estate holdings we expect that any gain or loss
      recognized on the liquidation would be insignificant to us primarily due to
      the
      short period of time that the properties were owned combined with the absence
      of
      any significant changes in property values in the real estate markets where
      the
      real estate holdings are located.





***Express
      Car Wash Business***





While
      we
      continue to own ASG, we consolidate the operations of its express car wash
      business with our business. An express car wash is a hybrid of full service
      conveyor (tunnel) and self-service car wash facilities. At an express wash,
      customers pay via cash or credit card at an automated kiosk (similar to a drive
      thru ATM) at the site entrance. The customers remain in their cars while being
      directed onto a high speed wash tunnel conveyor (21⁄2 minutes +/- to wash
      completion in tunnel), and have the option of utilizing free vacuum facilities
      on site prior to exit. Facilities are located at highly visible locations in
      high automobile traffic locations. Typical sites for a Bubba’s Express Wash will
      require approximately one acre of land for construction of the tunnel and
      customer detail/vacuum areas. Facilities generally require two employees for
      operation. A fully staffed facility will typically require five employees (three
      full-time employees and two part-time employees).





As
      described above, ASG presently has one operating Bubba’s Express Wash site which
      opened on March 8, 2006. As of March 29, 2006, our Board of Directors has
      determined to dispose of ASG along with all of our other non-patient safety
      related assets. On April 4, 2007, ASG entered into an agreement for the sale
      of
      real property located in Tuscaloosa, Alabama (the “Tuscaloosa Undeveloped Land”)
      to Twin Properties, LLC. Pursuant to the agreement, ASG agreed to sell the
      Tuscaloosa Undeveloped Land for a purchase price of $965,000. On April 26,
      2007,
      ASG entered into a binding term sheet to sell its express car wash and a parcel
      of real property, both 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. The aggregate purchase price
      for
      both properties is $2.25 million. To the extent we are successful closing these
      transactions, we would expect to close on all of the transactions by July 2007.




10





The
      Board
      of Directors established a special committee in January 2007 to evaluate
      potential divestiture transactions for ASG and our other real estate assets.
      In
      conjunction with both the special committee and our Board of Directors, we
      are
      continuing to evaluate the available alternatives to determine the most
      beneficial method to dispose of our remaining non-patient safety related assets.
      Upon the closing of the above ASG transactions, the remaining assets would
      consist of two additional properties with a carrying value of $430,000, as
      well
      as an investment in a privately held company, Alacra, Inc., valued at $1
      Million.





***Competition***





We
      have
      concentrations of investments in Heber Springs, Arkansas and Springfield,
      Tennessee.  We compete with a large number of real estate property owners
      and developers in those regions.  Principal factors of competition are
      attractiveness of location, the quality of the property and breadth and quality
      of available uses for the property.  Since we have not generated any
      revenue from our real estate holdings, the relative competitive position of
      the
      properties cannot be determined. The potential value that we could realize
      upon
      disposing of our real estate holdings depends upon, among other factors, trends
      of the national and local economies, taxes, governmental regulations,
      legislation and population trends.





ASG’s
      “express” car wash business competes with other car wash sites, which includes:
      (a) full service conveyor locations characterized by large numbers of employees
      required to deliver exterior and interior cleaning services; (b) in-bay
      automatic facilities (typically at gas stations or convenience stores); (c)
      self-serve locations (which in the past few years have begun to incorporate
      in-bay automatic facilities); and (d) full service detailing facilities. Prices
      generally correspond to the level of personnel required to deliver the service,
      with the highest prices at detail shops and full service conveyors, lower prices
      at in-bay facilities, and lowest prices at non-attended self-serve locations.
      ASG’s express car wash business also competes with the ability of automobile
      owners to wash their vehicles using their home facilities. ASG competes for
      car
      wash business by offering superior value delivered quickly, conveniently and
      inexpensively. ASG believes its “express” car wash facility provides comparable
      quality to a full service tunnel or a full service detail shop and at
      considerably less cost to customers comparable to in-bay automatic facilities
      and self service locations. The “express” car wash facility is also designed to
      require less time than any of the competing car wash methods. ASG estimates
      there are less than 150 “express” car wash sites nationwide in the United
      States, but that this number continues to grow at a considerable rate. This
      compares with ASG’s estimate that there are over 30,000 traditional car was
      facilities. ASG estimates that its express car wash business represents less
      than one percent of the car wash market in the United States.





**Regulation
      of the Medical Products and Healthcare Industry**





The
      healthcare industry is affected by extensive government regulation at the
      federal and state levels. In addition, our business may also be subject to
      varying degrees of governmental regulation in the countries in which operations
      are conducted, and the general trend is toward regulation of increasing
      stringency. In the United States, the drug, device, diagnostics and cosmetic
      industries have long been subject to regulation by various federal, state and
      local agencies, primarily as to product safety, efficacy, advertising and
      labeling. The exercise of broad regulatory powers by the Food and Drug
      Administration ( ***“FDA”*** )
      continues to result in increases in the amounts of testing and documentation
      required for FDA clearance of new drugs and devices and a corresponding increase
      in the expense of product introduction. Similar trends toward product and
      process regulation are also evident in a number of major countries outside
      of
      the United States, especially in the European Community where efforts are
      continuing to harmonize the internal regulatory systems.




11





The
      FDA
      administers the Food, Drug and Cosmetics Act (the ***“FDC
      Act”*** ).
      Under
      the FDC Act, most medical devices must receive FDA clearance through the
      Section 510(k) notification process ( ***“510(k)”*** )
      or the
      more lengthy premarket approval ( ***“PMA”*** )
      process
      before they can be sold in the United States. All of our products, currently
      consisting only of the Safety-SpongeTM System, must receive 510(k) clearance or
      PMA approval. The Center for Devices and Radiological Health ( ***“CDRH”*** )
      handles
      the PMA approval process for medical devices at the FDA. The CDRH places medical
      devices into one of many predefined groups, then classifies each group into
      one
      of three classes (Class I, II or III) based on the level of controls necessary
      to assure the safety and effectiveness of the specific device group. Class
      I and
      II devices also have subsets of “exempt devices” which are exempt from the PMA
      approval requirement subject to certain limitations. 21 CFR 878.4450
      (”Gauze/Sponge, Internal, X-Ray Detectable”) is the defined device group that
      the Safety-Sponge line of products falls into. This defined device group is
      specifically denoted as “exempt” from the premarket notification process.
      SurgiCount submitted specific information on its Safety-Sponge product directly
      to the CDRH and received confirmation of the 501(k) exempt status of this line
      of products.





To
      obtain
      510(k) marketing clearance, a company must show that a new product is
“substantially equivalent” in terms of safety and effectiveness to a product
      already legally marketed and which does not require a PMA. Therefore, it is
      not
      always necessary to prove the actual safety and effectiveness of the new product
      in order to obtain 510(k) clearance for such product. To obtain a PMA, we must
      submit extensive data, including clinical trial data, to prove the safety,
      effectiveness and clinical utility of our products. FDA’s quality system
      regulations also require companies to adhere to certain good manufacturing
      practices requirements, which include testing, quality control, storage, and
      documentation procedures. Compliance with applicable regulatory requirements
      is
      monitored through periodic site inspections by the FDA. In addition, we are
      required to comply with FDA requirements for labeling and promotion. The Federal
      Trade Commission also regulates most device advertising.





The
      costs
      of human health care have been and continue to be a subject of study,
      investigation and regulation by governmental agencies and legislative bodies
      in
      the United States and other countries. In the United States, attention has
      been
      focused on drug prices and profits and programs that encourage doctors to write
      prescriptions for particular drugs or recommend particular medical devices.
      Managed care has become a more potent force in the market place and it is likely
      that increased attention will be paid to drug and medical device pricing,
      appropriate drug and medical device utilization and the quality of health
      care.





The
      regulatory agencies under whose purview we operate have administrative powers
      that may subject us to such actions as product recalls, seizure of products
      and
      other civil and criminal sanctions. In some cases we may deem it advisable
      to
      initiate product recalls voluntarily. We are also subject to the Safe Medical
      Devices Act of 1990, which imposes certain reporting requirements on
      distributors in the event of an incident involving serious illness, injury
      or
      death caused by a medical device.





In
      addition, sales and marketing practices in the health care industry have come
      under increased scrutiny by government agencies and state attorney generals
      and
      resulting investigations and prosecutions carry the risk of significant civil
      and criminal penalties.





Changes
      in regulations and healthcare policy occur frequently and may impact our
      results, growth potential and the profitability of products we sell. There
      can
      be no assurance that changes to governmental reimbursement programs will not
      have a material adverse effect on the Company and our operations.





**Regulation
      of the Real Estate Industry**





The
      real
      estate development industry is subject to substantial environmental, building,
      construction, zoning and real estate regulations that are imposed by various
      federal, state and local authorities. In order to develop our properties, we
      must obtain the approval of numerous governmental agencies regarding such
      matters as permitted land uses, density, the installation of utility services
      (such as water, sewer, gas, electric, telephone and cable television) and the
      dedication of acreage for various community purposes. Furthermore, changes
      in
      prevailing local circumstances or applicable laws may require additional
      approvals or modifications of approvals previously obtained. Delays in obtaining
      required approvals and authorizations could adversely affect the profitability
      of our projects.




12





**Regulation
      of the Car Wash Industry**





We
      are
      not aware of any existing or probable governmental regulations that may have
      a
      material effect on the normal operations of ASG’s express car wash business. We
      also are not aware of any relevant environmental laws that require compliance
      by
      ASG that may have a material effect on the normal operations of its express
      car
      wash business.





**Code
      of Business Conduct and Ethics**





Each
      executive officer and director as well as every employee of the Company is
      subject to the Company’s Code of Business Conduct and Ethics (the ***“Code
      of Ethics”*** ) which
      was adopted by the Board of Directors on November 11, 2004 and is filed as
      Appendix D to the definitive proxy materials filed with the SEC on March 2,
      2005. The Code of Ethics applies to all directors, officers and certain
      employees of the Company, including the chief executive officer, chief financial
      officer, principal accounting officer or controller, or persons performing
      similar functions. A copy of the Code of Ethics may be obtained, without charge,
      upon a written request mailed to: Patient Safety Technologies, Inc., c/o
      Corporate Secretary, 27555 Ynez Road, Suite 330, Temecula, CA 92591. The Code
      of
      Ethics is also posted on our Internet website, which is located at www.patientsafetytechnologies.com .





**Available
      Information**





Copies
      of
      our quarterly reports on Form 10-Q, annual reports on Form 10-K and current
      reports on Form 8-K, and any amendments to the foregoing, will be provided
      without charge to any shareholder submitting a written request to the Corporate
      Secretary, Patient Safety Technologies, Inc., 27555 Ynez Road, Suite 330,
      Temecula, CA 92591 or by calling (951) 587-6201. You may also obtain the
      documents filed by Patient Safety Technologies, Inc. with the SEC for free
      at
      the Internet website maintained by the SEC at www.sec.gov. The Company does
      not
      currently make these documents available on its website.





**Item
      1A. Risk Factors.**





An
      investment in our securities involves a high degree of risk. Before you invest
      in our securities you should carefully consider the risks and uncertainties
      described below and the other information in this prospectus. Each of the
      following risks may materially and adversely affect our business, results of
      operations and financial condition. These risks may cause the market price
      of
      our common stock to decline, which may cause you to lose all or a part of the
      money you paid to buy our securities. We provide the following cautionary
      discussion of risks, uncertainties and possible inaccurate assumptions relevant
      to our business and our products. These are factors that we think could cause
      our actual results to differ materially from expected results.




**RISKS
      RELATING TO OUR BUSINESS AND STRUCTURE**




*WE
      HAVE JUST BEGUN TO GENERATE SALES FROM OUR SAFETY-SPONGE(TM) SYSTEM AND THE
      REVENUES HAVE BEEN NOMINAL TO DATE. A SUBSTANTIAL AMOUNT OF OUR REVENUE DURING
      THE YEAR ENDED DECEMBER 31, 2006 IS FROM A RELATED PARTY. BECAUSE OF THIS,
      YOU
      SHOULD NOT RELY ON OUR HISTORICAL RESULTS OF OPERATIONS AS AN INDICATION OF
      OUR
      FUTURE PERFORMANCE.*




13




We
      have
      not made any significant amount of sales or generated any significant amount
      of
      revenue to date from our Safety-Sponge(TM) System. Further, of our $245,000
      of
      revenue during fiscal 2006, $104,000 was generated from a contract to provide
      management consulting services to one of our portfolio companies IPEX, Inc.,
      which is considered a related party. Our future success is dependent on our
      ability to develop our patient-safety related assets into a successful business,
      which depends upon wide-spread acceptance of and commercializing our
      Safety-SpongeTM System. None of these factors is demonstrated by our historic
      performance to date and there is no assurance we will be able to accomplish
      them
      in order to sustain our operations. As a result, you should not rely on our
      historical results of operations as an indication of the future performance
      of
      our business.




*WE
      RECENTLY RESTRUCTURED OUR BUSINESS STRATEGY AND OBJECTIVE AND HAVE LIMITED
      OPERATING HISTORY UNDER OUR NEW STRUCTURE. IF WE CANNOT SUCCESSFULLY IMPLEMENT
      OUR NEW BUSINESS STRUCTURE THE VALUE OF YOUR INVESTMENT IN OUR BUSINESS COULD
      DECLINE.*




Upon
      the
      change of control that occurred in October 2004, we restructured our business
      strategy and objective to focus on the medical products, healthcare solutions,
      financial services and real estate industries instead of the radio and
      telecommunications industries. Although we still own certain real estate assets,
      we are no longer focusing on the financial services and real estate industries.
      As of March 29, 2006, our Board of Directors determined to focus our business
      exclusively on the patient safety medical products field. We have a limited
      operating history under this new structure. Historically, we have not typically
      invested in these industries and therefore our historical results of operations
      should not be relied upon as an indication of our future financial performance.
      If we do not successfully implement our new business structure the value of
      your
      investment in our business could decline substantially.




*WITHDRAWAL
      OF OUR ELECTION TO BE TREATED AS A BDC MAY INCREASE THE RISKS TO OUR
      SHAREHOLDERS SINCE WE ARE NO LONGER SUBJECT TO THE REGULATORY RESTRICTIONS
      OR
      FINANCIAL REPORTING BENEFITS OF THE 1940 ACT.*




Since
      we
      withdrew our election to be treated as a BDC, we are no longer subject to
      regulation under the 1940 Act, which is designed to protect the interests of
      investors in investment companies. As a non-BDC, we are no longer subject to
      many of the regulatory, financial reporting and other requirements and
      restrictions imposed by the 1940 Act including, but not limited to, limitations
      on the amounts, types and prices at which we may issue securities, participation
      in related party transactions, the payment of compensation to executives, and
      the scope of eligible investments.




The
      nature of our business has changed from investing in radio and
      telecommunications companies with the goal of achieving gains on appreciation
      and dividend income, to actively operating businesses in the medical products
      and health care solutions industries, with the goal of generating income from
      the operations of those businesses. No assurance can be given that our business
      strategy or investment objectives will be achieved by withdrawing our election
      to be treated as a BDC.




Further,
      our election to withdraw as a BDC under the 1940 Act has resulted in a
      significant change in our method of accounting. BDC financial statement
      presentation and accounting utilizes the value method of accounting used by
      investment companies, which allows BDCs to recognize income and value their
      investments at market value as opposed to historical cost. As an operating
      company, the required financial statement presentation and accounting for
      securities held is either fair value or historical cost methods of accounting,
      depending on the classification of the investment and our intent with respect
      to
      the period of time we intend to hold the investment.




A
      change
      in our method of accounting could reduce the market value of our investments
      in
      privately held companies by eliminating our ability to report an increase in
      the
      value of our holdings as they occur. Also, as an operating company, we have
      to
      consolidate our financial statements with subsidiaries, thus eliminating the
      portfolio company reporting benefits available to BDCs.




14




*TOGETHER
      WITH OUR SUBSIDIARIES, WE MAY HAVE TO TAKE ACTIONS THAT ARE DISRUPTIVE TO OUR
      BUSINESS STRATEGY TO AVOID REGISTRATION UNDER THE 1940 ACT.*




The
      1940
      Act generally requires public companies that are engaged primarily in the
      business of investing, reinvesting, owning, holding or trading in securities
      to
      register as investment companies. A company may be deemed to be an investment
      company if it owns "investment securities" with a value exceeding 40% of the
      value of its total assets (excluding government securities and cash items)
      on an
      unconsolidated basis, unless an exemption or exclusion applies. Securities
      issued by companies other than majority-owned subsidiaries are generally counted
      as investment securities for purposes of the 1940 Act. While on an
      unconsolidated basis, our subsidiaries' assets which constitute investment
      securities have not approached 40%, as of December 31, 2006, 9.0% of our assets
      on a consolidated basis with subsidiaries were comprised of investment
      securities. If Patient Safety Technologies, Inc. or any of its subsidiaries
      were
      to own investment securities with a value exceeding 40% of its total assets
      it
      could require the subsidiary and/or Patient Safety Technologies, Inc. to
      register as an investment company under the 1940 Act. Registration as an
      investment company would subject us to restrictions that are inconsistent with
      our fundamental business strategy of equity growth through creating, building
      and operating companies in the medical products and healthcare services
      industries, particularly the patient safety field. Moreover, registration under
      the 1940 Act would subject us to increased regulatory and compliance costs,
      and
      other restrictions on the way we operate. We may also have to take actions,
      including buying, refraining from buying, selling or refraining from selling
      securities, when we would otherwise not choose to do so in order to continue
      to
      avoid registration under the 1940 Act.




*WE
      INTEND TO UNDERTAKE ADDITIONAL FINANCINGS TO MEET OUR GROWTH, OPERATING AND/OR
      CAPITAL NEEDS, WHICH MAY RESULT IN DILUTION TO YOUR OWNERSHIP AND VOTING
      RIGHTS.*




We
      anticipate that revenue from our operations for the foreseeable future will
      not
      be sufficient to meet our growth, operating and/or capital requirements. We
      believe that in order to have the financial resources to meet our operating
      requirements for the next twelve months we will need to undertake additional
      equity or debt financings to allow us to meet our future growth, operating
      and/or capital requirements. We currently have no commitments for any such
      financings. Any equity financing may be dilutive to our stockholders, and debt
      financing, if available, may involve restrictive covenants or other adverse
      terms with respect to raising future capital and other financial and operational
      matters. We may not be able to obtain additional financing in sufficient amounts
      or on acceptable terms when needed, which could adversely affect our operating
      results and prospects. If we fail to arrange for sufficient capital in the
      future, we may be required to reduce the scope of our business activities until
      we can obtain adequate financing.




*WE
      HAVE RECEIVED SHAREHOLDER APPROVAL TO SELL UP TO $10 MILLION OF EQUITY AND/OR
      DEBT SECURITIES TO CERTAIN RELATED PARTIES WHICH MAY RESULT IN DILUTION TO
      YOUR
      OWNERSHIP AND VOTING RIGHTS OR MAY RESULT IN THE INCURRENCE OF SUBSTANTIAL
      DEBT.*




We
      have
      received shareholder approval to sell equity and/or debt securities up to $10
      million in any calendar year to Milton "Todd" Ault, III, Lynne Silverstein,
      Louis Glazer, M.D., Ph.G., and Melanie Glazer. Mr. Ault is our former Chairman
      and Chief Executive Officer, Ms. Silverstein is our Executive Vice-President
      and
      Secretary, Mr. Glazer is a Director and our former Chairman and Chief Executive
      Officer, and Mrs. Glazer is the former Manager of our closed subsidiary Ault
      Glazer Bodnar Capital Properties, LLC and also is Mr. Glazer's spouse. If we
      propose to sell more than $10 million of securities in a calendar year to such
      persons additional shareholder approval would be required. Although we do not
      currently anticipate selling equity or debt securities to these persons if
      we do
      sell any such securities it will result in dilution to your ownership and voting
      rights and/or possibly result in our incurring substantial debt. Any such equity
      financing would result in dilution to existing stockholders and may involve
      securities that have rights, preferences, or privileges that are senior to
      our
      common stock. Any such debt financing may be convertible into common stock
      which
      would result in dilution to our stockholders and would have rights that are
      senior to our common stock. Further, any debt financing must be repaid
      regardless of whether or not we generate profits or cash flows from our business
      activities, which could strain our capital resources.




15




*SHOULD
      THE VALUE OF OUR PATENTS BE LESS THAN THEIR PURCHASE PRICE, WE COULD INCUR
      SIGNIFICANT IMPAIRMENT CHARGES.*




At
      December 31, 2006, patents received in the acquisition of SurgiCount Medical,
      Inc., net of accumulated amortization, represented $4,089,000, or 36.6%, of
      our
      total assets. We perform an annual review in the fourth quarter of each year,
      or
      more frequently if indicators of potential impairment exist to determine if
      the
      recorded amount of our patents is impaired. This determination requires
      significant judgment and changes in our estimates and assumptions could
      materially affect the determination of fair value and/or impairment of patents.
      We may incur charges for the impairment of our patents in the future if sales
      of
      our patient safety products, in particular our Safety-SpongeTM System, fail to
      achieve our assumed revenue growth rates or assumed operating margin
      results.




*WE
      MAY NOT BE ABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITION TARGETS, WHICH WOULD
      BE
      DETRIMENTAL TO OUR BUSINESS.*




On
      February 25, 2005, we purchased SurgiCount Medical, Inc., a holding company
      for
      intellectual property rights relating to our Safety-SpongeTM System. We
      anticipate seeking other acquisitions in furtherance of our plan to acquire
      assets and businesses in the patient safety medical products industry.
      Acquisitions involve numerous risks, including potential difficulty in
      integrating operations, technologies, systems, and products and services of
      acquired companies, diversion of management's attention and disruption of
      operations, increased expenses and working capital requirements and the
      potential loss of key employees and customers of acquired companies. In
      addition, acquisitions involve financial risks, such as the potential
      liabilities of the acquired businesses, the dilutive effect of the issuance
      of
      additional equity securities, the incurrence of additional debt, the financial
      impact of transaction expenses and the amortization of goodwill and other
      intangible assets involved in any transactions that are accounted for by using
      the purchase method of accounting, and possible adverse tax and accounting
      effects. Any of the foregoing could materially and adversely affect our
      business.




*FAILURE
      TO PROPERLY MANAGE OUR POTENTIAL GROWTH WOULD BE DETRIMENTAL TO OUR
      BUSINESS.*




Any
      growth in our operations will place a significant strain on our resources and
      increase demands on our management and on our operational and administrative
      systems, controls and other resources. There can be no assurance that our
      existing personnel, systems, procedures or controls will be adequate to support
      our operations in the future or that we will be able to successfully implement
      appropriate measures consistent with our growth strategy. As part of this
      growth, we may have to implement new operational and financial systems,
      procedures and controls to expand, train and manage our employee base and
      maintain close coordination among our technical, accounting, finance, marketing,
      and sales staffs. We cannot guarantee that we will be able to do so, or that
      if
      we are able to do so, we will be able to effectively integrate them into our
      existing staff and systems. We may fail to adequately manage our anticipated
      future growth. We will also need to continue to attract, retain and integrate
      personnel in all aspects of our operations. Failure to manage our growth
      effectively could hurt our business.




*IF
      THE PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS IS INADEQUATE, OUR ABILITY
      TO
      COMPETE SUCCESSFULLY COULD BE IMPAIRED.*




In
      connection with our purchase of SurgiCount Medical, Inc., we acquired one
      registered U.S. patent and one registered international patent of the
      Safety-SpongeTM System. We regard our patents, copyrights, trademarks, trade
      secrets and similar intellectual property as critical to our business. We rely
      on a combination of patent, trademark and copyright law and trade secret
      protection to protect our proprietary rights. Nevertheless, the steps we take
      to
      protect our proprietary rights may be inadequate. Detection and elimination
      of
      unauthorized use of our products is difficult. We may not have the means,
      financial or otherwise, to prosecute infringing uses of our intellectual
      property by third parties. Further, effective patent, trademark, service mark,
      copyright and trade secret protection may not be available in every country
      in
      which we will sell our products and offer our services. If we are unable to
      protect or preserve the value of our patents, trademarks, copyrights, trade
      secrets or other proprietary rights for any reason, our business, operating
      results and financial condition could be harmed.




16




Litigation
      may be necessary in the future to enforce our intellectual property rights,
      to
      protect our trade secrets, to determine the validity and scope of the
      proprietary rights of others, or to defend against claims that our products
      infringe upon the proprietary rights of others or that proprietary rights that
      we claim are invalid. Litigation could result in substantial costs and diversion
      of resources and could harm our business, operating results and financial
      condition regardless of the outcome of the litigation.




Other
      parties may assert infringement or unfair competition claims against us. We
      cannot predict whether third parties will assert claims of infringement against
      us, or whether any future claims will prevent us from operating our business
      as
      planned. If we are forced to defend against third-party infringement claims,
      whether they are with or without merit or are determined in our favor, we could
      face expensive and time-consuming litigation, which could distract technical
      and
      management personnel. If an infringement claim is determined against us, we
      may
      be required to pay monetary damages or ongoing royalties. Further, as a result
      of infringement claims, we may be required, or deem it advisable, to develop
      non-infringing intellectual property or enter into costly royalty or licensing
      agreements. Such royalty or licensing agreements, if required, may be
      unavailable on terms that are acceptable to us, or at all. If a third party
      successfully asserts an infringement claim against us and we are required to
      pay
      monetary damages or royalties or we are unable to develop suitable
      non-infringing alternatives or license the infringed or similar intellectual
      property on reasonable terms on a timely basis, it could significantly harm
      our
      business.




*THERE
      ARE SIGNIFICANT POTENTIAL CONFLICTS OF INTEREST WITH OUR OFFICERS, DIRECTORS
      AND
      OUR AFFILIATED ENTITIES WHICH COULD ADVERSELY AFFECT OUR RESULTS FROM
      OPERATIONS.*




Certain
      of our officers, directors and/or their family members had existing
      responsibilities to act and/or provide services as executive officers,
      directors, owners and/or managers of Ault Glazer Asset Management ( ***“AG
      Management”*** )
      (f/k/a
      Ault Glazer Bodnar & Company Investment Management LLC), its affiliates
      and/or some of the companies in which we had invested. We currently share office
      space with AG Management. William B. Horne, our Chief Executive Officer and
      Chief Financial Officer, was a principal of AG Management. Mr. Horne devoted
      approximately 85% of his time to our business, based on a 60-hour, 6-day
      workweek. Accordingly, certain conflicts of interest may arise from time to
      time
      with our officers, directors and AG Management.




Certain
      conflicts of interest may also arise from time to time with our officers,
      directors and the companies in which we invest. Of our $245,000 of revenue
      during the year ended December 31, 2006, $104,000 was generated from a contract
      to provide management consulting services to our portfolio company IPEX, Inc.
      Mr. Ault, our former Chief Executive Officer is currently a director of IPEX,
      Inc. and he served as interim Chief Executive Officer of IPEX, Inc. from May
      26,
      2005 until July 13, 2005. From May 28, 2005 until approximately December 14,
      2005 Mr. Ault held an irrevocable proxy to vote 67% of the outstanding shares
      of
      IPEX, Inc. owned by the former Chief Executive Officer and a founder of IPEX,
      Inc. Darrell W. Grimsley, Jr., Chief Executive Officer of Automotive Services
      Group, LLC, a subsidiary which is wholly owned by Automotive Services Group,
      Inc., served as a director of IPEX, Inc. and a member of its Audit Committee
      from August 30, 2005 until January 30, 2006. Ms. Campbell, our former director,
      served as a director of IPEX, Inc. and Chairman of its Audit Committee from
      September 23, 2005 until January 30, 2006. Mr. Horne is a director of our
      portfolio company Digicorp. From December 29, 2005 until April 20, 2007, Mr.
      Horne also served as Digicorp’s Chief Financial Officer and from September 30,
      2005 until December 29, 2005, Mr. Horne also served as Digicorp's Chief
      Executive Officer and Chairman of Digicorp's Board of Directors. One of our
      former directors, Alice Campbell, is currently a director of Digicorp. Mr.
      Ault
      served as Chief Executive Officer of Digicorp from April 26, 2005 until
      September 30, 2005 and Chairman of Digicorp's Board of Directors from July
      16,
      2005 until September 30, 2005. Ms. Silverstein served as Secretary of Digicorp
      from April 26, 2005 until December 29, 2005. Mr. Grimsley served as a director
      of Digicorp from July 16, 2005 until December 29, 2005.





Due
      to
      the potential conflicts of interest that could arise from the divestiture of
      our
      non-patient safety related assets as well as the anticipated restructuring
      of
      debt with related parties, the Board of Directors established a special
      committee in January 2007 to evaluate any potential divestiture or debt
      restructuring transaction. The special committee evaluated several alternative
      divestiture transactions for ASG and determined that in some instances the
      most
      favorable transactions involved transactions with a related party.
      Specificially, ASG’s sale of its express car wash and a parcel of real property
      to Charles H. Dellaccio and Darrell Grimsley. The special committee will also
      begin to evaluate the impact of restructuring debt with Ault Glazer Capital
      Partners, LLC, a portion of which is currently in default.




17




Because
      of these possible conflicts of interest, such individuals may direct potential
      business and investment opportunities to other entities rather than to us,
      which
      may not be in the best interest of our stockholders. We will attempt to resolve
      any such conflicts of interest in our favor. Our Board of Directors does not
      believe that we have experienced any losses due to any conflicts of interest
      with the business of AG Management, other than certain of our officers'
      responsibility to devote their time to provide management and administrative
      services to AG Management and its clients from time-to-time. Similarly, our
      Board of Directors does not believe that we have experienced any losses due
      to
      any conflicts of interest with the companies in which we hold investments other
      than certain of our officers' and directors' responsibility to devote their
      time
      to provide management services to some of such companies. However, subject
      to
      applicable law, we may engage in transactions with AG Management and other
      related parties in the future. These related party transactions may raise
      conflicts of interest and, although we do not have a formal policy to address
      such conflicts of interest, our Audit Committee intends to evaluate
      relationships and transactions involving conflicts of interest on a case-by-case
      basis and the approval of our Audit Committee is required for all such
      transactions. The Audit Committee intends that any related party transactions
      will be on terms and conditions no less favorable to us than terms and
      conditions reasonably obtainable from third parties and in accordance with
      applicable law.




*OUR
      MANAGEMENT HAS LIMITED EXPERIENCE IN MANAGING AND OPERATING A PUBLIC COMPANY.
      ANY FAILURE TO COMPLY OR ADEQUATELY COMPLY WITH FEDERAL SECURITIES LAWS, RULES
      OR REGULATIONS COULD SUBJECT US TO FINES OR REGULATORY ACTIONS, WHICH MAY
      MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
      CONDITION.*




Prior
      to
      the change in control that occurred in October 2004, members of our current
      senior management had limited experience operating a public company. Therefore,
      our senior management lacks practical experience operating a public company
      and
      relies in many instances on the professional experience and advice of third
      parties including its consultants, attorneys and accountants. Failure to comply
      or adequately comply with any laws, rules, or regulations applicable to our
      business may result in fines or regulatory actions, which may materially
      adversely affect our business, results of operation, or financial
      condition.




*WE
      HAVE EXPERIENCED TURNOVER IN OUR CHIEF EXECUTIVE OFFICER POSITION IN RECENT
      MONTHS AND IF WE ARE NOT ABLE TO RETAIN OUR NEW CHIEF EXECUTIVE OFFICER, WILLIAM
      HORNE, WE MAY HAVE DIFFICULTY IMPLEMENTING OUR BUSINESS
      STRATEGY.*




Milton
      "Todd" Ault, III resigned as our Chairman and Chief Executive Officer on January
      9, 2006. On January 7, 2006, our Board of Directors appointed Louis Glazer,
      M.D., Ph.G. as Chairman and Chief Executive Officer in anticipation of Mr.
      Ault's resignation. During March 2005, Dr. Glazer had indicated his intent
      to
      resign as Chairman and Chief Executive Officer at such time that we retain
      a
      suitable candidate for the position of Chief Executive Officer. Due to health
      concerns, Dr. Glazer resigned his position as Chief Executive Officer on July
      11, 2006 and Milton "Todd" Ault, III was re-appointed Chief Executive Officer
      and a Director of the Company. On January 5, 2007, Milton “Todd” Ault, III
      resigned as our Chief Executive Officer and on January 9, 2007, Milton “Todd”
Ault, III resigned as our Chairman. On January 9, 2007, our Board of Directors
      appointed William B. Horne as our Chief Executive Officer. Our future success
      is
      dependent on our ability to retain our Chief Executive Officer. Although we
      do
      not believe we have experienced any losses or negative effects from Mr. Ault's
      and Dr. Glazer's resignations and we do not expect any adverse consequences
      in
      the future, if we are not able to retain our current Chief Executive Officer
      we
      may have difficulty implementing our business strategy.




18




*OUR
      FORMER CHIEF EXECUTIVE OFFICER CONTROLS A SIGNIFICANT PORTION OF OUR OUTSTANDING
      COMMON STOCK AND HIS OWNERSHIP INTEREST MAY CONFLICT WITH OUR OTHER STOCKHOLDERS
      WHO MAY BE UNABLE TO INFLUENCE MANAGEMENT AND EXERCISE CONTROL OVER OUR
      BUSINESS.*




As
      of May
      8, 2007, Milton "Todd" Ault, III, our former Chief Executive Officer,
      beneficially owned approximately 31% of our common stock. As a result, Mr.
      Ault
      may be able to exert significant influence over our management and policies
      to:





·
            elect or defeat the election of our
              directors;




·
            amend
                or prevent amendment of our certificate of incorporation or bylaws;




·
            effect
                or prevent a merger, sale of assets or other corporate transaction;
                and




·
            control
                the outcome of any other matter submitted to the shareholders for
                vote.





Accordingly,
      our other stockholders may be unable to influence management and exercise
      control over our business.




**RISKS
      RELATED TO OUR MEDICAL PRODUCTS AND HEALTHCARE-RELATED
      BUSINESS**




*WE
      RELY ON A THIRD PARTY MANUFACTURER AND SUPPLIER TO MANUFACTURE OUR
      SAFETY-SPONGE(TM) SYSTEM, THE LOSS OF WHICH MAY INTERRUPT OUR
      OPERATIONS.*





On
      January 29, 2007, SurgiCount entered into an agreement for A Plus International
      Inc. to be the exclusive manufacturer and provider of SurgiCount's
      Safety-SpongeTM products and granted A Plus the exclusive, world-wide license to
      manufacture and import SurgiCount's products including the right to sublicense
      to the extent necessary to carry out the grant. A Plus was previously engaged
      in
      the manufacturing of SurgiCount's products under a Supply Agreement dated August
      17, 2005, but was not previously granted the exclusive, world-wide license
      to
      manufacture and import the products. In the event A Plus International Inc.
      does
      not meet the requirements of the agreement, SurgiCount may seek additional
      providers of the Safety-SpongeTM products. While our relationship with A Plus
      International Inc. is currently on good terms, we cannot assure you that we
      will
      be able to maintain our relationship with A Plus International Inc. or secure
      additional suppliers and manufacturers on favorable terms as needed. Although
      we
      believe the raw materials used in the manufacture of the Safety-SpongeTM System
      are readily available and can be purchased and/or produced by multiple vendors,
      the loss of our agreement with A Plus International Inc., the deterioration
      of
      our relationship with A Plus International Inc., changes in the specifications
      of components used in our products, or our failure to establish good
      relationships with major new suppliers or manufacturers as needed, could have
      a
      material adverse effect on our business, financial condition and results of
      operations.




*THE
      UNPREDICTABLE PRODUCT CYCLES OF THE MEDICAL DEVICE AND HEALTHCARE-RELATED
      INDUSTRIES AND UNCERTAIN DEMAND FOR PRODUCTS COULD CAUSE OUR REVENUES TO
      FLUCTUATE.*




Our
      target customer base includes hospitals, physicians, nurses and clinics. The
      medical device and healthcare-related industries are subject to rapid
      technological changes, short product life cycles, frequent new product
      introductions and evolving industry standards, as well as economic cycles.
      If
      the market for our products does not grow as rapidly as our management expects,
      our revenues could be less than expected. We also face the risk that changes
      in
      the medical device industry, for example, cost-cutting measures, changes to
      manufacturing techniques or production standards, could cause our manufacturing,
      design and engineering capabilities to lose widespread market acceptance. If
      our
      products do not gain market acceptance or suffer because of competing products,
      unfavorable regulatory actions, alternative treatment methods or cures, product
      recalls or liability claims, they will no longer have the need for our products
      and we may experience a decline in revenues. Adverse economic conditions
      affecting the medical device and healthcare-related industries, in general,
      or
      the market for our products in particular, could result in diminished sales,
      reduced profit margins and a disruption in our business.




19




*WE
      ARE SUBJECT TO CHANGES IN THE REGULATORY AND ECONOMIC ENVIRONMENT IN THE
      HEALTHCARE INDUSTRY, WHICH COULD ADVERSELY AFFECT OUR
      BUSINESS.*




The
      healthcare industry in the United States continues to experience change. In
      recent years, the United States Congress and state legislatures have introduced
      and debated various healthcare reform proposals. Federal, state and local
      government representatives will, in all likelihood, continue to review and
      assess alternative healthcare delivery systems and payment methodologies, and
      ongoing public debate of these issues is expected. Cost containment initiatives,
      market pressures and proposed changes in applicable laws and regulations may
      have a dramatic effect on pricing or potential demand for medical devices,
      the
      relative costs associated with doing business and the amount of reimbursement
      by
      both government and third-party payors to persons providing medical services.
      In
      particular, the healthcare industry is experiencing market-driven reforms from
      forces within the industry that are exerting pressure on healthcare companies
      to
      reduce healthcare costs. Managed care and other healthcare provider
      organizations have grown substantially in terms of the percentage of the
      population in the United States that receives medical benefits through such
      organizations and in terms of the influence and control that they are able
      to
      exert over an increasingly large portion of the healthcare industry. Managed
      care organizations are continuing to consolidate and grow, increasing the
      ability of these organizations to influence the practices and pricing involved
      in the purchase of medical devices, including our products, which is expected
      to
      exert downward pressure on product margins. Both short-and long-term cost
      containment pressures, as well as the possibility of continued regulatory
      reform, may have an adverse impact on our business, financial condition and
      operating results.




*WE
      ARE SUBJECT TO GOVERNMENT REGULATION IN THE UNITED STATES AND ABROAD, WHICH
      CAN
      BE TIME CONSUMING AND COSTLY TO OUR BUSINESS.*




Our
      products and operations are subject to extensive regulation by numerous
      governmental authorities, including, but not limited to, the FDA and state
      and
      foreign governmental authorities. In particular, we must obtain specific
      clearance or approval from the FDA before we can market new products or certain
      modified products in the United States. The FDA administers the Food, Drug
      and
      Cosmetics Act (the "FDC ACT"). Under the FDC Act, most medical devices must
      receive FDA clearance through the Section 510(k) notification process ("510(K)")
      or the more lengthy premarket approval ("PMA") process before they can be sold
      in the United States. All of our products, currently consisting only of the
      Safety-SpongeTM System, must receive 510(k) clearance or PMA approval. The
      Safety-SpongeTM System has already received 501(k) exempt status from the FDA. To
      obtain 510(k) marketing clearance, a company must show that a new product is
      "substantially equivalent" in terms of safety and effectiveness to a product
      already legally marketed and which does not require a PMA. Therefore, it is
      not
      always necessary to prove the actual safety and effectiveness of the new product
      in order to obtain 510(k) clearance for such product. To obtain a PMA, we must
      submit extensive data, including clinical trial data, to prove the safety,
      effectiveness and clinical utility of our products. The process of obtaining
      such clearances or approvals can be time-consuming and expensive, and there
      can
      be no assurance that all clearances or approvals sought by us will be granted
      or
      that FDA review will not involve delays adversely affecting the marketing and
      sale of our products. FDA's quality system regulations also require companies
      to
      adhere to certain good manufacturing practices requirements, which include
      testing, quality control, storage, and documentation procedures. Compliance
      with
      applicable regulatory requirements is monitored through periodic site
      inspections by the FDA. In addition, we are required to comply with FDA
      requirements for labeling and promotion. The Federal Trade Commission also
      regulates most device advertising.




In
      addition, international regulatory bodies often establish varying regulations
      governing product testing and licensing standards, manufacturing compliance,
      such as compliance with ISO 9001 standards, packaging requirements, labeling
      requirements, import restrictions, tariff regulations, duties and tax
      requirements and pricing and reimbursement levels. Our inability or failure
      to
      comply with the varying regulations or the imposition of new regulations could
      restrict our ability to sell our products internationally and thereby adversely
      affect our business, financial condition and operating results.




Failure
      to comply with applicable federal, state or foreign laws or regulations could
      subject us to enforcement actions, including, but not limited to, product
      seizures, injunctions, recalls, possible withdrawal of product clearances,
      civil
      penalties and criminal prosecutions, any one or more of which could have a
      material adverse effect on our business, financial condition and operating
      results. Federal, state and foreign laws and regulations regarding the
      manufacture and sale of medical devices are subject to future changes, as are
      administrative interpretations of regulatory requirements. Any such changes
      may
      have a material adverse effect on our business, financial condition and
      operating results.




20




*WE
      ARE SUBJECT TO INTENSE COMPETITION IN THE MEDICAL PRODUCTS AND HEALTH-CARE
      RELATED MARKETS, WHICH COULD HARM OUR BUSINESS.*




The
      medical products and healthcare solutions industry is highly competitive. We
      compete against other medical products and healthcare solutions companies,
      some
      of which are much larger and have significantly greater financial resources,
      management resources, research and development staffs, sales and marketing
      organizations and experience in the medical products and healthcare solutions
      industries than us. In addition, these companies compete with us to acquire
      technologies from universities and research laboratories. We also compete
      against large companies that seek to license medical products and healthcare
      solutions technologies for themselves. We cannot assure you that we will be
      able
      to successfully compete against these competitors in the acquisition,
      development, or commercialization of any medical products and healthcare
      solutions, funding of medical products and healthcare solutions companies or
      marketing of our products and solutions. If we cannot compete effectively
      against our competitors, our business, financial condition and results of
      operations may be materially adversely affected.




*WE
      MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND IF OUR INSURANCE IS NOT
      SUFFICIENT TO COVER PRODUCT LIABILITY CLAIMS OUR BUSINESS AND FINANCIAL
      CONDITION WILL BE MATERIALLY ADVERSELY AFFECTED.*




The
      nature of our business exposes us to potential product liability risks, which
      are inherent in the distribution of medical equipment and healthcare products.
      We may not be able to avoid product liability exposure, since third parties
      develop and manufacture our equipment and products. If a product liability
      claim
      is successfully brought against us or any third party manufacturer then we
      would
      experience adverse consequences to our reputation, we might be required to
      pay
      damages, our insurance, legal and other expenses would increase, we might lose
      customers and/or suppliers and there may be other adverse results.




Through
      our subsidiary SurgiCount Medical, Inc. we have general liability insurance
      to
      cover claims up to $3,000,000. This insurance covers the clinical trial/time
      study relating to the bar coding of surgical sponges only. In addition, A Plus
      International, Inc., the manufacturer of our surgical sponges, maintains general
      liability insurance for claims up to $4,000,000 that covers product liability
      claims against SurgiCount Medical, Inc. There can be no assurance that one
      or
      more liability claims will not exceed the coverage limits of any of such
      policies. If we or our manufacturer are subjected to product liability claims,
      the result of such claims could harm our reputation and lead to less acceptance
      of our products in the healthcare products market. In addition, if our insurance
      or our manufacturer's insurance is not sufficient to cover product liability
      claims, our business and financial condition will be materially adversely
      affected.




**RISKS
      RELATED TO OUR INVESTMENTS**




*WE
      MAY EXPERIENCE FLUCTUATIONS IN OUR QUARTERLY RESULTS DUE TO THE SUCCESS RATE
      OF
      INVESTMENTS WE HOLD.*




We
      may
      experience fluctuations in our quarterly operating results due to a number
      of
      factors, including the success rate of our current investments, variations
      in
      and the timing of the recognition of realized and unrealized gains or losses,
      and general economic conditions. As a result of these factors, results for
      any
      period should not be relied upon as being indicative of performance in future
      periods.




*WE
      HAVE INVESTED IN NON-MARKETABLE INVESTMENT SECURITIES WHICH MAY SUBJECT US
      TO
      SIGNIFICANT IMPAIRMENT CHARGES.*




We
      have
      invested in illiquid equity securities acquired directly from issuers in private
      transactions. At December 31, 2006, 9.0% of our assets on a consolidated basis
      with subsidiaries was comprised of investment securities, the majority of which
      are illiquid investments. Investments in illiquid, or non-marketable, securities
      are inherently risky and a number of the companies we invest in are expected
      to
      fail. We review all of our investments quarterly for indicators of impairment;
      however, for non-marketable equity securities, the impairment analysis requires
      significant judgment to identify events or circumstances that would likely
      have
      a material adverse effect on the fair value of the investment. The indicators
      we
      use to identify those events or circumstances include as relevant, the nature
      and value of any collateral, the portfolio company's ability to make payments
      and its earnings, the markets in which the portfolio company does business,
      comparison to valuations of publicly traded companies, comparisons to recent
      sales of comparable companies, the discounted cash flows of the portfolio
      company and other relevant factors. Because such valuations are inherently
      uncertain and may be based on estimates, our determinations of fair value may
      differ materially from the values that would be assessed if a ready market
      for
      these securities existed. 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 we write the investment down
      to
      its impaired value. When a company in which we hold investments is not
      considered viable from a financial or technological point of view, we write
      down
      the entire investment since we consider the estimated fair market value to
      be
      nominal. We recognized impairment charges of $1,445,000 and $50,000 for the
      fiscal years ended December 31, 2006 and 2005, respectively. Since a significant
      amount of our assets are comprised of non-marketable investment securities,
      any
      future impairment charges from the write down in value of these securities
      will
      most likely have a material adverse affect on our financial
      condition.




21




*ECONOMIC
      RECESSIONS OR DOWNTURNS COULD IMPAIR INVESTMENTS AND HARM OUR OPERATING
      RESULTS.*




Many
      of
      the companies in which we have made investments may be susceptible to economic
      slowdowns or recessions. An economic slowdown may affect the ability of a
      company to engage in a liquidity event such as a sale, recapitalization, or
      initial public offering. Our nonperforming assets are likely to increase and
      the
      value of our investments is likely to decrease during these periods. These
      conditions could lead to financial losses in our investments and a decrease
      in
      our revenues, net income, and assets. Our investments also may be affected
      by
      current and future market conditions. Significant changes in the capital markets
      could have an effect on the valuations of private companies and on the potential
      for liquidity events involving such companies. This could affect the amount
      and
      timing of gains or losses realized on our investments.




*INVESTING
      IN PRIVATE COMPANIES INVOLVES A HIGH DEGREE OF RISK.*




Our
      assets include an investment in a private company, a 1.6% equity interest in
      Alacra Corporation. Investments in private businesses involve a high degree
      of
      business and financial risk, which can result in substantial losses and
      accordingly should be considered speculative. Because of the speculative nature
      and the lack of a public market for this investment, there is significantly
      greater risk of loss than is the case with traditional investment securities.
      We
      expect that some of our investments will be a complete loss or will be
      unprofitable and that some will appear to be likely to become successful but
      never realize their potential. During the year ended December 31, 2005, we
      wrote
      off our investment in the private company China Nurse LLC. The amount of the
      loss was $50,000. We have in the past relied, and we continue to rely to a
      large
      extent, upon proceeds from sales of investments rather than investment income
      or
      revenue generated from operating activities to defray a significant portion
      of
      our operating expenses.




*THE
      LACK OF LIQUIDITY IN OUR INVESTMENTS MAY ADVERSELY AFFECT OUR
      BUSINESS.*




A
      portion
      of our investments consist of securities acquired directly from the issuer
      in
      private transactions. Some of these investments are subject to restrictions
      on
      resale and/or otherwise are illiquid. While most of these investments are in
      publicly traded companies, the trading volume in such companies' securities
      is
      low which reduces the liquidity of the investment. Additionally, many of such
      securities are not eligible for sale to the public without registration under
      the Securities Act of 1933, which could prevent or delay any sale by us of
      such
      investments or reduce the amount of proceeds that might otherwise be realized
      therefrom. Restricted securities generally sell at a price lower than similar
      securities not subject to restrictions on resale. The illiquidity of our
      investments may adversely affect our ability to dispose of debt and equity
      securities at times when it may be otherwise advantageous for us to liquidate
      such investments. In addition, if we were forced to immediately liquidate some
      or all of our investments, the proceeds of such liquidation may be significantly
      less than the value at which we acquired those investments.




22




*WE
      MAY NOT REALIZE GAINS FROM OUR EQUITY INVESTMENTS.*




Our
      investments are primarily in equity securities of other companies. These equity
      interests may not appreciate in value and, in fact, may decline in value.
      Accordingly, we may not be able to realize gains from our equity interests,
      and
      any gains that we do realize on the disposition of any equity interests may
      not
      be sufficient to offset any other losses we experience.




*THERE
      IS UNCERTAINTY REGARDING THE VALUE OF OUR INVESTMENTS THAT ARE NOT PUBLICLY
      TRADED SECURITIES, WHICH COULD ADVERSELY AFFECT THE DETERMINATION OF OUR ASSET
      VALUE.*




The
      fair
      value of investments that are not publicly traded securities is not readily
      determinable. Therefore, we value these securities at fair value as determined
      in good faith by our Board of Directors. The types of factors that our Board
      of
      Directors takes into account include, as relevant, the nature and value of
      any
      collateral, the portfolio company's ability to make payments and its earnings,
      the markets in which the portfolio 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. Because such valuations are inherently
      uncertain and may be based on estimates, our determinations of fair value may
      differ materially from the values that would be assessed if a ready market
      for
      these securities existed.




*WE
      BORROW MONEY, WHICH MAGNIFIES THE POTENTIAL FOR GAIN OR LOSS ON AMOUNTS INVESTED
      AND MAY INCREASE THE RISK OF INVESTING IN US.*




Borrowings,
      also known as leverage, magnify the potential for gain or loss on amounts
      invested and, therefore, increase the risks associated with investing in our
      securities. We may borrow from and issue senior debt securities to banks,
      insurance companies, and other lenders. Lenders of these senior securities
      have
      fixed dollar claims on our consolidated assets that are superior to the claims
      of our common shareholders. If the value of our consolidated assets increases,
      then leveraging would cause the value of our consolidated assets to increase
      more sharply than it would have had we not leveraged. Conversely, if the value
      of our consolidated assets decreases, leveraging would cause the value of our
      consolidated net assets to decline more sharply than it otherwise would have
      had
      we not leveraged. Similarly, any increase in our consolidated income in excess
      of consolidated interest payable on the borrowed funds would cause our net
      income to increase more than it would without the leverage, while any decrease
      in our consolidated income would cause net income to decline more sharply than
      it would have had we not borrowed.




**RISKS
      RELATED TO OUR REAL ESTATE HOLDINGS**




*THE
      VALUE OF REAL ESTATE FLUCTUATES DEPENDING ON CONDITIONS IN THE GENERAL ECONOMY
      AND THE REAL ESTATE BUSINESS. THESE CONDITIONS MAY LIMIT THE PROCEEDS FROM
      SALES
      OF OUR REAL ESTATE PROPERTIES AND AVAILABLE CASH.*




The
      value
      of our real estate holdings is affected by many factors including, but not
      limited to: national, regional and local economic conditions; consequences
      of
      any armed conflict involving or terrorist attacks against the United States;
      our
      ability to secure adequate insurance; local conditions such as an oversupply
      of
      space or a reduction in demand for real estate in a particular area; competition
      from other available space; whether tenants consider a property attractive;
      the
      financial condition of tenants, including the extent of tenant bankruptcies
      or
      defaults; whether we are able to pass some or all of any increased operating
      costs through to tenants; how well we manage our properties; fluctuations in
      interest rates; changes in real estate taxes and other expenses; changes in
      market rental rates; the timing and costs associated with property improvements
      and rentals; changes in taxation or zoning laws; government regulation;
      potential liability under environmental or other laws or regulations; and
      general competitive factors. The proceeds we expect to receive may not
      materialize as a result of adverse changes in any of these factors. If expected
      proceeds fail to materialize, we generally would expect to have less cash
      available to pay our operating costs. In addition, some expenses, including
      mortgage payments, real estate taxes and maintenance costs, generally do not
      decline when the related value of our real estate holdings decline.




23




*OUR
      CURRENT REAL ESTATE HOLDINGS ARE CONCENTRATED IN HEBER SPRINGS, ARKANSAS AND
      SPRINGFIELD, TENNESSEE. ADVERSE CIRCUMSTANCES AFFECTING THESE AREAS GENERALLY
      COULD ADVERSELY AFFECT OUR BUSINESS.*




A
      significant proportion of our real estate investments are in Heber Springs,
      Arkansas and Springfield, Tennessee and are affected by the economic cycles
      and
      risks inherent to those regions. Like other real estate markets, the real estate
      markets in these areas have experienced economic downturns in the past, and
      we
      cannot predict how the current economic conditions will impact these markets
      in
      both the short and long term. Further declines in the economy or a decline
      in
      the real estate markets in these areas could hurt our financial performance
      and
      the value of our properties. The factors affecting economic conditions in these
      regions include: business layoffs or downsizing; industry slowdowns; relocations
      of businesses; changing demographics; and any oversupply of or reduced demand
      for real estate.





**RISKS
      RELATED TO OUR CAR WASH BUSINESS**




*IF
      A
      COMPETING CAR WASH FACILITY IS OPENED WITHIN THE SERVICE AREA OF ONE OF OUR
      EXPRESS CAR WASH SITES OUR CAR WASH BUSINESS MAY LOSE REVENUE.*




Our
      indirect wholly owned subsidiary Automotive Services Group, LLC ("ASG") is
      in
      the business of operating express car wash facilities. ASG's first express
      car
      wash site, developed in Birmingham, Alabama, had its grand opening on March
      8,
      2006. ASG chooses locations for its express car wash sites based on the
      locations' high visibility and proximity to high automobile traffic. Competitors
      may develop facilities offering similar services within the service area of
      ASG's express car wash facilities, which could cause ASG's car wash facilities
      to lose revenue. ASG will attempt to mitigate this risk during site due
      diligence, conducting discussions with local permitting and zoning personnel
      to
      determine if competing facilities have been planned or requested within the
      relevant service area. However, such due diligence, no matter how extensive,
      may
      not always reveal any planned competing businesses in a particular service
      area.
      In addition, a competing car wash site may be developed after ASG begins
      operating a car wash in a particular service area. If competing facilities
      are
      developed in the same service area as one or more of ASG's express car wash
      sites, it could cause ASG to lose a significant amount of revenue and may
      require ASG to close one or more express car wash sites.




*ADVERSE
      WEATHER CONDITIONS MAY CAUSE ASG'S EXPRESS CAR WAS SITES TO LOSE
      REVENUE.*




Automobile
      owners generally do not wash their vehicles during extreme weather conditions.
      During rainy periods automobile owners do not generally wash their vehicles
      because rain and mud causes the vehicles to quickly become dirty again. During
      periods of severe drought automobile owners may not desire to wash their
      vehicles because they do not want to endure extreme outdoor temperatures.
      Further during severe drought conditions local governments tend to impose
      restrictions on when and in what amounts residents can use water. Any such
      adverse weather conditions may cause unpredictable business cycles for ASG
      and
      may cause ASG's express car wash sites to lose a significant amount of
      revenue.




**RISKS
      RELATED TO OUR COMMON STOCK**




*OUR
      HISTORIC STOCK PRICE HAS BEEN VOLATILE AND THE FUTURE MARKET PRICE FOR OUR
      COMMON STOCK MAY CONTINUE TO BE VOLATILE. FURTHER, THE LIMITED MARKET FOR OUR
      SHARES WILL MAKE OUR PRICE MORE VOLATILE. THIS MAY MAKE IT DIFFICULT FOR YOU
      TO
      SELL OUR COMMON STOCK FOR A POSITIVE RETURN ON YOUR
      INVESTMENT.*




The
      public market for our common stock has historically been very volatile. Over
      the
      past two fiscal years and the subsequent interim quarterly periods, the market
      price for our common stock has ranged from $0.30 to $7.33 (as adjusted to
      reflect a 3:1 forward stock split effective April 5, 2005). Any future market
      price for our shares may continue to be very volatile. This price volatility
      may
      make it more difficult for you to sell shares when you want at prices you find
      attractive. We do not know of any one particular factor that has caused
      volatility in our stock price. However, the stock market in general has
      experienced extreme price and volume fluctuations that often are unrelated
      or
      disproportionate to the operating performance of companies. Broad market factors
      and the investing public's negative perception of our business may reduce our
      stock price, regardless of our operating performance. Further, the market for
      our common stock is limited and we cannot assure you that a larger market will
      ever be developed or maintained. Our common stock is currently on the OTC
      Bulletin Board under the symbol PSTX. Prior thereto, the Company’s common stock
      was traded on the American Stock Exchange ("AMEX") under the symbol “PST.” As of
      May 8, 2007, the average daily trading volume of our common stock over the
      past
      three months was approximately 9,000 shares. The last reported sales price
      for
      our common stock on May 8, 2007, was $1.70 per share. Market fluctuations and
      volatility, as well as general economic, market and political conditions, could
      reduce our market price. As a result, this may make it difficult or impossible
      for you to sell our common stock.




24




*OUR
      COMMON STOCK IS SUBJECT TO THE "PENNY STOCK" RULES OF THE SEC, WHICH WOULD
      MAKE
      TRANSACTIONS IN OUR COMMON STOCK CUMBERSOME AND MAY REDUCE THE VALUE OF AN
      INVESTMENT IN OUR STOCK.*




The
      SEC
      has adopted Rule 3a51-1 which establishes the definition of a "penny stock,"
      for
      the purposes relevant to us, as any equity security that has a market price
      of
      less than $5.00 per share or with an exercise price of less than $5.00 per
      share, subject to certain exceptions. For any transaction involving a penny
      stock, unless exempt, Rule 15g-9 require:




·
            that
                a broker or dealer approve a person's account for transactions in
                penny
                stocks; and




·
            the
                broker or dealer receive from the investor a written agreement to
                the
                transaction, setting forth the identity and quantity of the penny
                stock to
                be purchased.




In
      order
      to approve a person's account for transactions in penny stocks, the broker
      or
      dealer must:




·
            obtain
                financial information and investment experience objectives of the
                person;
                and




·
            make
                a reasonable determination that the transactions in penny stocks
                are
                suitable for that person and the person has sufficient knowledge
                and
                experience in financial matters to be capable of evaluating the risks
                of
                transactions in penny stocks.




The
      broker or dealer must also deliver, prior to any transaction in a penny stock,
      a
      disclosure schedule prescribed by the SEC relating to the penny stock market,
      which, in highlight form:




·
            sets
                forth the basis on which the broker or dealer made the suitability
                determination; and




·
            that
                the broker or dealer received a signed, written agreement from the
                investor prior to the transaction.




Generally,
      brokers may be less willing to execute transactions in securities subject to
      the
      "penny stock" rules. This may make it more difficult for investors to dispose
      of
      our common stock and cause a decline in the market value of our
      stock.




Disclosure
      also has to be made about the risks of investing in penny stocks in both public
      offerings and in secondary trading and about the commissions payable to both
      the
      broker-dealer and the registered representative, current quotations for the
      securities and the rights and remedies available to an investor in cases of
      fraud in penny stock transactions. Finally, monthly statements have to be sent
      disclosing recent price information for the penny stock held in the account
      and
      information on the limited market in penny stocks.




25




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





The
      Company has 22 unresolved comments relating to its prior periodic reports.
      The
      Company anticipates responding to these comments in May 2007.




**Item
      2. Properties.**





We
      do not
      own any real estate or other physical properties materially important to our
      operation. Our headquarters are located at 27555 Ynez Road, Suite 330, Temecula,
      CA 92591. We are responsible for paying approximately $4,300 per month for
      the
      lease expense associated with our headquarters. Our office space is currently
      approximately 2,000 square feet.





Our
      indirect wholly owned subsidiary, ASG owns property in Birmingham, Alabama
      and
      its immediate surrounding areas. Development on ASG’s first automated car wash
      site was completed in March 2006 and ASG held its grand opening on March 8,
      2006. The cost of this property, as carried in our financial statements, is
      approximately $1.5 million. ASG also
      owns two other parcels of undeveloped land which were initially purchased to
      develop additional automated car wash sites. The cost of these two parcels
      of
      undeveloped land, as carried in our financial statements, is approximately
      $1.7
      million.





In
      addition, we also have several real estate investments. These investments range
      in cost, as carried in our financial statements, from $180,000 to $250,000
      and
      are comprised of approximately 8.5 acres of undeveloped land in Heber Springs,
      Arkansas and 0.61 acres of undeveloped land in Springfield, Tennessee.
      Management does not currently believe that the Company’s real estate holdings
      represent a material risk to the Company.





**Item
      3. Legal Proceedings.**





On
      July
      28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a
      lawsuit in the Superior Court of the State of California for the county of
      Los
      Angeles, Central District against us and five other defendants affiliated with
      Winstar Communications, Inc. The plaintiffs are attempting to collect a default
      judgment of $5,014,000 entered against Winstar Global Media, Inc. ( ***“WGM”*** )
      by a
      federal court in New York, by attempting to enforce the judgment against us
      and
      the other defendants, none of whom are judgment debtors. Further, the plaintiffs
      are attempting to enforce their default judgment against us when their initial
      lawsuit in federal court against us was dismissed on the merits. The Court
      granted plaintiffs leave to amend the current Complaint after twice granting
      our
      motions to dismiss.   Plaintiffs made some changes to their Complaint
      and dropped two other defendants. On April 18, 2007, we filed our Answer setting
      forth our numerous defenses.  We believe the lawsuit is without merit and
      will be dismissed upon Summary Judgment.  In any event we intend to
      vigorously defend against the lawsuit.  However, an unfavorable outcome may
      have a material adverse effect on our business, financial condition and results
      of operations.





On
      February 3, 2006, WGM filed a lawsuit against us in the United States District
      Court, Southern District of New York. The WGM lawsuit attempts to collect upon
      the $1,000,000 note between the Company and Winstar Communications, Inc.
      ( ***“Winstar”*** ).
      As
      part of the purchase price paid by us on August 28, 2001 for an investment
      in
      Excelsior Radio Networks, Inc., we issued a $1,000,000 note to Winstar. This
      note was due February 28, 2002 with interest at 3.54% but in accordance with
      the
      terms of the purchase the Company had a right of offset against certain
      representations and warranties made by 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.





26


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





No
      matters were submitted to our shareholders during the year ended December 31,
      2006.





**PART
      II**




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





**Stock
      Transfer Agent**





Transfer
      Online, Inc., 317 SW Alder Street, 2 nd Floor,
      Portland, OR 97204 (Telephone (503) 227-2950) serves as transfer agent for
      the
      Company’s common stock. Certificates to be transferred should be mailed directly
      to the transfer agent, preferably by registered mail.





**Market
      Prices**





The
      Company’s common stock has been quoted on the OTC Bulletin Board since February
      16, 2007 under the symbol PSTX. Prior thereto, the Company’s common stock was
      traded on the American Stock Exchange under the symbol “PST.” The following
      table sets forth the range of the high and low selling price of the Company’s
      common stock during each quarter of the last two fiscal years, as reported
      by
      the American Stock Exchange.





Fiscal
                2006
            Fiscal
                2005Fiscal
                Quarter
            
            
            High
            
            
            Low
            
            
            High
            
            
            LowFirst
                Quarter Ended March 31
            
            $
            4.70
            
            $
            2.27
            
            $
            7.33
            
            $
            4.18Second
                Quarter Ended June 30
            
            $
            4.30
            
            $
            2.60
            
            $
            6.23
            
            $
            3.20Third
                Quarter Ended September 30
            
            $
            3.25
            
            $
            1.45
            
            $
            3.90
            
            $
            2.90Fourth
                Quarter Ended December 31
            
            $
            3.97
            
            $
            0.57
            
            $
            4.64
            
            $
            3.21




**Dividends**





The
      Company paid nil, $19,163, and $76,650 in dividends to preferred stockholders
      during 2006, 2005 and 2004, respectively, and has not paid any dividends to
      common stockholders during the past three years. Dividends to preferred
      stockholders are cumulative and paid at the rate of 7% a year. We currently
      have
      no intention of paying dividends on our common stock.





**Stockholders**





As
      of May
      8, 2007, there were approximately 634 holders of record of the Company’s common
      stock. The Company has 25,000,000 shares of common stock authorized, of which
      9,937,059 were issued and outstanding at May 8, 2007. The Company has 1,000,000
      shares of convertible preferred stock authorized, of which 10,950 were issued
      and outstanding at May 8, 2007.





**Recent
      Sales of Unregistered Securities**





On
      January 12, 2006, ASG entered into a Secured Promissory Note with Steven J.
      Caspi in the principal amount of $1,000,000. As additional consideration for
      entering into the secured promissory note, Mr. Caspi received warrants to
      purchase 30,000 shares of the Company’s common stock. The warrants are
      exercisable for a period of five years and have an exercise price of $4.50
      per
      share. The issuance of the above warrants to Mr. Caspi was exempt from
      registration requirements pursuant to Section 4(2) of the Securities Act of
      1933, as amended (the ***“Securities
      Act”*** ),
      and
      Rule 506 promulgated thereunder. No advertising or general solicitation was
      employed in offering the securities and Mr. Caspi represented that he is an
      accredited investor and that he is able to bear the economic risk of his
      investment.




27




On
      February 8, 2006, we entered into a Secured Promissory Note with AGB Acquisition
      Fund in the principal amount of $687,000. As an inducement for entering into
      the
      secured promissory note AGB Acquisition Fund received warrants to purchase
      20,608 shares of the Company’s common stock. The warrants are exercisable for a
      period of five years and have an exercise price equal to $3.86. The issuance
      of
      the above warrants to AGB Acquisition Fund was exempt from registration
      requirements pursuant to Section 4(2) of the Securities Act and Rule 506
      promulgated thereunder. No advertising or general solicitation was employed
      in
      offering the securities and Mr. Caspi represented that he is an accredited
      investor and that he is able to bear the economic risk of his investment.





On
      February 13, 2006, the Company issued 175,000 warrants to purchase shares of
      common stock at $3.95 per share to a consultant. The warrants vested immediately
      and have a three-year life. The warrants were valued at $405,000 and were
      expensed during the three months ended March 31, 2006. These warrants were
      issued in reliance upon the exemption provided by Section 4(2) of the Securities
      Act.





On
      March
      15, 2006 the Company, Automotive Services Group, ASG and Darell W. Grimsley,
      Jr.
      entered into a Unit Purchase Agreement for Automotive Services Group to purchase
      a 50% equity interest (the ***“Membership
      Interest”*** )
      in ASG
      from Mr. Grimsley. As consideration for the Membership Interest the Company
      issued Mr. Grimsley 200,000 shares of the Company’s common stock. Mr. Grimsley
      will continue to act as Chairman and Chief Executive Officer of Automotive
      Services Group. The issuance of the above shares to Mr. Grimsley was exempt
      from
      registration requirements pursuant to Section 4(2) of the Securities Act of
      1933, as amended, and Rule 506 promulgated thereunder. No advertising or general
      solicitation was employed in offering the securities and Mr. Grimsley
      represented that he is an accredited investor and that he is able to bear the
      economic risk of his investment.





On
      May
      19, 2006, the Company issued 32,120 warrants to purchase shares of common stock
      at $3.50 per share to a consultant. The warrants vested immediately and have
      a
      one-year life. The warrants were valued at approximately $31,000 and are being
      expensed over the warrant term. These securities will be issued pursuant to
      Section 4(2) of the Securities Act. These warrants were issued in reliance
      upon
      the exemption provided by Section 4(2) of the Securities Act.





On
      June
      6, 2006 we entered into a Secured Convertible Promissory Note with Alan Morelli
      in the principal amount of $1,100,000. As an inducement for entering into the
      secured convertible promissory note, Mr. Morelli received warrants to purchase
      401,460 shares of our common stock. On August 17, 2006, we sold
      shares of our common stock at $1.25 per share thereby requiring modifications
      to
      Mr. Morelli’s secured convertible promissory note and warrant. These
      modifications resulted in an adjustment to the conversion price of the Morelli
      Note from $2.74 to $1.25 per share, an adjustment to the exercise price of
      the
      Morelli Warrant, and an increase in the number of shares of common stock
      available to purchase upon exercise of the Morelli Warrant from 401,460 to
      976,351. T he
      warrants are exercisable for a period of five years and have an adjusted
      exercise price equal to $1.25. The issuance of these securities to Mr. Morelli
      was exempt from registration requirements pursuant to Section 4(2) of the
      Securities Act and Rule 506 promulgated thereunder. No advertising or general
      solicitation was employed in offering the securities and Mr. Morelli represented
      that he is an accredited investor and that he is able to bear the economic
      risk
      of his investment.





On
      July
      12, 2006 we entered into a Convertible Promissory Note with Charles J. Kalina,
      III in the principal amount of $250,000. As an inducement for entering into
      the
      secured promissory note, Mr. Kalina received warrants to purchase 85,000 shares
      of the Company’s common stock. The warrants are exercisable for a period of five
      years and have an exercise price equal to $2.69. The issuance of these
      securities to Mr. Kalina was exempt from registration requirements pursuant
      to
      Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No
      advertising or general solicitation was employed in offering the securities
      and
      Mr. Kalina represented that he is an accredited investor and that he is able
      to
      bear the economic risk of his investment.




28




In
      August
      2006, we entered into subscription agreements with two unaffiliated accredited
      investors, pursuant to which we sold 200,000 shares of the Company’s common
      stock, $0.33 par value per share, at a price of $1.25 per share. We received
      gross proceeds of approximately $250,000 from the sale of our common stock
      to
      the accredited investors. Pursuant to the subscription agreement, we granted
      the
      accredited investors piggy back registration rights to register the resale
      of
      the shares of common stock. The sale was made in a private placement exempt
      from
      registration requirements pursuant to Section 4(2) of the Securities Act and
      Rule 506 promulgated thereunder.





On
      September 8, 2006 we entered into a Convertible Promissory Note with Steven
      J.
      Caspi in the principal amount of $1,495,000. As an inducement for entering
      into
      the secured promissory note, Mr. Caspi received warrants to purchase 250,000
      shares of the Company’s common stock. The warrants are exercisable for a period
      of five years and have an exercise price equal to $1.25. The issuance of these
      securities to Mr. Caspi was exempt from registration requirements pursuant
      to
      Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No
      advertising or general solicitation was employed in offering the securities
      and
      Mr. Caspi represented that he is an accredited investor and that he is able
      to
      bear the economic risk of his investment.





Between
      September 15, 2006 and November 1, 2006, the Company issued 70,694 shares of
      Common Stock to two employees and a consultant. The Common Stock was issued
      for
      accrued salaries and services. The Common Stock was valued at approximately
      $190,000. These shares were issued in reliance upon the exemption provided
      by
      Section 4(2) of the Securities Act.





On
      November 1, 2006 we entered into a Convertible Promissory Note with Michael
      G.
      Sedlak in the principal amount of $71,000. As an inducement for entering into
      the secured promissory note, Mr. Sedlak received warrants to purchase 20,000
      shares of the Company’s common stock. The warrants are exercisable for a period
      of five years and have an exercise price equal to $1.25. The issuance of these
      securities to Mr. Sedlak was exempt from registration requirements pursuant
      to
      Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No
      advertising or general solicitation was employed in offering the securities
      and
      Mr. Sedlak represented that he is an accredited investor and that he is able
      to
      bear the economic risk of his investment.





On
      November 1, 2006 we entered into a Convertible Promissory Note with James
      Sveinson in the principal amount of $102,000. As an inducement for entering
      into
      the secured promissory note, Mr. Sveinson received warrants to purchase 20,000
      shares of the Company’s common stock. The warrants are exercisable for a period
      of five years and have an exercise price equal to $1.25. The issuance of these
      securities to Mr. Sveinson was exempt from registration requirements pursuant
      to
      Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. No
      advertising or general solicitation was employed in offering the securities
      and
      Mr. Sveinson represented that he is an accredited investor and that he is able
      to bear the economic risk of his investment.





On
      November 3, 2006 we entered into a Convertible Promissory Note with Charles
      J.
      Kalina, III in the principal amount of $400,000. As an inducement for entering
      into the secured promissory note, Mr. Kalina received warrants to purchase
      100,000 shares of the Company’s common stock. The warrants are exercisable for a
      period of five years and have an exercise price equal to $1.25. The issuance
      of
      these securities to Mr. Kalina was exempt from registration requirements
      pursuant to Section 4(2) of the Securities Act and Rule 506 promulgated
      thereunder. No advertising or general solicitation was employed in offering
      the
      securities and Mr. Caspi represented that he is an accredited investor and
      that
      he is able to bear the economic risk of his investment.





On
      November 13, 2006 we entered into a Promissory Note with Herbert Langsam, a
      Director of the Company, in the principal amount of $100,000. As an inducement
      for entering into the secured promissory note, Mr. Langsam received warrants
      to
      purchase 50,000 shares of the Company’s common stock. The warrants are
      exercisable for a period of five years and have an exercise price equal to
      $1.25. The issuance of these securities to Mr. Langsam was exempt from
      registration requirements pursuant to Section 4(2) of the Securities Act and
      Rule 506 promulgated thereunder. No advertising or general solicitation was
      employed in offering the securities and Mr. Langsam represented that he is
      an
      accredited investor and that he is able to bear the economic risk of his
      investment.




29




On
      November 18, 2006, the Company issued 12,500 warrants to purchase shares of
      common stock at $2.00 per share to a consultant. The warrants vested immediately
      and have a three-year life. The warrants were valued at approximately $2,000
      and
      were expensed at the time of issuance. These securities will be issued pursuant
      to Section 4(2) of the Securities Act. These warrants were issued in reliance
      upon the exemption provided by Section 4(2) of the Securities Act.





Between
      November 30, 2006 and December 15, 2006, the Company entered into a subscription
      agreement and sold an aggregate of 238,000 shares of its Common Stock and
      warrants to purchase an aggregate of up to 119,000 shares of its Common Stock
      in
      a private placement transaction to certain accredited investors. 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. The Company received aggregate
      gross proceeds of $298,000. These securities were sold in reliance upon the
      exemption provided by Section 4(2) of the Securities Act and the safe harbor
      of
      Rule 506 under Regulation D promulgated under the Securities Act. No advertising
      or general solicitation was employed in offering the securities, the sales
      were
      made to a limited number of persons, all of whom represented to the Company
      that
      they are accredited investors, and transfer of the securities is restricted
      in
      accordance with the requirements of the Securities Act.





On
      December 26, 2006 we entered into a Promissory Note with Maroon Creek Capital,
      LP ( ***“Maroon”*** ),
      a
      California limited partnership, in the principal amount of $81,000. As an
      inducement for entering into the secured promissory note, Maroon received
      warrants to purchase 30,000 shares of the Company’s common stock. The warrants
      are exercisable for a period of five years and have an exercise price equal
      to
      $2.00. The issuance of these securities to Maroon was exempt from registration
      requirements pursuant to Section 4(2) of the Securities Act and Rule 506
      promulgated thereunder. No advertising or general solicitation was employed
      in
      offering the securities and Maroon represented that it is an accredited investor
      and that it is able to bear the economic risk of his investment.





On
      December 31, 2006, the Company issued 56,340 warrants to purchase shares of
      common stock at $1.25 per share to the Company’s placement agent, Ault Glazer
& Co., LLC, (the ***“Placement
      Agent”*** ).
      The
      warrants vested immediately and have a five-year life. The warrants were valued
      at approximately $62,000 and were expensed at the time of issuance. These
      securities will be issued pursuant to Section 4(2) of the Securities Act. These
      warrants were issued in reliance upon the exemption provided by Section 4(2)
      of
      the Securities Act.





On
      December 31, 2006, the Company issued 19,040 warrants to purchase shares of
      common stock at $2.00 per share to the Company’s Placement Agent. The warrants
      vested immediately and have a five-year life. The warrants were valued at
      approximately $17,000 and were expensed at the time of issuance. These
      securities will be issued pursuant to Section 4(2) of the Securities Act. These
      warrants were issued in reliance upon the exemption provided by Section 4(2)
      of
      the Securities Act.





Between
      January 1, 2007 and April 6, 2007, the Company issued 79,138 shares of Common
      Stock to various employees, directors, consultants and creditors. The Common
      Stock was issued for services and payment of accrued interest. The Common Stock
      was valued at approximately $131,000. These shares were issued in reliance
      upon
      the exemption provided by Section 4(2) of the Securities Act.





On
      January 29, 2007, the Company entered into a subscription agreement and sold
      an
      aggregate of 800,000 shares of its Common Stock and warrants to purchase an
      aggregate of up to 300,000 shares of its Common Stock in a private placement
      transaction to A Plus, an accredited investor. The warrants are exercisable
      for
      a period of 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. The Company received gross proceeds of $500,000 in
      cash
      and will receive $500,000 in product over the course of the next twelve (12)
      months. These securities were sold in reliance upon the exemption provided
      by
      Section 4(2) of the Securities Act and the safe harbor of Rule 506 under
      Regulation D promulgated under the Securities Act. No advertising or general
      solicitation was employed in offering the securities, the sales were made to
      a
      limited number of persons, all of whom represented to the Company that they
      are
      accredited investors, and transfer of the securities is restricted in accordance
      with the requirements of the Securities Act.




30




On
      January 29, 2007, the Company entered into a subscription agreement with several
      unaffiliated accredited investors in a private placement exempt from the
      registration requirements of the Securities Act. The Company issued and sold
      to
      these accredited investors an aggregate of 104,000 shares of its common stock
      and warrants to purchase an additional 52,000 shares of its common stock. The
      warrants are exercisable for a period of 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 $130,000. These securities were
      sold in reliance upon the exemption provided by Section 4(2) of the Securities
      Act and the safe harbor of Rule 506 under Regulation D promulgated under the
      Securities Act. No advertising or general solicitation was employed in offering
      the securities, the sales were made to a limited number of persons, all of
      whom
      represented to the Company that they are accredited investors, and transfer
      of
      the securities is restricted in accordance with the requirements of the
      Securities Act.





On
      January 30, 2007, the Company issued 8,320 warrants to purchase shares of common
      stock at $2.00 per share to the Company’s Placement Agent. The warrants vested
      immediately and have a five-year life. The warrants were valued at approximately
      $8,000 and were expensed at the time of issuance. These securities will be
      issued pursuant to Section 4(2) of the Securities Act of 1933. These warrants
      were issued in reliance upon the exemption provided by Section 4(2) of the
      Securities Act.





Between
      March 7, 2007 and April 5, 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. The Company issued and
      sold
      to these accredited investors an aggregate of 2,000,000 shares of its common
      stock and warrants to purchase an additional 1,000,000 shares of its common
      stock. The warrants are exercisable for a period of 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 $2,500,000. We are
      required to use our reasonable best efforts to cause the registration statement
      to become effective within 120 days after the Closing Date, April 5, 2007.
      If
      the registration statement has not been filed on or prior to the 120th day
      after
      the Closing Date, we will issue, as liquidated damages, to the purchasers of
      the
      2,000,000 shares of our Common Stock and the warrants to purchase 1,000,000
      shares of our Common Stock warrants with a term of five years and an exercise
      price of $2.00 per share to purchase shares of our Common Stock equal to 2.5%
      of
      the number of shares of Common Stock purchased by the purchasers. We intend
      to
      use the net proceeds from this private placement transaction primarily for
      general corporate purposes and repayment of existing liabilities. These
      securities were sold in reliance upon the exemption provided by Section 4(2)
      of
      the Securities Act and the safe harbor of Rule 506 under Regulation D
      promulgated under the Securities Act. No advertising or general solicitation
      was
      employed in offering the securities, the sales were made to a limited number
      of
      persons, all of whom represented to the Company that they are accredited
      investors, and transfer of the securities is restricted in accordance with
      the
      requirements of the Securities Act.





On
      April
      5, 2007, the Company issued 89,600 warrants to purchase shares of common stock
      at $2.00 per share to the Company’s Placement Agent. The warrants vested
      immediately and have a five-year life. The warrants were valued at approximately
      $81,000 and were expensed at the time of issuance. These securities will be
      issued pursuant to Section 4(2) of the Securities Act of 1933. These warrants
      were issued in reliance upon the exemption provided by Section 4(2) of the
      Securities Act.





31




**Item
      6. Selected Financial Data.**





The
      following selected financial data for the fiscal year ended December 31, 2006,
      2005, 2004, 2003 and 2002 are derived from our financial statements which
      have been audited by Ernst & Young, LLP (December 31, 2002 and 2003),
      Rothstein Kass (December 31, 2004 and 2005), and Squar, Milner, Peterson,
      Miranda & Williamson, LLP (December 31, 2006), our independent registered
      public accounting firms.  The data should be read in conjunction with our
      financial statements and related notes thereto and “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” included elsewhere in
      this report.




**BALANCE
                SHEET DATA****as
                of December 31,**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Total
                assets
            
            $
            11,181,446
            
            $
            16,033,865
            
            $
            6,934,243
            
            $
            3,258,032
            
            $
            4,632,338Liabilities
            
            $
            9,638,092
            
            $
            6,659,923
            
            $
            3,367,974
            
            $
            1,233,894
            
            $
            1,364,798Net
                assets
            
            $
            1,543,354
            
            $
            9,120,950
            
            $
            3,566,269
            
            $
            2,024,138
            
            $
            3,267,540Shares
                outstanding
            
            
            6,561,195
            
            
            5,672,445
            
            
            4,670,703
            
            
            3,060,300
            
            
            3,148,800**OPERATING
                DATA****for
                the year ended December 31,**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**Revenues
                from related parties
            
            $
            103,875
            
            $
            562,374
            
            $
            -
            
            $
            180,000
            
            $
            450,000Interest,
                dividend income and other, net
            
            $
            2,251
            
            $
            42,476
            
            $
            11,056
            
            $
            3,159
            
            $
            5,081Operating
                expenses
            
            $
            7,850,090
            
            $
            8,384,525
            
            $
            2,923,983
            
            $
            1,236,623
            
            $
            1,950,049Realized
                (loss) gains on investments, net
            
            $
            (1,541,506
            )
            $
            2,014,369
            
            $
            1,591,156
            
            $
            430,883
            
            $
            237,327Unrealized
                gains (losses) on marketable securities, net
            
            $
            16,901
            
            $
            32,335
            
            $
            (1,054,702
            )
            $
            (475,605
            )
            $
            1,663,304Net
                gain (loss) attributable to common shareholders
            
            $
            (13,699,802
            )
            $
            (5,983,223
            )
            $
            (2,485,407
            )
            $
            (1,217,741
            )
            $
            255,110Basic
                and diluted net income (loss) per common share
            
            $
            (2.15
            )
            $
            (1.11
            )
            $
            (0.75
            )
            $
            (0.39
            )
            $
            0.08





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





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our financial statements and
      the
      related notes thereto contained elsewhere in this Form 10-K. This
      discussion contains forward-looking statements that involve risks and
      uncertainties. All statements regarding future events, our future financial
      performance and operating results, our business strategy and our financing
      plans
      are forward-looking statements. In many cases, you can identify forward-looking
      statements by terminology, such as “may,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or
“continue” or the negative of such terms and other comparable terminology. These
      statements are only predictions. Known and unknown risks, uncertainties and
      other factors could cause our actual results to differ materially from those
      projected in any forward-looking statements. In evaluating these statements,
      you
      should specifically consider various factors, including, but not limited to,
      those set forth under “Item 1A. Risk Factors” and elsewhere in this report on
      Form 10-K.*





*The
      following “Overview” section is a brief summary of the significant issues
      addressed in Management’s Discussion and Analysis of Financial Condition and
      Results of Operations (* ***“MD&A”*** *).
      Investors should read the relevant sections of the MD&A for a complete
      discussion of the issues summarized below. The entire MD&A should be read in
      conjunction with Item 6. Selected Financial Data and Item 8. Financial
      Statements and Supplementary Data appearing elsewhere in this Form
      10-K.*




32




**Overview**





Until
      March 31, 2005, Patient Safety Technologies, Inc., a Delaware corporation
      (referred to herein as the ***“Company,”
      “we,” “us,”*** and ***“our”*** ),
      elected to be a Business Development Company ( ***“BDC”*** ) under
      the Investment Company Act of 1940, as amended (the ***“1940
      Act”*** ). On
      March 30, 2005, stockholder approval was obtained to withdraw our election
      to be
      treated as a BDC and on March 31, 2005 we filed an election to withdraw our
      election with the Securities and Exchange Commission. At December 31, 2006,
      8.9%
      of our assets, consisting primarily of our investment in Alacra Corporation,
      on
      a consolidated basis with subsidiaries were comprised of investment securities
      within the meaning of the 1940 Act ( ***“Investment
      Securities”*** ). If
      the
      value of our assets that consist of Investment Securities were to exceed 40%
      of
      our total assets (excluding government securities and cash items) on an
      unconsolidated basis we could be required to re-register as an investment
      company under the 1940 Act unless an exemption or exclusion applies. We continue
      to evaluate ways in which we can dispose of these Investment Securities and
      do
      not believe that the value of our Investment Securities will increase in an
      amount that would require us to re-register as a BDC. Registration as an
      investment company would subject us to restrictions that are inconsistent with
      our fundamental business strategy of equity growth through creating, building
      and operating companies
      in the patient safety medical products industry. Registration under the 1940
      Act
      would also subject us to increased regulatory and compliance costs, and other
      restrictions on the way we operate and would change the method of accounting
      for
      our assets under GAAP.





We
      have
      two wholly-owned operating subsidiaries: (1) SurgiCount Medical, Inc., a
      California corporation; and (2) Automotive Services Group, Inc., (formerly
      known
      as Ault Glazer Bodnar Merchant Capital, Inc.) a Delaware
      corporation.





We
      are
      engaged in the acquisition of controlling interests in companies and research
      and development 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. In
      the
      past we also focused on the financial services and real estate industries,
      however, on March 29, 2006, our Board of Directors determined to focus our
      business on the patient safety medical products field. Automotive Services
      Group
      holds our investment in ASG, its wholly-owned express car wash subsidiary.
      In
      addition to the assets that are held in Automotive Services Group, we hold
      various other unrelated investments which we are in the process of liquidating.
      The unrelated investments are included in a separate segment, financial services
      and real estate. We purchased the remaining equity interest in ASG in March
      2006
      and during the fourth quarter of 2006 we began marketing for sale the assets
      held in ASG.





SurgiCount’s
      Safety-SpongeTM System helps reduce the number of retained sponges and towels in
      patients during surgical procedures and allows for faster and more accurate
      counting of surgical sponges. The SurgiCount Safety-Sponge TM 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. The Safety-Sponge System works much like
      a
      grocery store checkout process: Every surgical sponge and towel is affixed
      with
      a unique inseparable two-dimensional data matrix bar code and used with a
      SurgiCounter to scan and record the sponges during the initial and final counts.
      Because each sponge is identified with a unique code, a SurgiCounter will not
      allow the same sponge to be counted more than one time. When counts have been
      completed at the end of a procedure, the system will produce a printed report,
      or can be modified to work with a hospital's paperless system. By scanning
      the
      surgical dressings in at the beginning of a surgical procedure and then scanning
      them out at the end of the procedure, the sponges can be counted faster and
      more
      accurately than traditional methods which require two medical personnel manually
      counting the used and un-used sponges. The Safety-Sponge System is the only
      FDA
      510k approved computer assisted sponge counting system.  SurgiCount
      is the first acquisition in our plan to become a leader in the patient safety
      market.




33





Our
      principal executive offices are located at 27555 Ynez Road, Suite 330, Temecula,
      CA 92591. Our telephone number is (951) 587-6201. Our website is located at http://www.patientsafetytechnologies.com .





**Critical
      accounting policies and estimates**





The
      below
      discussion and analysis of our financial condition and results of operations
      is
      based upon the accompanying financial statements. The preparation of financial
      statements in conformity with accounting principles generally accepted in the
      United States of America requires management to make estimates and assumptions
      that affect the amounts reported in the financial statements. Critical
      accounting policies are those that are both important to the presentation of
      our
      financial condition and results of operations and require management's most
      difficult, complex, or subjective judgments, often as a result of the need
      to
      make estimates of matters that are inherently uncertain. Our most critical
      accounting policy relates to the valuation of our investments in non-marketable
      equity securities, valuation of our intangible assets and stock based
      compensation.





**Valuation
      of Non-Marketable Equity Securities**





In
      the
      past we invested in illiquid equity securities acquired directly from issuers
      in
      private transactions. These investments are generally subject to restrictions
      on
      resale or otherwise are illiquid and generally have no established trading
      market. Additionally, our investment in Alacra, our only remaining investment
      in
      a privately held company, will not be eligible for sale to the public without
      registration under the Securities Act of 1933. Because of the type of
      investments that we made and the nature of our business, our valuation process
      requires an analysis of various factors.





Investments
      in non-marketable securities are inherently risky and the one remaining
      privately held company that we have invested in may fail. Its success (or lack
      thereof) is dependent upon product development, market acceptance, operational
      efficiency and other key business success factors. In addition, depending on
      its
      future prospects, it may not be able to raise additional funds when needed
      or it
      may receive lower valuations, with less favorable investment terms than in
      previous financings, likely causing our investments to become
      impaired.





We
      review
      all of our investments quarterly for indicators of impairment; however, for
      non-marketable equity securities, the impairment analysis requires significant
      judgment to identify events or circumstances that would likely have a material
      adverse effect on the fair value of the investment. The indicators that we
      use
      to identify those events or circumstances includes as relevant, the nature
      and
      value of any collateral, the portfolio company’s ability to make payments and
      its earnings, the markets in which the portfolio 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. Because such valuations are
      inherently uncertain and may be based on estimates, our determinations of fair
      value may differ materially from the values that would be assessed if a liquid
      market for these securities existed.





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
      we write the investment down to its impaired value. When a portfolio company
      is
      not considered viable from a financial or technological point of view, we write
      down the entire investment since we consider the estimated fair market value
      to
      be nominal. If a portfolio company obtains additional funding at a valuation
      lower than our carrying amount or requires a new round of equity funding to
      stay
      in operation and the new funding does not appear imminent, we presume that
      the
      investment is other than temporarily impaired, unless specific facts and
      circumstances indicate otherwise. We recognized $1,445,000, $50,000 and nil,
      in
      impairments during the years ended December 31, 2006, 2005, and 2004,
      respectively.





Security
      investments which are publicly traded on a national securities exchange or
      over-the-counter market are stated at the last reported sale 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. Our Board may determine, if appropriate,
      to
      discount the value where there is an impediment to the marketability of the
      securities held.




34





**Valuation
      of Intangible Assets**





We
      assess
      the impairment of intangible assets when events or changes in circumstances
      indicate that the carrying value of the assets or the asset grouping may not
      be
      recoverable. Factors that we consider in deciding when to perform an impairment
      review include significant under-performance of a product line in relation
      to
      expectations, significant negative industry or economic trends, and significant
      changes or planned changes in our use of the assets. Recoverability of
      intangible assets that will continue to be used in our operations is measured
      by
      comparing the carrying amount of the asset grouping to our estimate of the
      related total future net cash flows. If an asset grouping’s carrying value is
      not recoverable through the related cash flows, the asset grouping is considered
      to be impaired. The impairment is measured by the difference between the asset
      grouping’s carrying amount and its fair value, based on the best information
      available, including market prices or discounted cash flow analysis. Impairments
      of intangible assets are determined for groups of assets related to the lowest
      level of identifiable independent cash flows. Due to our limited operating
      history and the early stage of development of some of our intangible assets,
      we
      must make subjective judgments in determining the independent cash flows that
      can be related to specific asset groupings. To date we have not recognized
      impairments on any of our intangible assets related to the Safety SpongeTM
System.





**Stock-Based
      Compensation**





We
      have
      adopted the provisions of SFAS No. 123(R), *Share-Based
      Payment* ,
      effective 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). The
      fair
      value of each option grant, nonvested stock award and shares issued under the
      employee stock purchase plan were estimated on the date of grant using the
      Black-Scholes option pricing model and various inputs to the model. Expected
      volatilities were based on historical volatility of our stock. The expected
      term
      represents the period of time that grants and awards are expected to be
      outstanding. The risk-free interest rate approximates the U.S. treasury
      rate corresponding to the expected term of the option, and dividends were
      assumed to be zero. These inputs are based on our assumptions, which include
      complex and subjective variables. Other reasonable assumptions could result
      in
      different fair values for our stock-based awards.





Stock-based
      compensation expense, as determined using the Black-Scholes option pricing
      model, is recognized on a straight line basis over the service period, net
      of
      estimated forfeitures. Forfeiture estimates are based
      on
      historical data. To the extent actual results or revised estimates differ from
      the estimates used, such amounts will be recorded as a cumulative adjustment
      in
      the period that estimates are revised.





**New
      Accounting Pronouncements**





In
      June
      2006, the FASB issued FASB Interpretation No. (FIN) 48, *Accounting
      for Uncertainty in Income Taxes — An Interpretation of FASB Statement
      No. 109* ,
      which
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in an income tax return. FIN 48 will be effective beginning
      January 1, 2007. We are currently evaluating the impact of implementation
      on our consolidated financial statements but we do not believe the adoption
      of
      this statement will have a material impact on our financial condition or results
      of operations.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* ,
      which
      establishes a framework for measuring fair value and requires expanded
      disclosure about the information used to measure fair value. This statement
      is
      effective for us in the first
      quarter of fiscal 2008 .
      The
      statement applies whenever other statements require, or permit, assets or
      liabilities to be measured at fair value, but does not expand the use of fair
      value in any new circumstances. We do not expect the adoption of this statement
      to have a material impact on our financial condition or results of operations.





See
      Note
      2 to the consolidated financial statements for a complete discussion of recent
      accounting pronouncements.




35





**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      and marketable securities were $4,000 at December 31, 2006, versus $79,000
      at
      December 31, 2005. Total current liabilities were $5,700,000 at December 31,
      2006, versus $4,000,000 at December 31, 2005. Included in current liabilities
      at
      December 31, 2006 and December 31, 2005 is a note payable, and accrued interest
      on such note, payable to Winstar Communications, Inc. ( ***“Winstar”*** )
      in the
      amount of $450,000 and $939,000, respectively. The due date on the note payable
      to Winstar was February 28, 2002. However, as a result of the lawsuits filed
      against us by Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. the
      due
      date of the note was extended until the lawsuit is settled. However, on February
      3, 2006 Winstar Global Media, Inc. ( ***“WGM”*** )
      filed a
      lawsuit claiming that we were in default under the terms of the note. On
      September 5, 2006, subject to the approval of The United States Bankruptcy
      Court
      for the District of Delaware, which was granted on November 7, 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 of $191,000 on the elimination of principal
      and interest in excess of the settlement amount.





During
      2005 our Board authorized us to invest our cash balances in the public equity
      and debt markets as appropriate to maximize the short-term return on such
      assets. Such investments are typically short-term and focus on what we believe
      to be mispriced domestic public equities and instruments.





In
      August
      2005, we entered into an agreement with the financial institution IXIS
      Derivatives Inc. to
      borrow against securities which we held. The agreement, which extended for
      53
      weeks, was subject to a premium of up to 6% of the amount of the borrowings
      which is amortized on a straight line basis over the term of the agreement.
      At
      December 31, 2005, we terminated the August 2005 agreement with IXIS Derivatives
      Inc. To the extent the agreement was terminated early, we did not incur a
      premium for the amount of time that the agreement was terminated. The agreement
      also provided that in addition to the securities held by the financial
      institution, we pledge a total of 25% of the value of the securities in cash.
      The pledged cash was reduced daily by the amount of the earned premium and
      protected the financial institution from decreases in the market value of the
      securities. Any decrease in the market value of the pledged securities in excess
      of 5% over the securities notional value would require us to fund additional
      monies, such that 25% of the initial borrowing, as adjusted by the earned
      premium, was covered. If we failed to fund additional monies the financial
      institution had the right to liquidate the pledged securities. In the event
      the
      proceeds from liquidation were insufficient to cover the amount of the
      borrowings, the financial institution’s sole recourse was against the pledged
      cash. During January 2006, we renewed our August 2005 agreement with IXIS
      Derivatives Inc. to borrow against securities and during the quarter ended
      September 30, 2006 terminated this agreement and the agreement was closed upon
      our liquidation of the underlying assets. We currently have no plans to renew
      this form of financing in the future.





We
      had a
      working capital deficit of approximately $5,433,000 at December 31, 2006 and
      we
      continue to have recurring losses. In the past we have relied upon private
      placements of equity and debt securities and we may rely on private placements
      to fund our capital requirements in the future. We have received shareholder
      approval to sell equity and/or debt securities of the Company up to $10 million
      in any calendar year to our former Chairman and Chief Executive Officer, Milton
      “Todd” Ault, III, to the Company’s Executive Vice President and Secretary, Lynne
      Silverstein, to another former Chairman and Chief Executive Officer, Louis
      Glazer, and to the former Manager of our closed subsidiary Ault Glazer Bodnar
      Capital Properties, LLC and Mr. Glazer’s spouse, Melanie Glazer. If we proposed
      to sell more than $10 million of securities in a calendar year to such persons
      additional shareholder approval would be required. We do not currently
      anticipate selling equity or debt securities to these persons and, in the event
      we elected to pursue such an investment, we cannot guarantee that such persons
      would be willing to further invest in the Company. We have, however, received
      funding from Ault Glazer Capital Partners, LLC (formerly AGB Acquisition Fund)
      (the ***“Fund”*** ).
      AG
      Management is the managing member of the Fund. The managing member of AG
      Management is The Ault Glazer Group, Inc. ( ***“The
      AG Group”*** )
      (f/k/a
      Ault Glazer Bodnar & Company, Inc.). The Company’s former Chairman and
      former Chief Executive Officer, Milton “Todd” Ault, III, is Chairman, Chief
      Executive Officer and President of The AG Group.




36





On
      January 12, 2006, Steven J. Caspi ( ***“Caspi”*** )
      loaned
      $1,000,000 to ASG. As consideration for the loan, ASG issued Caspi a promissory
      note in the principal amount of $1,000,000 (the ***“Caspi
      Note”*** )
      and
      granted 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, we entered
      into
      an agreement guaranteeing ASG’s obligations pursuant to the Caspi Note and Caspi
      received warrants to purchase 30,000 shares of our common stock at an exercise
      price of $4.50 per share. We recorded debt discount in the amount of $92,000
      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 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 by the scheduled maturity and to date has not been extended.
      The Caspi Note is in default and therefore accruing interest at the rate of
      18%
      per annum. During the year ended December 31, 2006, the Company had incurred
      interest expense of $130,000 on the Caspi Note, of which $75,000 is accrued
      at
      December 31, 2006.





From
      September 8, 2006 through September 19, 2006, Caspi loaned the Company a total
      of $1,495,000, all of which is outstanding at December 31, 2006. As
      consideration for the loan, the Company issued Caspi a Convertible Promissory
      Note in the principal amount of $1,495,000 (the ***“Second
      Caspi Note”*** ).
      The
      Second Caspi Note bears interest at the rate of 12% per annum and is due upon
      the earlier of March 31, 2008 or, the occurrence of an event of default, and
      is
      convertible into shares of the Company’s common stock at $1.25 per share. As
      security for the performance of the Company’s obligations pursuant to the Second
      Caspi Note, the Company granted Caspi a security interest in certain real
      property. 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. During the year ended December 31, 2006,
      the Company had incurred interest expense, excluding amortization of debt
      discount, of $56,000 on the Second Caspi Note, all of which is accrued at
      December 31, 2006.





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 will be amortized as non-cash interest expense over
      the term of the debt using the effective interest method. Through December
      31,
      2006, interest expense of $123,000 has been recorded from the debt discount
      amortization.





From
      January 11, 2006 through September 30, 2006 AGB Acquisition Fund, a related
      party, loaned the Company a total of $443,000 to cover a portion of our
      operating expenses, all of which was repaid.





On
      February 8, 2006, AGB Acquisition Fund loaned $687,000 to ASG (the ***“ASG
      Note”*** )
      to
      purchase land for an additional car wash facility. The loan was evidenced by
      a
      secured promissory note accompanied by a real estate mortgage relating to
      certain real property located in Jefferson County, Alabama (the “Property”). The
      ASG Note, as amended, bears interest at the rate of 10% per annum and was due
      on
      September 15, 2006. The ASG Note is in default and classified with current
      liabilities on the balance sheet. AGB Acquisition Fund received warrants to
      purchase 20,608 shares of our common stock at an exercise price of $3.86 per
      share as additional consideration for entering into the loan agreement. We
      recorded debt discount in the amount of $44,000 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.
      As additional security for the performance of ASG’s obligations pursuant to the
      ASG Note, ASG granted AGB Acquisition Fund a security interest in all personal
      property and fixtures located at the ASG Property. During the year ended
      December 31, 2006, the Company incurred interest expense, excluding amortization
      of debt discount, of $61,000 on the ASG Note.




37





In
      addition, as of December 31, 2006, AGB Acquisition Fund had loaned an aggregate
      of $1,495,000 to ASG to pay for the land and constructions costs of ASG’s first
      car wash facility, pursuant to the terms of a Real Estate Note dated July 27,
      2005, as amended (the ***"Real
      Estate Note"*** ).
      The
      Real Estate Note bears interest at the rate of 3% above the Prime Rate as
      published in the Wall Street Journal (8.25% at December 31, 2006). All unpaid
      principal, interest and charges under the Real Estate Note are due in full
      on
      July 31, 2010. The Real Estate Note is 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 AGB Acquisition Fund. During the years ended December 31, 2006
      and 2005, the Company incurred interest expense of $160,000 and 29,000,
      respectively, on the Real Estate Note, all of which is accrued at December
      31,
      2006.





From
      March 7, 2006 through October 16, 2006, the Fund loaned the Company a total
      of
      $524,000, of which $130,000 was repaid. The outstanding balance at December
      31,
      2006 is $394,000. The loans were advanced to us pursuant to a Revolving Line
      of
      Credit Agreement (the ***“Revolving
      Line of Credit”*** )
      entered
      into with AGB Acquisition Fund on March 7, 2006. The Revolving Line of Credit
      allows us to request advances of up to $500,000 from AGB Acquisition Fund and
      will be primarily used to cover our operating expenses. The initial term of
      the
      Revolving Line of Credit is for a period of six months and may be extended
      for
      one or more additional six month periods upon mutual agreement of the parties.
      Each advance under the Revolving Line of Credit is evidenced by a secured
      promissory note and a security agreement. The secured promissory notes issued
      pursuant to the Revolving Line of Credit must be repaid with interest at the
      Prime Rate plus 1% within 60 days from issuance and are convertible into shares
      of our common stock at the option of AGB Acquisition Fund at a price of $3.10
      per share. Our obligations pursuant to such secured promissory notes are secured
      by our assets, personal property and fixtures, inventory, products and proceeds
      therefrom. During the year ended December 31, 2006, the Company had incurred
      interest expense of $16,000 on the Revolving Line of Credit, of which $13,000
      is
      accrued at December 31, 2006.





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”*** ).
      The
      Langsam Note accrues interest at the rate of 12% per annum and had a maturity
      date of November 1, 2006. The Langsam Note is in default and classified with
      current liabilities on the balance sheet. In the event of breach or default
      on
      any provision of the Langsam Note, the interest rate will increase to 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”*** ).
      The
      Second Langsam Note accrues interest at the rate of 12% per annum and had a
      maturity date of May 13, 2007. The Second Langsam Note is in default and
      classified with current liabilities on the balance sheet. In the event of breach
      or default on any provision of the Second Langsam Note, the interest rate will
      increase to 16% per annum. 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. 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 will be amortized as non-cash interest expense over the term
      of
      the debt using the effective interest method.





On
      June
      6, 2006 the Company entered into a Secured Convertible Note and Warrant Purchase
      Agreement (the ***“Purchase
      Agreement”*** )
      pursuant to which the Company sold a $1,100,000 principal amount Secured
      Convertible Promissory Note (the ***“Morelli
      Note”*** )
      and a
      warrant to purchase 401,460 shares of the Company’s common stock (the ***“Morelli
      Warrant”*** )
      to Alan
      E. Morelli.





The
      Morelli Note accrued interest at the rate of 12% per annum through July 6,
      2006,
      after which the interest rate increased to 15% per annum from July 6, 2006
      through the date the loan is repaid. The principal amount of the Morelli Note
      and any accrued but unpaid interest was due to be paid on October 6, 2006,
      or
      the occurrence of an event of default. On August 15, 2006 the Company received
      a
      notice of default regarding the Morelli Note. The notice of default specifically
      cited the Company’s failure to obtain the prior written consent of Mr. Morelli
      to the incurrence of indebtedness and failure to repay the obligations owing
      under the Morelli Note in an amount equal to the proceeds of the indebtedness.
      Upon the occurrence of an event of default the interest rate increase to 19%
      per
      annum. During September 2006, from the proceeds of the Second Caspi Note, the
      Company repaid the outstanding principal amount and accrued interest of
      $51,000.




38





In
      August
      2006, prior to the repayment of the Morelli Note, the Company sold shares of
      its
      common stock at $1.25 per share thereby requiring modifications to both the
      Morelli Warrant and Morelli Note. These modifications resulted in an adjustment
      to the conversion price of the Morelli Note, an adjustment to the exercise
      price
      of the Morelli Warrant and an increase in the number of shares of common stock
      available to purchase upon exercise of the Morelli Warrant. These modifications
      were sufficiently different from the initial terms of the Morelli Note and
      Morelli Warrant, requiring the Company to account for the change in conversion
      terms as a substantial modification of terms in accordance with EITF Issue
      No.
      96-19, *“Debtor’s
      Accounting and Modification on Exchange of Debt Instruments”* .





The
      original notes converted into common stock at a rate of $2.74 per share with
      401,460 warrants to purchase common stock exercisable at $3.04 per share. The
      new terms provided conversion into common stock at $1.25 per share with 976,351
      warrants to purchase common stock exercisable at $1.25 per share. On
      extinguishment of the original terms of the Morelli Note and Morelli Warrant,
      the Company recorded non-cash interest expense of
      $880,000 as the estimated difference in the fair value of the Morelli Warrant
      under the original terms to that of the modified terms and
      further recorded entries to record discounts related to the beneficial
      conversion feature totaling $572,000 which was amortized
      as non-cash interest expense .





On
      July
      12, 2006 we 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 our common stock (the ***“Kalina
      Warrant”*** )
      in
      favor of Charles J. Kalina, III ( ***“Kalina”*** ),
      an
      existing shareholder of the Company. The Kalina Note accrues 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 upon
      the
      earlier of October 10, 2006, or the occurrence of an event of default. Principal
      and interest on the Kalina Note was convertible into our shares of common stock
      at a conversion price of $3.00. The Kalina Warrant has an exercise price of
      $
      2.69 per share and will expire on July 11, 2011. We 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 term
      of
      the debt using the effective interest method.





On
      November 3, 2006, Kalina converted the Kalina Note into a new Convertible
      Promissory Note in the principal amount of $400,000 (the ***“Second
      Kalina Note”*** )
      and a
      warrant for the purchase of 100,000 Shares of our common stock exercisable
      at
      $1.25 per share (the ***“Second
      Kalina Warrant”*** ).
      The
      Second Kalina Note bears interest at the rate of 12% per annum, is due to be
      paid on January 31, 2008, and is convertible into shares of the Company’s common
      stock at $1.25 per share. 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 will record debt discount in the amount of $77,000
      based on the intrinsic value of the beneficial conversion feature of the note.
      The Second Kalina Warrant 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 will be amortized as non-cash interest
      expense over the term of the debt using the effective interest
      method.





On
      November 1, 2006 we entered into a Convertible Promissory Note in the principal
      amount of $71,000 (the ***“Sedlak
      Note”*** )
      and a
      warrant for the purchase of 20,000 shares of our common stock exercisable at
      $1.25 per share (the ***“Sedlak
      Warrant”*** )
      in
      favor of Michael G. Sedlak. The Sedlak Note bears interest at the rate of 12%
      per annum, is due to be paid on January 31, 2008, and is convertible into shares
      of the Company’s common stock at $1.25 per share. As the effective conversion
      price of the Sedlak 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 $22,000 based on the intrinsic value of the beneficial conversion feature
      of
      the note. The Sedlak Warrant will expire after November 1, 2011. The Company
      recorded debt discount in the amount of $14,000 based on the estimated fair
      value of the warrants. The debt discount will be amortized as non-cash interest
      expense over the term of the debt using the effective interest
      method




39




On
      November 1, 2006 we entered into a Convertible Promissory Note in the principal
      amount of $102,000 (the ***“Sveinson
      Note”*** )
      and a
      warrant for the purchase of 20,000 shares of our common stock exercisable at
      $1.25 per share (the ***“Sveinson
      Warrant”*** )
      in
      favor of James Sveinson. The Sveinson Note bears interest at the rate of 12%
      per
      annum, is due to be paid on January 31, 2008, and is convertible into shares
      of
      the Company’s common stock at $1.25 per share. As the effective conversion price
      of the Sveinson 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
      $27,000 based on the intrinsic value of the beneficial conversion feature of
      the
      note. The Sveinson Warrant will expire after November 1, 2011. The Company
      recorded debt discount in the amount of $14,000 based on the estimated fair
      value of the warrants. The debt discount will be amortized as non-cash interest
      expense over the term of the debt using the effective interest
      method





On
      March
      15, 2006 the Company, Automotive Services Group, ASG and Darell W. Grimsley,
      Jr.
      entered into a Unit Purchase Agreement for Automotive Services Group to purchase
      a 50% equity interest (the ***“Membership
      Interest”*** )
      in ASG
      from Mr. Grimsley. As consideration for the Membership Interest the Company
      issued Mr. Grimsley 200,000 shares of the Company’s common stock. Mr. Grimsley
      will continue to act as Chairman and Chief Executive Officer of Automotive
      Services Group.





In
      August
      2006, we entered into subscription agreements with two unaffiliated accredited
      investors, pursuant to which we sold 200,000 shares of the Company’s common
      stock, $0.33 par value per share, at a price of $1.25 per share. We received
      gross proceeds of approximately $250,000 from the sale of our common stock
      to
      the accredited investors. Pursuant to the subscription agreement, we granted
      the
      accredited investors piggy back registration rights to register the resale
      of
      the shares of common stock.





Between
      November 30, 2006 and December 15, 2006, the Company entered into a subscription
      agreement and sold an aggregate of 238,000 shares of its Common Stock and
      warrants to purchase an aggregate of up to 119,000 shares of its Common Stock
      in
      a private placement transaction to certain unaffiliated accredited investors.
      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. Pursuant to the
      subscription agreement, we granted the accredited investors piggy back
      registration rights to register the resale of the shares of common stock. We
      received aggregate gross proceeds of $298,000.





On
      December 26, 2006 we entered into a Promissory Note with Maroon Creek Capital,
      LP ( ***“Maroon”*** ),
      a
      California limited partnership, in the principal amount of $81,000. The loan
      is
      documented by an $81,000 Secured Promissory Note (the ***“Maroon
      Note”*** )
      payable
      to the Maroon. The Maroon Note accrues interest at a rate equal to the prime
      rate published in *The
      Wall Street Journal* from
      time to time ,
      and
      currently 8.25%, and
      has a
      maturity date of April 26, 2007. In the event of breach or default on any
      provision of the Maroon Note, the interest rate will increase to 12% per annum
      and we shall be required to issue to Maroon a warrant to purchase 10,000 shares
      of the Company’s common stock, exercisable for a period of five years, at an
      exercise price of $2.00 per share. Maroon received warrants to purchase 30,000
      shares of the Company’s common stock at an exercise price of $2.00 per share as
      additional consideration for entering into the loan agreement. The Company
      recorded debt discount in the amount of $28,000 as the estimated value of the
      warrants. The debt discount will be amortized as non-cash interest expense
      over
      the term of the debt using the effective interest method.





On
      January 29, 2007, the Company entered into a subscription agreement and sold
      an
      aggregate of 800,000 shares of its Common Stock and warrants to purchase an
      aggregate of up to 300,000 shares of its Common Stock in a private placement
      transaction to A Plus, an accredited investor. The warrants are exercisable
      for
      a period of 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. The Company received gross proceeds of $500,000 in
      cash
      and will receive $500,000 in product over the course of the next twelve (12)
      months. We used the net proceeds from the private placement transaction
      primarily for general corporate purposes and repayment of existing liabilities.
      Pursuant to the subscription agreement, we granted the accredited investors
      piggy back registration rights to register the resale of the shares of common
      stock.




40





On
      January 29, 2007, the Company entered into a subscription agreement with several
      unaffiliated accredited investors in a private placement exempt from the
      registration requirements of the Securities Act. The Company issued and sold
      to
      these accredited investors an aggregate of 104,000 shares of its common stock
      and warrants to purchase an additional 52,000 shares of its common stock. The
      warrants are exercisable for a period of 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 $130,000. We used the net proceeds
      from the private placement transaction primarily for general corporate purposes
      . Pursuant to the subscription agreement, we granted the accredited investors
      piggy back registration rights to register the resale of the shares of common
      stock.





Between
      March 7, 2007 and April 5, 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. The Company issued and
      sold
      to these accredited investors an aggregate of 2,000,000 shares of its common
      stock and warrants to purchase an additional 1,000,000 shares of its common
      stock. The warrants are exercisable for a period of 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 $2,500,000. We are
      required to use our reasonable best efforts to cause the registration statement
      to become effective within 120 days after the Closing Date, April 5, 2007.
      If
      the registration statement has not been filed on or prior to the 120th day
      after
      the Closing Date, we will issue, as liquidated damages, to the purchasers of
      the
      2,000,000 shares of our Common Stock and the warrants to purchase 1,000,000
      shares of our Common Stock warrants with a term of five years and an exercise
      price of $2.00 per share to purchase shares of our Common Stock equal to 2.5%
      of
      the number of shares of Common Stock purchased by the purchasers. We intend
      to
      use the net proceeds from this private placement transaction primarily for
      general corporate purposes and repayment of existing liabilities.





On
      April
      4, 2007, ASG entered into an agreement for the sale of real property located
      in
      Tuscaloosa, Alabama for $965,000 and on April 26, 2007, ASG entered into a
      binding term sheet to sell its express car wash and a parcel of real property,
      both located in Birmingham, Alabama, to Charles H. Dellaccio and Darrell
      Grimsley for $2.25 milllion. Mr. Grimsley is the Chairman of the Board and
      Chief
      Executive Officer of Automotive Services Group. There can be no guarantee that
      the execution of these contracts will result
      in
      the consummation of the transactions. However, to the extent we are successful
      in consummating these transactions then we would expect to receive proceeds
      from
      the transactions in July 2007. If
      all
      the properties are sold, we will receive gross proceeds of approximately $3.2
      Million. By selling these assets we will be better positioned to aggressively
      pursue the market for surgical sponges in the United States and Europe, which
      we
      believe represents a market opportunity equal to or in excess of $650 million
      in
      annual sales.





Management
      is currently seeking additional financing and believes that it will be
      successful. However, in the event management is not successful in obtaining
      additional financing, existing cash resources, together with proceeds from
      investments and anticipated revenues from operations, may not be adequate to
      fund our operations for the twelve months subsequent to December 31, 2006.
      However, ultimately long-term liquidity is dependent on our ability to attain
      future profitable operations. We intend to undertake additional debt or equity
      financings to better enable us to grow and meet future operating and capital
      requirements.





As
      of
      December 31, 2006, other than our office lease and employment agreements with
      key executive officers, we had no commitments not reflected in our consolidated
      financial statements.




41





Cash
      decreased by $76,000 to $4,000 for the year ended December 31, 2006, compared
      to
      a decrease of $767,000 for the year ended December 31, 2005.




Operating
      activities used $2,794,000 of cash for the year ended December 31, 2006,
      compared to using $1,719,000 for the year ended December 31, 2005.





Operating
      activities for the year ended December 31, 2006, exclusive of changes in
      operating assets and liabilities, used $4,870,000 of cash, as the Company's
      net
      cash used in operating activities of $2,794,000 included non-cash charges for
      depreciation and amortization of $461,000, debt discount of $2,983,000, goodwill
      impairment of $971,000, gain on debt extinguishment of $191,000, realized gains
      of $1,542,000, unrealized gains of $17,000 and stock based compensation of
      $3,301,000. For the year ended December 31, 2005, operating activities,
      exclusive of changes in operating assets and liabilities, used $3,900,000 of
      cash, as the Company's net cash used in operating activities of $1,719,000
      included non-cash charges for depreciation and amortization of $286,000,
      realized gains of $2,014,000, unrealized gains of $32,000 and stock based
      compensation of $4,504,000.





Changes
      in operating assets and liabilities provided cash of $1,895,000 during the
      year
      ended December 31, 2006, principally due to net proceeds received from
      marketable securities, decreases in our receivables from investments and
      increases in the level of accounts payable and accrued liabilities which were
      partially offset by decreases in the amounts due to our broker. The amount
      due
      to our broker is directly attributable to purchases of marketable investment
      securities that were purchased on margin or to securities that were margined
      subsequent to their purchase. During the first quarter of 2006 and for the
      entire year of 2005, the Company actively invested its cash balances in the
      public equity and debt markets in an attempt to maximize the short-term return
      on such assets. The amount due to our broker varied throughout the year
      depending upon the aggregate amount of marketable investment securities held
      by
      us and the level of borrowing against our available-for-sale securities. The
      actual amount of marketable investment securities held was influenced by several
      factors, including but not limited to, our expectations of potential returns
      available from what we considered to be mispriced securities as well as the
      cash
      needs of our operating activities. Consistent with our emphasis on the patient
      safety products field, we no longer invest in the public equity and debt
      markets. During the year ended December 31, 2005, changes in operating assets
      and liabilities provided cash of $2,181,000 primarily due to net proceeds
      received from marketable securities, and increases in the level of accounts
      payable and accrued liabilities and amounts due to broker which were partially
      offset by increases in accounts receivable.





The
      principal factor in the $2,016,000 of cash used in investing activities during
      the year ended December 31, 2006 was the purchase of land of $1,697,000,
      capitalized construction costs of $381,000 related to ASG, and capitalized
      costs
      of $148,000 related to the ongoing development of software related to our
      Safety-Sponge TM System
      offset by proceeds from the sale of long-term investments of $289,000. The
      principal factor in the $794,000 of cash used in investing activities during
      the
      year ended December 31, 2005 was caused from our initial cash investments in
      ASG
      and SurgiCount of $300,000 and $432,000, respectively, and an investment in
      the
      construction of our first automated car wash site by our subsidiary, ASG, in
      the
      amount of $604,000. These investments were offset by proceeds received from
      the
      sale of long-term investments, primarily from our stock appreciation rights
      in
      our holding in Excelsior for $847,000, repayment of loans secured by real estate
      of $350,000 and the sale of real estate valued at $67,000.





Cash
      provided by financing activities during the year ended December 31, 2006, of
      $4,735,000 resulted from the net proceeds from notes payable of $4,207,000
      and
      the proceeds from the issuance of common stock and warrants for $528,000. Cash
      provided by financing activities for the year ended December 31, 2005, of
      $1,746,000 resulted primarily from the net proceeds from notes payable of
      $1,526,000 and the net proceeds from issuance of common stock and warrants
      of
      $250,000 and payment of preferred dividends of $19,000.




42


**Investments**





Our
      financial condition is partially dependent on the success of our existing
      investments. In the past, short selling was a component of our investment
      strategy and these trades ranged, in any particular month, from 0% to 20% of
      total trading activity. The making of such investments entailed significant
      risk
      that the price of a security may increase resulting in the loss of or negative
      return on the investment. We have not engaged in the practice of short selling
      since the quarter ended September 30, 2005, and do not expect to participate
      in
      short selling in the future. On March 29, 2006 our Board of Directors directed
      us to liquidate all of our investments and other assets that do not relate
      to
      the patient safety medical products business. Some of our investments are
      subject to restrictions on resale under federal securities laws and otherwise
      are illiquid, which will make it difficult to dispose of the securities quickly.
      Since we will be forced liquidate some or all of the investments on an
      accelerated timeline, the proceeds of such liquidation may be significantly
      less
      than the value at which we acquired the investments. The following is a
      discussion of our most significant investments at December 31,
      2006.





A
      summary
      of our investment portfolio, which is valued at $1,442,000 and represents 12.9%
      of our total assets, is reflected below. Excluding our real estate investments,
      our investment portfolio represents 9.0% of our total assets. The investment
      portfolio is classified as long-term investments.




**December
                31,**
                **2006**
            
            
            **December
                31,**
                **2005**Alacra
                Corporation
            
            $
            1,000,000
            
            $
            1,000,000Digicorp
            
            
            10,969
            
            
            3,025,398IPEX,
                Inc.
            
            
            —
            
            
            1,243,550Real
                Estate
            
            
            430,564
            
            
            481,033Tuxis
                Corporation
            
            
            —
            
            
            746,580Other
            
            
            —
            
            
            64,170$
            1,441,533
            
            $
            6,560,731








*Alacra
      Corporation*





At
      December 31, 2006, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued at $1,000,000, which represents 8.9% of our total assets. On April 20,
      2000, we purchased $1,000,000 worth of Alacra Series F Convertible Preferred
      Stock. Alacra has recorded revenue growth in every year since the Company’s
      original investment, further, Alacra is forecasting that 2007 revenues will
      be
      approximately $19.2 million, which would represent an increase of 22% over
      2006
      unaudited revenues. At December 31, 2006, Alacra reported in their unaudited
      financial statements total assets of approximately $4.7 million with total
      liabilities of approximately $7.4 million. Deferred revenue, which represents
      subscription revenues are amortized over the term of the contract, which is
      generally one year, and represented approximately $3.7 million of the total
      liabilities. We have the right, subject to Alacra having the available cash,
      to
      have the preferred stock redeemed by Alacra over a period of three years for
      face value plus accrued dividends beginning on December 31, 2006. Pursuant
      to
      this right, in December 2006 we informed management of Alacra that we were
      exercising our right to put back one-third of our preferred stock. If Alacra
      has
      a sufficient amount of cash to redeem our preferred stock we would expect the
      redemption to occur in the fourth quarter of 2007. In connection with this
      investment, the Company was granted observer rights on Alacra board of directors
      meetings.





Alacra,
      a
      privately held company based in New York, is a global provider of business
      and
      financial information. Alacra provides a diverse portfolio of fast,
      sophisticated online services that allow users to quickly find, analyze, package
      and present business information. Alacra’s customers include more than 750
      leading financial institutions, management consulting, law and accounting firms
      and other corporations throughout the world. Currently, Alacra’s largest
      customer segment is investment and commercial banking, followed closely by
      management consulting, law and multi-national corporations.




43





Alacra’s
      online service allows users to search via a set of tools designed to locate
      and
      extract business information from the Internet and from Alacra’s library of
      content. Alacra’s team of information professionals selects, categorizes and
      indexes more than 45,000 sites on the Web containing the most reliable and
      comprehensive business information. Simultaneously, users can search more than
      100 premium commercial databases that contain financial information, economic
      data, business news, and investment and market research. Alacra provides
      information in the required format, gleaned from such prestigious content
      partners as Thomson FinancialTM, Barra, The Economist Intelligence Unit, Factiva,
      Mergerstat® and many others.





The
      information services industry is intensely competitive and we expect it to
      remain so. Although Alacra has been in operation since 1996 they are
      significantly smaller in terms of revenue than a large number of companies
      offering similar services. Companies such as ChoicePoint, Inc. (NYSE: CPS),
      LexisNexis Group, and Dow Jones Reuters Business Interactive, LLC report
      revenues that range anywhere from $100 million to several billion dollars,
      as
      reported by Hoovers, Inc. As such, Alacra’s competitors can offer a far greater
      range of products and services, greater financial and marketing resources,
      larger customer bases, greater name recognition, greater global reach and more
      established relationships with potential customers than Alacra has. These larger
      and better capitalized competitors may be better able to respond to changes
      in
      the financial services industry, to compete for skilled professionals, to
      finance investment and acquisition opportunities, to fund internal growth and
      to
      compete for market share generally.





*Digicorp*





At
      December 31, 2006, the Company held 96,269 shares of Digicorp common stock
      valued at $10,970. Prior to December 31, 2005, the Company accounted for its
      investment in Digicorp under the equity method of accounting and the Company’s
      proportionate share of income or losses from this investment was recorded in
      equity in income (loss) of investee. However, on December 29, 2005, Digicorp
      completed the purchase of all of the issued and outstanding shares of capital
      stock of Rebel Crew Films, Inc. ( ***"Rebel
      Crew"*** ),
      a
      California corporation. Digicorp issued approximately 21 million shares of
      its
      common stock to the shareholders of Rebel Crew which decreased our ownership
      interest from approximately 20% at September 30, 2005, to approximately 7.5%
      at
      December 29, 2005, and accordingly, the Company began accounting for the
      investment under the cost method. During 2006, the Company sold 2,654,092 shares
      of Digicorp common stock, of which 2,421,292 shares were sold to the Chief
      Executive Officer of Digicorp. The Company received cash of $121,065 and a
      4
      year non-interest bearing promissory note in the principal amount of $121,064,
      or total gross proceeds of $242,129. The Company recognized a loss of $33,753
      on
      this transaction. Digicorp's common stock is traded on the OTC Bulletin Board,
      which reported a closing price, at December 31, 2006, of $0.18 per share. The
      Company has valued its holdings in Digicorp at an approximate 37% discount
      to
      the $0.18 closing price, due to the limited average number of shares traded
      on
      the OTC Bulletin Board.





We
      are
      required to purchase 224,000 shares of Digicorp common stock from certain
      selling shareholders of Digicorp at a price of $0.145 per share at such time
      that Digicorp registers the resale of the shares with the SEC. During December
      2005 we extended loans of approximately $32,500 to these selling shareholders
      from our working capital. Such loans represented the amount of the remaining
      obligation to purchase 224,000 shares of Digicorp common stock and are secured
      by the 224,000 shares of Digicorp common stock presently held by such selling
      shareholders. On July 20, 2005, William B. Horne, our Chief Executive Officer,
      was appointed as a director and as Chief Financial Officer of Digicorp. On
      September 30, 2005, Mr. Horne was appointed as the interim Chief Executive
      Officer. On December 29, 2005, William B. Horne resigned as Chief Executive
      Officer and on April 20, 2007 he resigned as the Chief Financial
      Officer.




44




*IPEX,
      Inc.*





At
      December 31, 2006, we held 950,000 shares of common stock and warrants to
      purchase 787,500 shares of common stock at $1.00 per share of IPEX, Inc.
      (“ ***IPEX”*** )
      in
      long-term investments. The Company acquired 450,000 shares of the common stock
      and all of the warrants directly from IPEX in March 2005 and received 500,000
      shares of the common stock for consulting services. On December 15, 2006, IPEX’s
      Chief Executive Officer, Principal Financial and Accounting Officer, and
      director, resigned citing that IPEX no longer had any operations, and was no
      longer conducting business as the reason for his resignation. As IPEX is no
      longer conducting business operations, the carrying value of this investment
      has
      been written down to zero and a related loss of $1,106,000 has been recognized
      during 2006. Additionally, during the year ended December 31, 2006, we sold
      95,000 shares of IPEX common stock that we held in marketable securities. We
      sold these 95,000 shares for $8,440, resulting in a realized loss of
      $339,000.





*Investments
      in Real Estate*





At
      December 31, 2006, we had several real estate investments, valued at $431,000,
      which represents 3.9% of our total assets. In the past we held our real estate
      investments in Ault Glazer Bodnar Capital Properties, LLC ***(“AGB
      Properties”)*** .
      AGB
      Properties, which was closed during 2006, was a Delaware limited liability
      company and a wholly owned subsidiary. The real estate investments, consisting
      of approximately 8.5 acres of undeveloped land in Heber Springs, Arkansas and
      0.61 acres of undeveloped land in Springfield, Tennessee, are currently being
      marketed for sale. During the year ended December 31, 2006, we received payment
      on loans that were secured by real estate of $50,000. During the year ended
      December 31, 2005, we liquidated properties with a cost basis of $113,000,
      which
      resulted in a gain of $28,000. We expect that any future gain or loss recognized
      on the liquidation of some or all of our real estate holdings would be
      insignificant primarily due to the short period of time that the properties
      were
      owned combined with the absence of any significant changes in property values
      in
      the real estate markets where the real estate holdings are located.


*Tuxis
      Corporation*




At
      December 31, 2005, we held 108,200 shares of common stock of Tuxis Corporation
      ( ***“Tuxis”*** )
      valued
      at $746,580. Tuxis’ common stock is traded on the American Stock Exchange, which
      reported a closing price, at December 31, 2005, of $7.50. During the year ended
      December 31, 2006, the Company sold its entire holdings in Tuxis for $733,000,
      resulting in a realized loss of $144,000.





**Results
      of Operations**





We
      account for our operations under accounting principles generally accepted in
      the
      United States. The principal measure of our financial performance is captioned
      “Net loss attributable to common shareholders,” which is comprised of the
      following:




·
            "Revenues,"
                which is the amount we receive from sales of our
                products;





·
            “Operating
                expenses,” which are the related costs and expenses of operating our
                business;





·
            “Interest,
                dividend income and other, net,” which is the amount we receive from
                interest and dividends from our short term investments and money
                market
                accounts, and our proportionate share of income or losses from investments
                accounted for under the equity method of
                accounting;





·
            “Realized
                gains (losses) on investments, net,” which is the difference between the
                proceeds received from dispositions of investments and their stated
                cost;
                and





·
            “Unrealized
                gains (losses) on marketable securities, net,” which is the net change in
                the fair value of our marketable securities, net of any (decrease)
                increase in deferred income taxes that would become payable if the
                unrealized appreciation were realized through the sale or other
                disposition of the investment
                portfolio.





45


“Realized
      gains (losses) on investments, net” and “Unrealized gains (losses) on marketable
      securities, net” are directly related. When a security is sold to realize a
      gain, the net unrealized gain decreases and the net realized gain increases.
      When a security is sold to realize a loss, the net unrealized gain increases
      and
      the net realized gain decreases.





We
      generally earn interest income from loans, preferred stock, corporate bonds
      and
      other fixed income securities. The amount of interest income varies based upon
      the average balance of our fixed income portfolio and the average yield on
      this
      portfolio.





**Revenues**





We
      recognized revenues of $245,000, $562,000, and nil for the years ended December
      31, 2006, 2005 and 2004, respectively. Of these revenues, only $141,000 related
      to sales of our Safety-Sponge TM System.
      As expected, these initial revenues did not have a significant impact on our
      results of operations, however, we expect revenues will increase significantly
      during 2007 and the revenues from our Safety-Sponge TM System
      will in all probability become a continual source of funds to cover a portion
      of
      our operating costs.




Of
      the
      revenue earned during the years ended December 31, 2006 and 2005, 104,000 and
      $562,000, respectively, was the result of a consulting agreement, consented
      to
      by IPEX, whereby the majority shareholder of IPEX and former President, former
      Chief Executive Officer and former director of IPEX ( ***“Majority
      Shareholder”*** ),
      retained us to serve as a business consultant to IPEX. In consideration for
      the
      services, during December 2005, the Majority Shareholder personally transferred
      us 500,000 shares of common stock of IPEX as a non-refundable consulting fee.
      Services stipulated under the terms of the consulting agreement included, but
      were not limited to,: (i) a review of the business and operations (ii) advice
      in
      connection with IPEX’s purchase of certain intellectual property assets; (iii)
      the hiring by IPEX of a new Chief Executive Officer, Chief Operating Officer
      and
      a Vice President of Research & Development; and (iv) IPEX’s appointment of
      two new members to its Board of Directors. This consulting agreement reflected
      our prior focus in the financial services and real estate industries. Since
      we
      now only focus our efforts on the patient safety markets, we do not expect
      to
      revenue from these types of consulting agreements to be a source of recurring
      revenue.





On
      November 14, 2006, SurgiCount entered into a Supply Agreement with Cardinal
      Health 200, Inc., a Delaware corporation ( ***"Cardinal"*** ).
      Pursuant to the agreement, Cardinal shall act as the exclusive distributor
      of
      SurgiCount's products in the United States, with the exception that SurgiCount
      may sell its products to one other hospital supply company, named in the
      agreement, solely for its sale/distribution to its hospital customers. The
      term
      of the agreement is 36 months, unless earlier terminated as set forth therein.
      Otherwise, the agreement automatically renews for successive 12 month periods.
      We cannot reasonably predict or estimate the financial impact of the agreement
      with Cardinal but believes it will have a material impact on our results of
      operations.





**Expenses**





Operating
      expenses were $7,850,000, 8,385,000, and $2,924,000 for the years ended December
      31, 2006, December 31, 2005 and December 31, 2004, respectively.





*Year
      2006 compared to Year 2005*





The
      decrease in operating expenses of $535,000, for the year ended December 31,
      2006
      when compared to December 31, 2005, was primarily the result of salaries and
      employee benefits, which decreased by $460,000. Our Compensation Committee,
      currently comprised of two independent directors, determines and recommends
      to
      our Board the cash and stock based compensation to be paid to our executive
      officers and also reviews the amount of salary and bonus for each of our other
      officers and employees. The most significant component of employee compensation
      is stock based compensation expense.




46





For
      the
      year ended December 31, 2006, we recorded $1,118,000 related to grants of
      nonqualified stock options, of which $114,000 was attributed to grants of
      nonqualified stock options to Darrell W. Grimsley, the Chief Executive Officer
      of our discontinued car wash segment. For comparison purposes, stock based
      compensation expense attributed to the discontinued car was segment will not
      be
      considered in an analysis of stock based compensation annual variances since
      expenses attributed to the discontinued operations are included as a separate
      line in our Consolidated Statements of Operations and Comprehensive Loss -
      Loss
      from discontinued car was segment. During the year ended December 31, 2006,
      we
      also recorded $1,105,000 related to restricted stock awards to our employees
      and
      non-employee directors. During the year ended December 31, 2005, we recorded
      $1,597,000 relating to grants of nonqualified stock options and $1,520,000
      related to restricted stock awards to our employees and non-employee directors.
      The issuance of stock options and restricted stock awards to our employees
      and
      non-employee directors, excluding the value of the grant to Mr. Grimsley,
      resulted in a decrease in stock based compensation expense of $1,008,000 for
      the
      year ended December 31, 2006. Therefore, excluding stock based compensation,
      salaries and employee benefits increased by $548,000.





The
      increase in employee compensation of $548,000 is attributed to a combination
      of
      factors. During the six months ended June 30, 2005 we did not incur any salary
      expense on four highly compensated employees. During the quarter ended September
      30, 2005 we entered into employment agreements with three of these highly
      compensated employees, which reflected annualized salaries of $450,000 and
      during the quarter ended June 30, 2006 we entered into the fourth employment
      contract with an annualized salary of $300,000. Excluding benefits, the absence
      of salary expense on these four highly compensated employees for either all
      or
      part of 2005 resulted in an increase of $436,000. In January 2006 we also
      entered into a non-recurring severance package of $180,000 that was paid to
      Milton “Todd” Ault III, our former Chairman and Chief Executive Officer. This
      severance package represented a $30,000 increase over Mr. Ault’s 2005 salary. In
      July 2006, subsequent to the payment of Mr. Ault’s severance package, Mr. Ault
      was re-appointed as our Chief Executive Officer at a nominal
      salary.





At
      December 31, 2006, four of our executives were covered under employment
      agreements. Our Chief Executive Officer, William B. Horne, is covered under
      a
      two year employment agreement with annual base compensation of $150,000; our
      Chief Executive Officer of SurgiCount Medical, Inc., Bill Adams is covered
      under
      a three year employment agreement with annual base compensation of $300,000;
      our
      President of Sales and Marketing of SurgiCount Medical, Inc., Richard Bertran,
      is covered under a three year employment agreement with annual base compensation
      of $200,000 and; our Chief Operating Officer of SurgiCount Medical, Inc., James
      Schafer, is covered under a two year employment agreement with annual base
      compensation of $100,000. As discussed above, the addition of these employment
      contracts effectively increased employee compensation during the year ended
      December 31, 2006 by $436,000. The remaining increase in employee compensation
      is attributed to an overall increase in benefits associated with the individuals
      that are covered under employment contracts. None of our other executives our
      currently covered under an employment agreement, therefore, we are under no
      financial obligation, other than monthly salaries, for our other executive
      officers. Currently, monthly gross salaries for all of our employees are
      $135,000. We believe, as with all our operating expenses, that our existing
      cash
      resources, together with proceeds from investments, anticipated financings
      and
      expected revenues from our operations, should be adequate to fund our salary
      obligations.





The
      second largest component of our operating expenses is professional fees, which
      decreased by $362,000 during the year ended December 31, 2006 compared to the
      amount reported during the previous year. This decrease is primarily comprised
      of decreases in stock based compensation to outside consultants of $489,000
      offset by an overall increase in cash payments to consultants who are utilized
      to generate awareness and train health care professionals in the use of our
      Safety-Sponge TM System.
      As in employee compensation, stock based compensation expense is the most
      significant component of professional fees. During the year ended December
      31,
      2006 and 2005, professional fees included stock based compensation related
      to
      the issuances of restricted stock and warrants of $898,000 and $1,388,000,
      respectively. The decrease in stock based compensation of $490,000 paid to
      our
      outside consultants is the primary component of our decrease in professional
      fees. This $490,000 decrease was primarily caused from warrant issuances during
      the year ended December 31, 2006 and 2005, of $593,000 and $918,000,
      respectively, a decrease of $325,000. A significant amount of the warrants
      issued during the year ended December 31, 2006, relate to a consulting agreement
      that we entered into in February 2006 with Analog Ventures, LLC ( ***“Analog
      Ventures”*** )
      whereby
      Analog Ventures agreed to consult with us on matters relating primarily to
      the
      divestiture of our non-core assets and assist us in our efforts to focus our
      business exclusively on the patient safety medical products field. As an
      incentive for entering into the agreement, we agreed to issue Analog Ventures
      a
      warrant to purchase 175,000 shares of our common stock at an exercise price
      of
      $3.95, exercisable for 3 years. We recognized an expense of $405,000 related
      to
      these warrants. In addition to the stock based compensation from the Analog
      Ventures warrant, we issued 75,380 warrants to purchase shares of our common
      stock at prices ranging from $1.25 to $2.00 per share to our placement agent,
      Ault Glazer & Co., LLC, (the ***“Placement
      Agent”*** ).
      These
      warrants, which were valued at $79,000, were issued to the Placement Agent
      for
      their successful efforts in assisting us with raising debt and equity financing.




47





During
      the year ended December 31, 2005 the primary amount of the warrants issued
      related to a consulting agreement with Health West Marketing Incorporated
      ( ***“Health
      West”*** )
      that we
      entered into in April 2005. As an incentive for entering into the agreement,
      we
      agreed to issue Health West a callable warrant to purchase 150,000 shares of
      our
      common stock at an exercise price of $5.95, exercisable for 5 years. We
      recognized an expense of $528,000 related to these warrants. In addition to
      the
      stock based compensation that we recognized as a result of our agreement with
      Health West, we issued additional warrants during the year ended December 30,
      2005, valued at $361,000, to purchase shares of common stock to two consultants
      performing investor relations services.





In
      the
      past we have also issued shares of our common stock to consultants for payment
      of professional services. Pursuant to the April 2005 consulting agreement with
      Health West, we have recognized expenses of $250,000 related to the issuance
      26,261 shares and future issuance of 15,756 shares of our common stock to Health
      West. We recognized $94,000 in 2006 as a result of Health West’s assistance in
      developing a regional distribution network to integrate the
      Safety-Sponge TM System
      into the existing acute care supply chain. The remaining $156,000 was recognized
      in 2005, a percentage upon the execution of our consulting agreement with Health
      West and the remaining amount upon our entering into a comprehensive
      manufacturing agreement with A Plus Manufacturing, Inc. The $62,000 decrease
      in
      expense from the issuance and future issuances of common stock to Health West
      combined with the $325,000 decrease in expense from warrants is the primary
      cause of the decrease in professional fees.





All
      of
      our stock based compensation issued to employees, non-employee directors and
      consultants were expensed in accordance with SFAS 123(R). We valued the
      nonqualified stock options and warrants using the Black-Scholes valuation model
      assuming expected dividend yield, risk-free interest rate, expected life and
      volatility of 0%, 3.00% to 4.50%, three to five years and 63% to 102%,
      respectively. The restricted stock awards were valued at the closing price
      on
      the date the restricted shares were granted.





The
      increase in cost of sales of $159,000 reflects a shift in our revenue mix from
      revenue generated primarily through consulting services which do not have any
      costs of sales to that of sales of our Safety-Sponge TM System.





The
      increase in amortization expense, which reflected an increase of $54,000, of
      our
      patents was caused by the full quarter of amortization during the three months
      ended March 31, 2006 as opposed to a partial quarter during the three months
      ended March 31, 2005. The entire capitalized costs of SurgiCount’s patents,
      valued at $4,685,000, are being amortized over their approximate useful life
      of
      14.4 years. Since the SurgiCount patents were not acquired until the end of
      February 2005, amortization for the three months ended March 31, 2005 was only
      $27,000 as opposed to $81,000 during the three months ended March 31,
      2006.





General
      and administrative expenses experienced an increase of $60,000 during the year
      ended December 31, 2006 over the prior year. Travel related expenses are a
      large
      component of general and administrative expenses and represented an increase
      of
      $187,000. This increase was attributed to expenses incurred in marketing our
      Safety-Sponge TM System
      to
      hospitals throughout the United States, attendance at trade shows and
      conventions to promote the Company’s Safety-Sponge TM System,
      and travel abroad to inspect the manufacturing facilities for our
      Safety-Sponge TM System.
      The offsetting decrease in general and administrative expenses is a combination
      of a several types of expenses, none of which are significant individually.




48





*Year
      2005 compared to Year 2004*





The
      increase in operating expenses for the year ended December 31, 2005 when
      compared to December 31, 2004, was primarily the result of stock based
      compensation expenses, and to a lesser extent printing, stock exchange and
      transfer agent fees. Until October 22, 2004, the date our shareholders approved
      certain proposals relating to our restructuring plan to change from a business
      development company to an operating company, our principal activities involved
      the management of existing investments. As such, compensation expense during
      2004 was primarily the salaries of our Chief Executive Officer and to a lesser
      extent the Chief Financial Officer. Since the restructuring plan, we have
      aggressively focused on expanding into the health care and medical products
      field, particularly the patient safety markets. A significant component of
      this
      strategy has resulted in the acquisition of assets. We have hired personnel
      in
      order to meet the increased needs of our current business focus which has
      resulted in increases in almost every expense category.





Printing,
      Amex stock exchange, and transfer agent fees for the year ended December 31,
      2005 increased by $50,000, $62,000 and $55,000, respectively, over the year
      ended December 31, 2005. The increase is primarily attributable to work
      performed on our proxy statements, registration statements, annual report and
      related annual meeting of shareholders. All of these reports required a
      significant amount of additional time to prepare due to our change from a
      business development company to an operating company. Printing fees increased
      as
      a direct result of the greater number of printed documents, including business
      cards and stationary, as well as revisions to those documents. Amex stock
      exchange fees primarily increased as a result of a non-recurring fee associated
      with our 3 for 1 stock split.





Printing,
      Amex stock exchange, and transfer agent fees are a component of the $835,000
      increase reflected in general and administrative expenses for the year ended
      December 31, 2005. An increase in travel related expenses of $240,000, sample
      product of $62,000, and a research grant to Brigham and Women’s Hospital of
      $108,000, also contributed to the overall increase in general and administrative
      expenses. Travel related expenses increased as a result of expenses incurred
      in
      identifying and reviewing investment opportunities and attendance at trade
      shows
      and conventions to promote our patient safety products. Travel related expenses
      also increased because of the need to visit prospective customers and
      demonstrate our Safety-Sponge TM System.
      These demonstrations created a need to order sample product for distribution
      at
      trade shows as well as to prospective customers.





On
      April
      26, 2005 we entered into a clinical trial agreement with Brigham and Women's
      Hospital, the teaching affiliate of Harvard Medical School, relating to our
      Safety-Sponge TM System.
      The clinical trial is the result of an on-going collaboration between Harvard
      and us to refine the Safety-Sponge TM System
      in
      a clinical optimization study. Under terms of the agreement, Brigham and Women's
      Hospital collected data on how the Safety-Sponge TM System
      saves time, reduces costs and increases patient safety in the operating room.
      The study also assists us to refine the system's technical processes in the
      operating room to provide clear guidance and instruction to hospitals, easily
      integrating the Safety-Sponge TM System
      into operating rooms. Brigham and Women's Hospital received a non-exclusive
      license to use the Safety-Sponge TM System,
      while we will own all technical innovations and other intellectual properties
      derived from the study. Unless the clinical trial agreement is terminated by
      either us or Brigham and Women’s Hospital, we will provide a research grant to
      Brigham and Women’s Hospital over the course of the clinical trial in the
      aggregate amount of $431,000 of which $108,000 was paid in 2005. We anticipate
      that the remaining amount of the research grant, of $323,000 will be paid during
      the year ended December 31, 2007. The remaining increase in general and
      administrative expenses is a direct result of an overall increase in business
      activity associated with being an operating company with increased personnel.
      These expenses, which are not significant individually, include but are not
      limited to office supplies, research material, postage, marketing and
      maintenance costs.





A
      majority of our operating expenses consist of employee compensation, which
      increased by $3,200,000. The most significant component of employee compensation
      is stock based compensation expense. For the year ended December 31, 2005,
      we
      recorded approximately $1,597,000 relating to grants of nonqualified stock
      options and $1,520,000 related to restricted stock awards to our employees
      and
      non-employee directors, all of which were expensed in accordance with SFAS
      123(R). During the year ended December 31, 2004, our total stock based
      compensation expense, which was caused from the issuance of 26,250 options
      to
      members of our Board of Directors, was $5,000. Thus, the increase in expenses
      related to the issuance of stock options and restricted stock awards to our
      employees and non-employee directors amounted to $3,112,000. The remaining
      increase in employee compensation of $171,000 is attributed to an increase
      in
      salaries and benefits of $662,000, attributed to the increased number of
      employees, offset by the lack of severance payments. At December 31, 2005,
      we
      had 13 full time employees as opposed to 7 full time employees at December
      31,
      2004. Further, of our full time employees at December 31, 2004, 3 were hired
      during the three months ended December 31, 2004. Included in compensation
      expense for the year ended December 31, 2004, was a non-recurring severance
      package paid to Stephen L. Brown, our former Chairman and Chief Executive
      Officer, of $483,000.




49





The
      second largest component of our operating expenses is professional fees, which
      increased by $1,039,000. As in employee compensation, stock based compensation
      expense is the most significant component of professional fees for year ended
      December 31, 2005. We incurred approximately $918,000 relating to the issuance
      of warrants and $470,000 related to restricted stock awards to our consultants
      performing services for us.





As
      discussed in our analysis of *Year
      2006 compared to Year* 2005,
      a
      significant amount of stock based compensation expense during the year ended
      December 31, 2005 was attributed to the warrants issued to Health West, valued
      at $528,000, combined with warrant issued to two consultants performing investor
      relations services, valued at $361,000. Conversely, during the year ended
      December 31, 2004, we did not incur any charges related to warrant issuances
      to
      outside consultants.





During
      2005 we also issued 150,000 warrants, valued at $537,000, to Aegis Securities
      Corp., a nonaffiliated consultant, for providing advisory services in connection
      with the acquisition of SurgiCount Medical, Inc. The services provided by Aegis
      Securities Corp. included an evaluation of and oversight over completion of
      the
      transaction. The value of the warrants, along with the purchase price and direct
      costs incurred as a result of the transaction, were capitalized. The entire
      capitalized costs, valued at $4,685,000, have been allocated to SurgiCount’s
      patents, with an approximate useful life of 14.4 years. Amortization expense
      related to the patents, for the year ended December 31, 2005, was approximately
      $270,000 as opposed to no expense during the year ended December 31,
      2004.





During
      the years ended December 31, 2006, 2005 and 2004, all of our stock based
      compensation issued to employees, non-employee directors and consultants were
      expensed in accordance with SFAS 123(R). We valued the nonqualified stock
      options and warrants using the Black-Scholes valuation model assuming expected
      dividend yield, risk-free interest rate, expected life and volatility of 0%,
      3.00% to 4.50%, three to five years and 63% to 102%, respectively. The
      restricted stock awards were valued at the closing price on the date the
      restricted shares were granted.





**Interest,
      dividend income and other, net**





We
      had
      interest income of $2,000, $42,000 and $11,000 for the years ended December
      31,
      2006, 2005, and 2004, respectively.





The
      decrease in interest income for the year ended December 31, 2006 when compared
      to December 31, 2005 was primarily the result of a decreased amount of fixed
      income investments held throughout the period, primarily during the first
      quarter of 2005. At March 31, 2005, we held in marketable securities
      approximately $2.5 million in U.S. Treasuries as opposed to no investments
      in
      U.S. Treasuries during the year ended December 31, 2006. Interest income
      recognized during the year ended December 31, 2004 was generated primarily
      from
      during December 2004 from the proceeds of our equity financing in which we
      received net proceeds of $3,925,000. Based upon our current cash position and
      future cash requirements we only expect to generate an immaterial amount of
      interest income during the current year.




50





**Interest
      expense**





We
      had
      interest expense of $3,156,000, $135,000 and $32,000 for the years ended
      December 31, 2006, 2005 and 2004, respectively.





The
      increase in interest expense for the year ended December 31, 2006 when compared
      to the prior years is primarily attributable to the non-cash interest charges
      incurred as a result of the debt discount associated with our short-term debt
      financings. During the year ended December 31, 2006 we recorded $2,983,000
      in
      non-cash interest charges of which $136,000 related to loans at our discontinued
      car wash segment. Thus, non-cash interest charges, excluding those of our
      discontinued car wash segment, resulted in an increase of $2,847,000 and
      represented the primary cause of the increase in interest expense. These charges
      resulted from the issuance of debt that either had conversion prices on the
      date
      of issuance that was below the fair market value of the underlying common stock
      or required the issuance of warrants to purchase shares of our common stock,
      which required us to record an expense based on the estimated fair value of
      the
      warrant.





**Realized
      gains (losses) on investments, net**





During
      the year ended December 31, 2006, we realized net losses of $1,542,000 which
      primarily related to our investment in IPEX. During 2006, we sold 95,000 shares
      of IPEX common stock for $8,000 and, because IPEX is no longer conducting
      business operations, we wrote down the carrying value of 950,000 shares of
      IPEX
      common stock. Our investment in IPEX had a cost basis of
      $1,458,000.





During
      the years ended December 31, 2005, we realized net gains of $2,014,000 primarily
      from our stock appreciation rights in our holding in Excelsior for
      $1,747,000.





During
      the year ended December 31, 2004, we realized net gains of $1,591,000. We
      realized a gain of $1,448,000 from the sale of 908,804 shares and warrants
      to
      purchase 87,111 shares of Excelsior common stock. Additionally, we realized
      a
      net gain of $143,000 from the sale of marketable securities.





**Unrealized
      gains (losses) on marketable securities, net**





Unrealized
      appreciation of investments increased by $17,000 during the year ended December
      31, 2006. Of this increase, $16,000 related to the sale of 108,200 shares of
      Tuxis Corporation and 95,000 shares of IPEX common stock. At December 31, 2005,
      both of these investments were classified as trading securities and while Tuxis
      Corporation had unrealized depreciation of $134,000 IPEX had unrealized
      appreciation of $118,000, which resulted in net unrealized depreciation of
      $16,000. When we exit an investment and realize a loss, we make an accounting
      entry to reverse any unrealized depreciation we had previously recorded to
      reflect the depreciated value of the investment.





Unrealized
      appreciation of investments increased by $32,000 during the year ended December
      31, 2005, due to the price appreciation of our marketable
      securities.





Unrealized
      appreciation of investments decreased by $1,055,000 during the year ended
      December 31, 2004, primarily due to the sale of 908,804 shares and warrants
      to
      purchase 87,111 shares of Excelsior common stock for a realized gain. When
      we
      exit an investment and realize a gain, we make an accounting entry to reverse
      any unrealized appreciation we had previously recorded to reflect the
      appreciated value of the investment.





**Loss
      from discontinued car was segment**





The
      loss
      from our discontinued car was segment increased by $1,585,000 during the year
      ended December 31, 2006 from a loss of $62,000 during the year ended December
      31, 2005, its first year of operations. In response to the financial constraints
      stemming from our unsuccessful efforts to raise the necessary capital to
      continue the planned build-out on the additional car wash facilities, coupled
      with our emphasis on the patient
      safety markets, we
      evaluated alternative methods to divest the car wash services segment.
      Recognizing that revenues and cash flows would be lower than expected from
      the
      car wash services segment, we 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. As a result of our goodwill impairment
      analyses, we recorded
      goodwill impairment charges of $971,000 and nil during the year ended December
      31, 2006 and 2005, respectively. This
      goodwill impairment related to goodwill that resulted from the Company’s
      acquisition of ASG.  The fair value of our reporting units were estimated
      using the expected present value of future cash flows and the valuation employed
      a combination of present value techniques to measure fair value and considered
      market factors .




51




The
      remaining increase in loss of $614,000 is primarily attributed to interest
      expense at the discontinued car wash segment of $458,000. The increase in
      interest expense was a combination of both non-cash interest charges of $136,000
      incurred as a result of the debt discount associated with our short-term debt
      financings and interest expense of $322,000 attributable to the overall increase
      in borrowings that occurred during the year ended December 31,
      2006.




**Accumulated
      other comprehensive income**





Unrealized
      gains (losses) on our investments designated as available-for-sale are recorded
      in accumulated other comprehensive income. At December 31, 2005, we classified
      our restricted holdings in Digicorp and IPEX as available-for-sale. During
      the
      year ended December 31, 2006, we had disposed of or written-off these
      investments. At December 31, 2005, the unrealized gains (losses) on our
      restricted holdings in IPEX and Digicorp amounted to ($328,000) and $2,703,000,
      respectively. The cumulative decrease in net unrealized gains amounts to
      $2,375,000. We did not hold any investments classified as available-for-sale
      at
      December 31, 2004.





**Taxes**





We
      are
      taxed subject to federal income tax on a portion of our taxable income. At
      December 31, 2006, we had a net operating loss carryforward of approximately
      $20.4 million to offset future taxable income for federal income tax purposes.
      The utilization of the loss carryforward to reduce any future income taxes
      will
      depend on our ability to generate sufficient taxable income prior to the
      expiration of the net operating loss carryforwards. The carryforward expires
      beginning in 2011.





A
      change
      in the ownership of a majority of the fair market value of our common stock
      can
      delay or limit the utilization of existing net operating loss carryforwards
      pursuant to Internal Revenue Code Section 382. We believe that such a change
      occurred during the year ended December 31, 2004. Based upon an analysis of
      purchase transactions of our equity securities during 2004, we believe that
      our
      net operating loss carryforward utilization is limited to approximately $755,000
      per year.




52


**Contractual
      Obligations**





The
      following table sets forth information relating to our contractual obligations
      as of December 31, 2006:




**Contractual
                obligations**
            
            **Payments
                Due by Period****Less
                than****Total**
            
            **1 year**
            
            **1-3 years**
            
            **3-5 years**Operating
                lease obligations
            
            $
            63,996
            
            $
            63,996
            
            $
            —
            
            $
            —Notes
                Payable to Steven J. Caspi
            
            
            2,495,281
            
            
            1,000,000
            
            
            1,495,281
            
            
            —Note
                Payable to Winstar
            
            
            450,000
            
            
            450,000
            
            
            —
            
            
            —Notes
                Payable to Ault Glazer Capital Partners, LLC
            
            
            2,575,528
            
            
            1,080,528
            
            
            —
            
            
            1,495,000Notes
                Payable to Herb Langsam
            
            
            600,000
            
            
            600,000
            
            
            —
            
            
            —Note
                Payable to Charles Kalina III
            
            
            400,000
            
            
            —
            
            
            400,000
            
            
            —Other
                Notes Payable
            
            
            598,232
            
            
            426,934
            
            
            171,298
            
            
            —Employment
                Agreements
            
            
            1,745,833
            
            
            783,333
            
            
            962,500
            
            
            —Clinical
                Trial Research Grant
            
            
            322,885
            
            
            322,885
            
            
            —
            
            
            —**Total**
            
            **$**
            **9,251,755**
            
            **$**
            **4,727,676**
            
            **$**
            **3,029,079**
            
            **$**
            **1,495,000**




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





Our
      business activities contain elements of market risk. We consider a principal
      type of market risk to be valuation risk. Investments and other assets are
      valued at fair value as determined in good faith by our Board of
      Directors.





We
      have
      invested a substantial portion of our assets in private development stage or
      start-up companies. These private businesses tend to be thinly capitalized,
      unproven, small companies that lack management depth and have not attained
      profitability or have no history of operations. Because of the speculative
      nature and the lack of public market for these investments, there is
      significantly greater risk of loss than is the case with traditional investment
      securities. We expect that some of our venture capital investments will be
      a
      complete loss or will be unprofitable and that some will appear to be likely
      to
      become successful but never realize their potential.





Because
      there is no public market for the equity interests of some of the small
      companies in which we have invested, the valuation of such the equity interests
      is subject to the estimate of our Board of Directors. In making its
      determination, the Board may consider valuation information provided by an
      independent third party or the portfolio company itself. In the absence of
      a
      readily ascertainable market value, the estimated value of our equity
      investments may differ significantly from the values that would be placed on
      them if a liquid market for the equity interests existed. Any changes in
      valuation are recorded in our consolidated statements of operations as either
      "Unrealized losses on marketable securities, net” or “Other comprehensive
      income."




53




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


**PATIENT
      SAFETY TECHNOLOGIES, INC.**


**INDEX
      TO FINANCIAL STATEMENTS**





Report
                of Squar, Milner, Peterson, Miranda & Williamson, LLP
            
            55Report
                of Rothstein, Kass & Company, P.C.
            
            56Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            
            57Consolidated
                Statements of Operations and Comprehensive loss for the years ended
                December 31, 2006, 2005 and 2004
            
            58Consolidated
                Statements of Cash Flows for the years ended December 31, 2006, 2005
                and
                2004
            
            59
                - 60Consolidated
                Statements of Stockholders' Equity for the years ended December 31,
                2006,
                2005 and 2004
            
            61Notes
                to Financial Statements
            
            62
                - 90





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




54




***REPORTOF
          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, 2006, and the related statements of operations and
      comprehensive loss, stockholders' equity (deficit), and cash flows for the
      year
      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, 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.





As
      discussed in Note 2 to the financial statements, the Company changed its method
      of accounting for stock-based compensation, effective January 1, 2005, as a
      result of the adoption of Statement of Financial Accounting Standards No. 123R, *Share-Based
      Payments* .





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, 2006 and has a significant accumulated deficit and a significant
      working capital deficit at December 31, 2006. 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,
                  LLPSan
                Diego, California
                May
                  16, 2007




55




**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 2004, and
      the related consolidated statements of operations and comprehensive loss,
      stockholders’ equity, and cash flows for each of the years 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 2004, and the results of their operations
      and
      their cash flows for each of the years 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




56




**PATIENT
                  SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                  Balance Sheets**
  **December
                  31,**
              
              **December
                  31,****2006**
              
              **2005****ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              3,775
              
              $
              79,373Accounts
                  receivable
              
              
              65,933
              
              
              —Receivables
                  from investments
              
              
              —
              
              
              934,031Marketable
                  securities
              
              
              —
              
              
              923,800Inventories
              
              
              42,825
              
              
              77,481Prepaid
                  expenses
              
              
              78,834
              
              
              112,734Other
                  current assets
              
              
              13,125
              
              
              113,594**TOTAL
                  CURRENT ASSETS**
              
              
              204,492
              
              
              2,241,013Restricted
                  certificate of deposit
              
              
              87,500
              
              
              87,500Notes
                  receivable
              
              
              153,668
              
              
              —Property
                  and equipment, net
              
              
              328,202
              
              
              239,417Assets
                  held for sale, net
              
              
              3,189,674
              
              
              1,727,686Goodwill
              
              
              1,687,527
              
              
              1,687,527Patents,
                  net
              
              
              4,088,850
              
              
              4,413,791Long-term
                  investments
              
              
              1,441,533
              
              
              5,636,931**TOTAL
                  ASSETS**
              
              $
              11,181,446
              
              $
              16,033,865**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Notes
                  payable, current portion
              
              $
              3,517,149
              
              $
              1,796,554Accounts
                  payable
              
              
              1,295,849
              
              
              785,507Accrued
                  liabilities
              
              
              824,466
              
              
              569,116Due
                  to broker
              
              
              —
              
              
              801,863**TOTAL
                  CURRENT LIABILITIES**
              
              
              5,637,464
              
              
              3,953,040Notes
                  payable, less current portion
              
              
              2,527,562
              
              
              1,116,838Deferred
                  tax liabilities
              
              
              1,473,066
              
              
              1,590,045**MINORITY
                  INTEREST**
              
              
              —
              
              
              252,992**COMMITMENTS
                  AND CONTINGENCIES****STOCKHOLDERS'
                  EQUITY**Convertible
                  preferred stock, $1.00 par value, cumulative 7% dividend:1,000,000
                  shares authorized; 10,950 issued and outstandingat
                  December 31, 2006 and December 31, 2005(Liquidation
                  preference $1,190,813)
              
              
              10,950
              
              
              10,950Common
                  stock, $0.33 par value: 25,000,000 shares authorized;7,489,026
                  shares issued and 6,874,889 shares outstanding as of December 31,
                  2006;6,995,276
                  shares issued and 5,672,445 shares outstanding at December 31,
                  2005
              
              
              2,471,379
              
              
              2,308,441Additional
                  paid-in capital
              
              
              29,654,341
              
              
              22,600,165Accumulated
                  other comprehensive income
              
              
              —
              
              
              2,374,858Accumulated
                  deficit
              
              
              (29,483,910
              )
              
              (15,784,108
              )2,652,760
              
              
              11,510,306Less:
                  614,137 and 1,322,831 shares of treasury stock,at
                  cost, at December 31, 2006 and December 31, 2005,
                  respectively
              
              
              (1,109,406
              )
              
              (2,389,356
              )**TOTAL
                  STOCKHOLDERS' EQUITY**
              
              
              1,543,354
              
              
              9,120,950**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              11,181,446
              
              $
              16,033,865
  The
                  accompanying notes are an integral part of these consolidated financial
                  statements.
  57
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
          Statements of Operations and Comprehensive Loss**
  **For
                    The Year Ended December 31,****2006**
                
                **2005**
                
                **2004****REVENUES**
                
                $
                244,529
                
                $
                562,374
                
                $
                —**OPERATING
                    EXPENSES**Cost
                    of sales
                
                
                158,902
                
                
                —
                
                
                —Salaries
                    and employee benefits
                
                
                3,722,822
                
                
                4,182,466
                
                
                982,261Professional
                    fees
                
                
                2,161,044
                
                
                2,523,035
                
                
                1,484,143Rent
                
                
                131,129
                
                
                88,368
                
                
                76,276Insurance
                
                
                87,674
                
                
                113,921
                
                
                64,083Taxes
                    other than income taxes
                
                
                101,536
                
                
                104,238
                
                
                50,697Amortization
                    of patents
                
                
                324,942
                
                
                270,785
                
                
                —General
                    and administrative
                
                
                1,162,041
                
                
                1,101,712
                
                
                266,523**Total
                    operating expenses**
                
                
                7,850,090
                
                
                8,384,525
                
                
                2,923,983**Operating
                    loss**
                
                
                (7,605,561
                )
                
                (7,822,151
                )
                
                (2,923,983
                )**OTHER
                    INCOME (EXPENSES)**Interest,
                    dividend income and other
                
                
                2,251
                
                
                42,476
                
                
                11,056Equity
                    in loss of investee
                
                
                —
                
                
                (74,660
                )
                
                —Realized
                    gain (loss) on investments, net
                
                
                (1,541,506
                )
                
                2,014,369
                
                
                1,591,156Gain
                    on debt extinguishment
                
                
                190,922
                
                
                —
                
                
                —Interest
                    expense
                
                
                (3,155,853
                )
                
                (135,414
                )
                
                (32,284
                )Unrealized
                    gain (loss) on marketable securities, net
                
                
                16,901
                
                
                32,335
                
                
                (1,054,702
                )**Loss
                    from continuing operations before income taxes**
                
                
                (12,092,846
                )
                
                (5,943,045
                )
                
                (2,408,757
                )**Income
                    tax benefit**
                
                
                116,979
                
                
                97,482
                
                
                —**Loss
                    from continuing operations**
                
                
                (11,975,867
                )
                
                (5,845,563
                )
                
                (2,408,757
                )**Loss
                    from discontinued operations**
                
                
                (1,647,285
                )
                
                (61,960
                )
                
                —**Net
                    loss**
                
                
                (13,623,152
                )
                
                (5,907,523
                )
                
                (2,408,757
                )**Preferred
                    dividends**
                
                
                (76,650
                )
                
                (75,700
                )
                
                (76,650
                )**Loss
                    available to common shareholders**
                
                $
                (13,699,802
                )
                $
                (5,983,223
                )
                $
                (2,485,407
                )**Basic
                    and diluted net loss per common share****Continuing
                    operations**
                
                $
                (1.89
                )
                $
                (1.10
                )
                $
                (0.75
                )**Discontinued
                    operations**
                
                $
                (0.26
                )
                $
                (0.01
                )
                $
                —**Net
                    loss**
                
                $
                (2.15
                )
                $
                (1.11
                )
                $
                (0.75
                )**Weighted
                    average common shares outstanding - basic and
                    diluted**
                
                
                6,362,195
                
                
                5,373,318
                
                
                3,300,973**Comprehensive
                    loss:****Net
                    loss**
                
                $
                (13,623,152
                )
                $
                (5,907,523
                )
                $
                (2,408,757
                )**Other
                    comprehensive (loss) gain, unrealized gain (loss) on available-for-sale
                    investments**
                
                
                (2,374,858
                )
                
                2,374,858
                
                
                —**Total
                    comprehensive loss**
                
                $
                (15,998,010
                )
                $
                (3,532,665
                )
                $
                (2,408,757
                )
  The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements.
  58
 **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
            Statements of Cash Flows**
 **For
                    The Year Ended December 31,****2006**
                
                **2005**
                
                **2004**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (13,623,152
                )
                $
                (5,907,523
                )
                $
                (2,408,757
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                
                
                136,056
                
                
                14,943
                
                
                863Amortization
                    of patents
                
                
                324,942
                
                
                270,785
                
                
                —Non-cash
                    interest
                
                
                2,983,417
                
                
                —
                
                
                —Goodwill
                    impairment
                
                
                971,036
                
                
                —
                
                
                —Realized
                    (gain) loss on investments, net
                
                
                1,541,506
                
                
                (2,014,369
                )
                
                (1,591,156
                )Gain
                    on debt extinguishment
                
                
                (190,922
                )
                
                —
                
                
                —Unrealized
                    gain (loss) on marketable securities
                
                
                (16,901
                )
                
                (32,335
                )
                
                1,054,702Stock-based
                    compensation to employees and directors
                
                
                2,403,173
                
                
                3,116,674
                
                
                5,094Stock-based
                    compensation to consultants
                
                
                898,294
                
                
                1,387,612
                
                
                —Stock
                    received for services
                
                
                —
                
                
                (666,249
                )
                
                —Loss
                    on investee
                
                
                —
                
                
                74,660
                
                
                —Income
                    tax benefit
                
                
                (116,979
                )
                
                (97,482
                )
                
                —Minority
                    interest
                
                
                —
                
                
                (47,008
                )
                
                —Changes
                    in operating assets and liabilities:Restricted
                    cash
                
                
                —
                
                
                (87,500
                )
                
                —Accounts
                    receivable
                
                
                (65,933
                )
                
                —
                
                
                —Receivables
                    from investments
                
                
                934,031
                
                
                (934,031
                )
                
                —Marketable
                    securities, net
                
                
                809,260
                
                
                2,439,665
                
                
                (232,379
                )Inventories
                
                
                34,656
                
                
                (77,481
                )
                
                —Prepaid
                    expenses
                
                
                33,900
                
                
                43,278
                
                
                —Other
                    current assets
                
                
                105,269
                
                
                (38,896
                )
                
                (201,392
                )Notes
                    receivable
                
                
                (32,603
                )Accounts
                    payable and accrued liabilities
                
                
                878,372
                
                
                494,918
                
                
                456,188Due
                    to broker
                
                
                (801,863
                )
                
                341,087
                
                
                460,776Net
                    cash used in operating activities
                
                
                (2,794,441
                )
                
                (1,719,252
                )
                
                (2,456,061
                )Cash
                    flows from investing activities:Purchase
                    of property and equipment
                
                
                (2,305,657
                )
                
                (829,537
                )
                
                —Purchase
                    of Surgicount
                
                
                —
                
                
                (432,398
                )
                
                —Proceeds
                    from sale of long-term investments
                
                
                289,409
                
                
                1,371,522
                
                
                —Purchases
                    of long-term investments
                
                
                —
                
                
                (903,173
                )
                
                (788,518
                )Net
                    cash used in investing activities
                
                
                (2,016,248
                )
                
                (793,586
                )
                
                (788,518
                )Cash
                    flows from financing activities:Proceeds
                    from issuance of common stock and warrants
                
                
                527,850
                
                
                250,000
                
                
                3,924,786Proceeds
                    from exercise of stock options
                
                
                —
                
                
                26,250
                
                
                39,375Cash
                    proceeds related to 16B filing
                
                
                —
                
                
                —
                
                
                2,471Purchases
                    of treasury stock
                
                
                —
                
                
                (36,931
                )
                
                —Payments
                    of preferred dividends
                
                
                —
                
                
                (19,163
                )
                
                (76,650
                )Proceeds
                    from notes payable
                
                
                7,549,683
                
                
                1,621,627
                
                
                —Payments
                    and decrease on notes payable
                
                
                (3,342,442
                )
                
                (95,976
                )
                
                (23,224
                )Net
                    cash provided by financing activities
                
                
                4,735,091
                
                
                1,745,807
                
                
                3,866,758(Decrease)
                    increase in cash
                
                
                (75,598
                )
                
                (767,031
                )
                
                622,179Cash
                    at beginning of period
                
                
                79,373
                
                
                846,404
                
                
                224,225Cash
                    at end of period
                
                $
                3,775
                
                $
                79,373
                
                $
                846,404
  The
                  accompanying notes are an integral part of these consolidated financial
                  statements.
  59
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
            Statements of Cash Flows (continued)**
  **For
                    The Year Ended December
                    31,****2006**
                
                **2005**
                
                **2004**Supplemental
                    disclosures of cash flow information:Cash
                    paid during the period for interest
                
                $
                216,779
                
                $
                61,593
                
                $
                2,452Supplemental
                    schedule of non cash investing and financing activities:Dividends
                    accrued
                
                $
                76,650
                
                $
                75,700
                
                $
                19,163Issuance
                    of common stock and warrants in connection with Surgicount
                    acquisition
                
                $
                —
                
                $
                4,232,178
                
                $
                —Issuance
                    of common stock in connection with asset purchase
                    agreement
                
                $
                —
                
                $
                66,895
                
                $
                —Issuance
                    of common stock in connection with land acquisition
                
                $
                —
                
                $
                85,619
                
                $
                —Issuance
                    of common stock in connection with purchase of marketable
                    securities
                
                $
                —
                
                $
                101,640
                
                $
                55,812Issuance
                    of common stock in connection with prepaid asset
                
                $
                50,000
                
                $
                —
                
                $
                —Accrued
                    purchase price of investment
                
                $
                —
                
                $
                (165,240
                )
                $
                165,240Assumption
                    of accrued liabilities
                
                $
                —
                
                $
                15,000
                
                
                —Capitalized
                    interest
                
                $
                —
                
                $
                28,840
                
                
                —Reclassification
                    of other current asset to purchase of Surgicount
                
                $
                —
                
                $
                20,000
                
                
                —
  Purchase
                    of the remaining 50% interest in ASG, through issuance of common
                    stock,
                    resulting in the following asset acquired and liabilities assumed
                    during
                    2006 as follows:
  ASGGoodwill
                
                $
                357,008
                
                $
                —
                
                $
                —Common
                    stock issued
                
                $
                (610,000
                )
                $
                —
                
                $
                —Minority
                    interest
                
                $
                252,992
                
                $
                —
                
                $
                —
  In
                    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
                    financial
                    statements.
  60
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
            Statements of Stockholders' Equity**
 **For
          the Three Years Ended December 31, 2006**
 **Preferred
                      Stock**
                  
                  **Common
                      Stock Issued**
                  
                  **Paid-In**
                  
                  **Other
                      Comprehensive**
                    **Income**
                  
                  **Accumulated**
                  
                  **Treasury
                      Stock**
                  
                  **Total****Shareholders’****Shares**
                  
                  **Amount**
                  
                  **Shares**
                  
                  **Amount**
                  
                  **Capital**
                  
                  **(loss)**
                  
                  **Deficit**
                  
                  **Shares**
                  
                  **Amount**
                  
                  **Equity**BALANCES,
                      January 1, 2004
                  
                  
                  10,950
                  
                  $
                  10,950
                  
                  
                  4,517,664
                  
                  $
                  1,490,829
                  
                  $
                  10,454,669
                  
                  $
                  —
                  
                  $
                  (7,315,478
                  )
                  
                  (1,457,364
                  )
                  $
                  (2,616,832
                  )
                  $
                  2,024,138Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (2,408,757
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (2,408,757
                  )Preferred
                      Dividends
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (76,650
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (76,650
                  )Compensation
                      expense due to stock option issuances
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,094
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,094Issuance
                      of common stockfor:Cash
                  
                  
                  —
                  
                  
                  —
                  
                  
                  1,517,700
                  
                  
                  500,841
                  
                  
                  3,426,416
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  3,927,257Exercise
                      of stock options
                  
                  
                  —
                  
                  
                  —
                  
                  
                  78,750
                  
                  
                  25,988
                  
                  
                  13,387
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  39,375Purchase
                      of investment
                  
                  
                  —
                  
                  
                  —
                  
                  
                  13,953
                  
                  
                  4,604
                  
                  
                  51,208
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  55,812BALANCES,
                      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 stockfor: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 loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (2,374,858
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (2,374,858
                  )Preferred
                      Dividends
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (76,650
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (76,650
                  )Issuance
                      of common stockfor: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
                  )
                  $
                  1,543,354
  The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements.
  61


**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006**
  **1.
        DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION**
 
 Patient
        Safety Technologies, Inc. ( ***"PST"*** ,
        or the ***"Company"*** )
        (formerly known as Franklin Capital Corporation) is a Delaware corporation.
        Until March 31, 2005, the Company was a Business Development Company
        ( ***“BDC”*** )
        under
        the Investment Company Act of 1940, as amended. On March 30, 2005, stockholder
        approval was obtained to withdraw the Company’s election to be treated as a BDC
        and on March 31, 2005, the Company filed an election to withdraw its election
        with the Securities and Exchange Commission ( ***“SEC”*** ).
        The
        Company currently has two wholly-owned operating subsidiaries: Surgicount
        Medical, Inc. ( ***“Surgicount”*** ),
        a
        California corporation; and Automotive Services Group, Inc., (formerly known
        as
        Ault Glazer Bodnar Merchant Capital, Inc.) a Delaware 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 TM 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.
 
 The
        Company also operates a car wash through Automotive Services Group, Inc.
        ( ***“Automotive
        Services Group”*** ),
        which
        holds the Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
        its
        wholly-owned subsidiary. As discussed in Note 3, the Company purchased the
        remaining equity interest in ASG in March 2006 and during the fourth quarter
        of
        2006 began marketing the assets held in ASG for sale. 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.
 
 **Going
        Concern**
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. At December 31, 2006, the Company
        has an accumulated deficit of approximately $29.5 million and a working capital
        deficit of approximately $5.4 million. For the year ended December 31, 2006,
        the
        Company incurred a loss of approximately $13.6 million and has utilized
        approximately $2.8 million in cash in its operations. Further, as of December
        31, 2006, 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. During the
        year ended December 31, 2006, the Company has relied on liquidating investments
        and short-term debt financings to fund its operations. In order to ensure
        the
        continued viability of the Company, equity financing and profitable operations
        must be obtained in order to repay the existing short-term debt and to provide
        a
        sufficient source of operating capital. The Company is currently seeking
        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.
 
 **2.
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Principles
        of Consolidation**
 
 The
        accompanying consolidated financial statements for 20 06
        include the accounts of the
        Company and its subsidiaries. All significant intercompany balances and
        transactions have been eliminated in consolidation.
  62
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  **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.
 
 **Reclassifications**
  Reclassifications
        have been made to previously issued consolidated financial statements to
        conform
        to the current year presentation. Most notably, the previously issued
        consolidated financial statements have been restated in accordance with the
        provisions of the Securities and Exchange Commission ( ***“SEC”*** )
        accounting rules under Regulation S-X. As discussed in Note 1, the Company
        was
        regulated (and reported) as a BDC under the Investment Company Act of 1940,
        as
        amended.
 
 **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, are stated at the lower of cost
        or
        market on the first-in, first-out basis.
 
 **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.
  63
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 *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
        - Equity Method**
 
 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.
 
 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. 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. No impairment charges were recognized
        during the year ended December 31, 2004.
  64
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  **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.
 
 **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. This method is
        predominately used by the Financial Services and Real Estate segment. Service
        activities may include the following: financial advice on mergers, acquisitions,
        restructurings and similar corporate finance matters. Revenues generated
        by the
        Company’s automated car wash subsidiary, Automotive Services Group are
        recognized at the time of service. Revenues from sales of the
        Safety-Sponge TM 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. As discussed in Note 9, the Company
        believed there were indicators of impairment present for its car wash services
        segment and after performing the tests described above, recorded impairment
        charges during the year ended December 31, 2006.
  **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 assets 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.
  65
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  **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 year ended December 31, 2004, the entire amount of equity compensation
        expense required to be recognized under the modified retrospective application
        method was $5,094 relating to stock option grants that occurred in the second
        quarter of 2004. During the years ended December 31, 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 $2,223,000 and
        $3,117,000, respectively. 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, 2006 and 2005, the Company had stock-based
        compensation expense, from issuances of restricted stock and warrants to
        consultants of the Company of $898,000 and $1,388,000, respectively.
 
 **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.
  66
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  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.
 
 **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 for 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 by the Company during
        the
        year ended December 31, 2006 and 2005 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.
 
 **Recent
        Accounting Pronouncements**
 
 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* .
        The
        interpretation contains a two step approach to recognizing and measuring
        uncertain tax positions accounted for in accordance with SFAS No. 109. The
        first step is to evaluate the tax position for recognition by determining
        if the
        weight of available evidence indicates it is more likely than not that the
        position will be sustained on audit, including resolution of related appeals
        or
        litigation processes, if any. The second step is to measure the tax benefit
        as
        the largest amount which is more than 50% likely of being realized upon ultimate
        settlement. Effective
        for the Company beginning January 1, 2007, FIN 48 is not expected to have
        any impact on the Company's financial position, results of operations or
        cash
        flows.
 
 In
        September 2006, the Financial Accounting Standards Board ( ***“FASB”*** ) issued
        Statement of Financial Accounting Standards ( ***“SFAS”*** ) No. 157, *Fair
        Value Measurements*  ( ***“SFAS
        No. 157”*** ) .
        The
        purpose of SFAS No. 157 is to define fair value, establish a framework for
        measuring fair value and enhance disclosures about fair value measurements.
        The
        measurement and disclosure requirements are effective for the Company beginning
        in the first quarter of fiscal 2008. The Company is currently evaluating
        the
        impact of adopting SFAS No. 157 on its financial statements.
  67
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  In
        September 2006, the FASB issued SFAS No. 158, *Employers’
        Accounting for Defined Benefit Pension and Other Postretirement Plans—An
        Amendment of FASB Statements No. 87, 88, 106, and 132R*  ( ***“SFAS
        No. 158”*** ) .
        SFAS
        No. 158 requires that the funded status of defined benefit postretirement
        plans be recognized on the company’s balance sheet, and changes in the funded
        status be reflected in comprehensive income. SFAS No. 158 also requires the
        measurement date of the plan’s funded status to be the same as the company’s
        fiscal year-end. Effective
        for the Company beginning January 1, 2007, SFAS No. 158 is not expected to
        have any impact on the Company's financial position, results of operations
        or
        cash flows.
 
 In
        September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108
        ( ***“SAB
        108”*** )
        to
        require registrants to quantify financial statement misstatements that have
        been
        accumulating in their financial statements for years and to correct them,
        if
        material, without restating. Under the provisions of SAB 108, financial
        statement misstatements are to be quantified and evaluated for materiality
        using
        both balance sheet and income statement approaches. SAB 108 is effective
        for
        fiscal years ending after November 15, 2006. The adoption of SAB 108 did
        not
        have a material impact on the Company’s financial statements.
 
 In
        November 2006, the EITF reached a final consensus in EITF Issue 06-6, *Debtor’s
        Accounting for a Modification (or Exchange) of Convertible Debt
        Instruments* ( ***“EITF
        No. 06-6”*** ).
         EITF No. 06-6 addresses the modification of a convertible debt instrument
        that changes the fair value of an embedded conversion option and the subsequent
        recognition of interest expense for the associated debt instrument when the
        modification does not result in a debt extinguishment pursuant to EITF No.
        96-19 *,
        Debtor’s Accounting for a Modification or Exchange of Debt
        Instruments* .
        The
        consensus should be applied to modifications or exchanges of debt instruments
        occurring in interim or annual periods beginning after November 29, 2006.
        The
        Company is currently evaluating the impact of this guidance on the Company’s
        consolidated financial position, results of operations or cash
        flows.
 
 In
        November 2006, the FASB ratified EITF Issue No. 06-7, *Issuer’s
        Accounting for a Previously Bifurcated Conversion Option in a Convertible
        Debt
        Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria
        in FASB Statement No. 133, Accounting for Derivative Instruments and
        Hedging Activities* ( ***“EITF
        No. 06-7”*** ).
        At the
        time of issuance, an embedded conversion option in a convertible debt instrument
        may be required to be bifurcated from the debt instrument and accounted for
        separately by the issuer as a derivative under SFAS No. 133, based on the
        application of EITF No. 00-19. Subsequent to the issuance of the convertible
        debt, facts may change and cause the embedded conversion option to no longer
        meet the conditions for separate accounting as a derivative instrument, such
        as
        when the bifurcated instrument meets the conditions of Issue 00-19 to be
        classified in stockholders’ equity. Under EITF No. 06-7, when an embedded
        conversion option previously accounted for as a derivative under SFAS No.
        133 no
        longer meets the bifurcation criteria under that standard, an issuer shall
        disclose a description of the principal changes causing the embedded conversion
        option to no longer require bifurcation under SFAS No. 133 and the amount
        of the
        liability for the conversion option reclassified to stockholders’ equity. EITF
        No. 06-7 should be applied to all previously bifurcated conversion options
        in
        convertible debt instruments that no longer meet the bifurcation criteria
        in
        SFAS No. 133 in interim or annual periods beginning after December 15,
        2006, regardless of whether the debt instrument was entered into prior or
        subsequent to the effective date of EITF No. 06-7. Earlier application of
        EITF
        No. 06-7 is permitted in periods for which financial statements have not
        yet
        been issued. The Company is currently evaluating the impact of this guidance
        on
        the Company’s consolidated financial position, results of operations or cash
        flows.
  In
        December 2006, the FASB issued FASB Staff Position ( ***“FSP”*** )
        EITF
        00-19-2, *Accounting
        for Registration Payment Arrangements* ( ***“FSP
        EITF 00-19-2”*** )
        which
        specifies that the contingent obligation to make future payments or otherwise
        transfer consideration under a registration payment arrangement should be
        separately recognized and measured in accordance with SFAS No. 5,
“Accounting for Contingencies.”    Adoption of FSP EITF 00-19-02
        is required for fiscal years beginning after December 15, 2006. The Company
        is currently evaluating the expected effect of FSP EITF 00-19-02 on its
        consolidated financial statements and is currently not yet in a position
        to
        determine such effects.
 
 In
        February 2007, the FASB issued SFAS No. 159, *The
        Fair Value Option for Financial Assets and Financial Liabilities—Including an
        amendment of FASB Statement No. 115* ( ***“SFAS
        No. 159”*** ),
        which
        permits entities to choose to measure many financial instruments and certain
        other items at fair value. The fair value option established by this Statement
        permits all entities to choose to measure eligible items at fair value at
        specified election dates. A business entity shall report unrealized gains
        and
        losses on items for which the fair value option has been elected in earnings
        at
        each subsequent reporting date. Adoption is required for fiscal years beginning
        after November 15, 2007. Early adoption is permitted as of the beginning of
        a fiscal year that begins on or before November 15, 2007, provided the
        entity also elects to apply the provisions of SFAS Statement No. 159.
 The Company is currently evaluating the expected effect of SFAS
        No. 159 on its consolidated financial statements and is currently not yet
        in a position to determine such effects.
  68
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  **3.
        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 Automotive
        Services Group, located
        in Alabama. The Company anticipates operating and generating operating cash
        flow
        from the one operating car wash until its disposition. The assets of Automotive
        Services Group 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, 2006, 2005 and 2004 related to the held for sale assets of
        Automotive Services Group :
 **Years
                    Ended December 31,****2006**
                
                
                **2005**
                
                
                **2004**Operating
                    revenues
                
                $
                343,431
                
                $
                —
                
                $
                —Operating
                    expenses
                
                
                530,285
                
                
                61,960
                
                
                —Depreciation
                    and amortization
                
                
                31,529
                
                
                —
                
                
                —Goodwill
                    impairment
                
                
                971,036
                
                
                —
                
                
                —Interest
                    expense
                
                
                457,866
                
                
                —
                
                
                —Loss
                    from discontinued operations
                
                $
                (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,**
                  **2006**
                
                
                **December
                    31,**
                  **2005**Property
                    and equipment, net
                
                $
                3,189,674
                
                $
                1,108,858Goodwill
                
                
                —
                
                
                614,028Other
                    assets
                
                
                —
                
                
                4,800Total
                    assets of discontinued operations
                
                $
                3,189,674
                
                $
                1,727,686
  69
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  **4.
        MARKETABLE SECURITIES**
 
 Marketable
        securities at December 31, 2006 and 2005 are comprised of the
        following:
  **December
                    31,**
                
                
                **December
                    31,****2006**
                
                
                **2005**IPEX,
                    Inc.
                
                $
                —
                
                $
                113,050Tuxis
                    Corporation
                
                
                —
                
                
                746,580Other
                
                
                —
                
                
                64,170$
                —
                
                $
                923,800
  *IPEX,
        Inc.*
 
 At
        December 31, 2005, the Company held in marketable securities 95,000 shares
        of
        IPEX common stock with a cost basis of $347,000. During the year ended December
        31, 2006, the Company sold all 95,000 shares for $8,000, resulting in a realized
        loss of $339,000.
 
 *Tuxis
        Corporation*
 
 At
        December 31, 2005, the Company held in marketable securities 108,200 shares
        of
        Tuxis common stock with a cost basis of $881,000. During the year ended December
        31, 2006, the Company sold its entire holdings in Tuxis for $733,000, resulting
        in a realized loss of $148,000.
 
 **5.
        RESTRICTED CERTIFICATE OF DEPOSIT**
 
 At
        December 31, 2006, 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 corporate offices that it occupies 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)
 
 **6.
        OTHER CURRENT ASSETS**
 
 At
        December 31, 2006 and December 31, 2005, the Company had an amount due from
        related parties of nil and $85,000, respectively, recorded in the consolidated
        balance sheets in other current assets. This amount relates to an allocation
        of
        expenses from the Company to the related parties. The remaining amount at
        December 31, 2006 and December 31, 2005, of $13,000 and $29,000, respectively,
        consists primarily of amounts due the Company for reimbursable expenses and
        to a
        lesser extent security deposits.
  70
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 **7.
        PROPERTY AND EQUIPMENT**
 
 Property
        and equipment at December 31, 2006 and 2005 are comprised of the
        following:
 **December
                    31,**
                  **2006**
                
                
                **December
                    31,**
                  **2005**Land
                
                $
                —
                
                $
                509,051Building
                
                
                —
                
                
                —Construction-in-progress
                
                
                —
                
                
                598,836Computer
                    software and equipment
                
                
                356,642
                
                
                199,323Furniture
                    and equipment
                
                
                71,687
                
                
                36,665Other
                
                
                20,206
                
                
                20,206Property
                    and equipment, gross
                
                
                448,535
                
                
                1,364,081Less:
                    accumulated depreciation
                
                
                (120,333
                )
                
                (15,806
                )Property
                    and equipment, net
                
                $
                328,202
                
                $
                1,348,275
  Depreciation
        expense for the years ended December 31, 2006, 2005 and 2004 was $136,056,
        $14,943 and $16,972, respectively.
 
 At
        December 31, 2005, the Company’s subsidiary, ASG, was in construction on its
        first automated
        car wash site located in Birmingham, Alabama. Construction of the site was
        completed in March 2006. At December 31, 2005, the amount expended for construction
        of this site, $598,836, was is in construction-in-progress and upon completion
        of the site reclassified as building.
 
 **8.
        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 Medical, Inc. ( ***”SurgiCount”*** ).
        The
        Company acquired SurgiCount for its patents related to the
        Safety-Sponge TM 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, 2005, 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, of which $20,000 was
        paid
        during 2004, 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 Merger. 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, in the event that
        prior to the fifth anniversary of the closing of the Merger the cumulative
        gross
        revenues of SurgiCount exceed $500,000, the Company is obligated to issue
        an
        additional 50,000 shares of the Company’s common stock to certain SurgiCount
        shareholders. Should the cumulative gross revenues exceed $1,000,000 during
        the
        five-year period, the additional shares would be increased by 50,000, for
        a
        total of 100,000 additional shares. Such amount is not included in the aggregate
        purchase price and will be recorded when and if issued.
  71
 **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements (continued)**
 The
        acquisition of Surgicount is being 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.
 
 The
        components of the 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 will be 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:
 **Years
                    ended December 31,****2005**
                
                **2004**Revenue
                
                $
                562,374
                
                $
                —Net
                    loss
                
                $
                (6,013,000
                )
                $
                (2,786,000
                )Basic
                    and diluted net loss per common share
                
                $
                (1.12
                )
                $
                (0.84
                )
  *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 now owns 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.
  72
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  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.
 
 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 9, 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.
 
 **9.
        GOODWILL AND PATENTS**
 
 The
        Company’s goodwill relates to the Medical Products reporting segment.
        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 an accumulated deficit of approximately
        $29.5 million and
        a
        working capital deficit of approximately $5.4 million. These financial
        constraints have 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 has evaluated alternative methods 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
        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, 2006, is as follows:
 
 **Goodwill**Balance
                  as of December 31, 2005
              
              $
              2,301,555Goodwill
                  for purchase of ASG
              
              
              357,008Impairment
                  of ASG Goodwill
              
              
              (971,036
              )Balance
                  as of December 31, 2006
              
              $
              1,687,527
  73
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  Identifiable
        intangible assets, net, as of December 31, 2006 are composed of patents:
 
 Patents
              
              $
              4,684,576Accumulated amortization
              
              
              (595,726
              )$
              4,088,850
 
 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.
 
 2007
              
              $
              325,0002008
              
              
              325,0002009
              
              
              325,0002010
              
              
              325,0002011
              
              
              325,000Thereafter
              
              
              2,463,850$
              4,088,850
 
 **10.
        LONG-TERM INVESTMENTS**
 
 Long-term
        investments at December 31, 2006 and December 31, 2005 are comprised of the
        following:
  **December
                    31,**
                  **2006**
                
                
                **December
                    31,**
                  **2005**Alacra
                    Corporation
                
                $
                1,000,000
                
                $
                1,000,000Digicorp
                
                
                10,970
                
                
                3,025,398IPEX,
                    Inc.
                
                
                —
                
                
                1,130,500Investments
                    in Real Estate
                
                
                430,563
                
                
                481,033$
                1,441,533
                
                $
                5,636,931
  *Alacra
        Corporation*
 
 At
        December 31, 2006, the Company had an investment in shares of Series F
        convertible preferred stock of Alacra Corporation ( ***“Alacra”*** ),
        valued
        at $1,000,000, 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. Alacra, based in New
        York, is a global provider of business and financial information.
 
 *Digicorp*
 
 At
        December 31, 2006, the Company held 96,269 shares of Digicorp common stock
        valued at $10,970. Prior to December 31, 2005, the Company accounted for
        its
        investment in Digicorp under the equity method of accounting and the Company’s
        proportionate share of income or losses from this investment was recorded
        in
        equity in income (loss) of investee. However, on December 29, 2005, Digicorp
        completed the purchase of all of the issued and outstanding shares of capital
        stock of Rebel Crew Films, Inc. ( ***"Rebel
        Crew"*** ),
        a
        California corporation. Digicorp issued approximately 21 million shares of
        its
        common stock to the shareholders of Rebel Crew which decreased the Company’s
        ownership interest from approximately 20% at September 30, 2005, to
        approximately 7.5% at December 29, 2005, and accordingly, the Company began
        accounting for the investment under the cost method. During 2006, the Company
        sold 2,654,092 shares of Digicorp common stock, of which 2,421,292 shares
        were
        sold to the Chief Executive Officer of Digicorp. The Company received cash
        of
        $121,065 and a 4 year non-interest bearing promissory note in the principal
        amount of $121,064, or total gross proceeds of $242,129. The Company recognized
        a loss of $33,753 on this transaction. Digicorp's common stock is traded
        on the
        OTC Bulletin Board, which reported a closing price, at December 31, 2006,
        of
        $0.18 per share. The Company has valued its holdings in Digicorp at an
        approximate 37% discount to the $0.18 closing price, due to the limited average
        number of shares traded on the OTC Bulletin Board.
  74
  **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  *IPEX,
        Inc.*
 
 At
        December 31, 2006, we held 950,000 shares of common stock and warrants to
        purchase 787,500 shares of common stock at $1.00 per share of IPEX, Inc.
        (“ ***IPEX”*** )
        in
        long-term investments. The Company acquired 450,000 shares of the common
        stock
        and all of the warrants directly from IPEX in March 2005 and received 500,000
        shares of the common stock for consulting services. On December 15, 2006,
        IPEX’s
        Chief Executive Officer, Principal Financial and Accounting Officer, and
        director, resigned citing that IPEX no longer had any operations, and was
        no
        longer conducting business as the reason for his resignation. As IPEX is
        no
        longer conducting business operations, the carrying value of this investment
        has
        been written down to zero and a related loss of $1,106,000 has been recognized
        during 2006.
 
 *Investments
        in Real Estate*
 
 At
        December 31, 2006, the Company had several real estate investments, recorded
        at
        their cost of $430,563. These investments are included in long-term investments.
        The Company holds its real estate investments in AGB Properties. AGB Properties
        real estate holdings consist of approximately 8.5 acres of undeveloped land
        in
        Heber Springs, Arkansas and 0.61 acres of undeveloped land in Springfield,
        Tennessee.
 
 *Excelsior
        Radio Networks, Inc.*
 
 During
        the period from August 12, 2003 through October 22, 2004, the Company liquidated
        its investment in Excelsior Radio Networks, Inc. ( ***“Excelsior”*** ).
        The
        Company sold a total of 1,476,804 shares and warrants to purchase 87,111
        shares
        of Excelsior common stock. Certain of these sales were subject to adjustment
        and
        in December 2005, the Company received additional proceeds of approximately
        $1,747,000, of which approximately $847,000 was cash and $900,000 was a
        receivable. The proceeds were recorded as realized gains on investments,
        net.
 
 75




**Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**
  **11.
        NOTES PAYABLE**
 
 Notes
        payable at December 31, 2006 and December 31, 2005 are comprised of the
        following:
  **December
                  31, 2006**
              
              
              **December
                  31, 2005**Note
                  payable to Winstar (a)
              
              $
              450,000
              
              $
              796,554Note
                  payable to Bodnar Capital Management, LLC (b)
              
              
              —
              
              
              1,000,000Notes
                  payable to Ault Glazer Capital Partners, LLC (c)
              
              
              2,575,528
              
              
              1,116,838Note
                  payable to Steven J. Caspi (d)
              
              
              1,000,000
              
              
              —Note
                  payable to Steven J. Caspi (e)
              
              
              1,495,281
              
              
              —Notes
                  payable to Herb Langsam (f)
              
              
              600,000
              
              
              —Note
                  payable to Charles Kalina III (g)
              
              
              400,000
              
              
              —Other
                  notes payable
              
              
              598,232
              
              
              —Total
                  notes payable
              
              
              7,119,041
              
              
              —Less:
                  debt discount on beneficial conversion feature
              
              
              (1,074,330
              )
              
              —$
              6,044,711
              
              $
              2,913,392
 
 Aggregate
        future required principal payments on these notes during the twelve month
        period
        subsequent to December 31, 2006 are as follows:
 
 2007
              
              $
              3,557,4622008
              
              
              2,066,5792009
              
              
              —2010
              
              
              1,495,000$
              7,119,041
 
 (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. This note was due February 28, 2002
                  with
                  interest at 3.54% per annum but in accordance with the agreement
                  has 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 reflected in the accompanying consolidated
                  interim
                  financial statements relating to legal fees attributed to our defense
                  of
                  the lawsuits filed against us. The Company has consistently asserted
                  that
                  the due date of the note is extended until the lawsuit discussed
                  in Note
                  19 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.
 
 (b)
              On
                  April 7, 2005, the Company issued a $1,000,000 principal amount
                  promissory
                  note (the***"Bodnar
                  Note"***)
                  to Bodnar Capital Management, LLC, in consideration for a loan
                  from Bodnar
                  Capital Management, LLC to the Company in the amount of $1,000,000.
                  Steven
                  J. Bodnar is a managing member of Bodnar Capital Management, LLC.
                  Mr.
                  Bodnar, through Bodnar Capital Management, LLC, is a principal
                  stockholder
                  of the Company. The principal amount of the Bodnar Note and interest
                  at
                  the rate of 6% per annum was payable on May 31, 2006. The obligations
                  under the Note were collateralized by all real property owned by
                  the
                  Company. During the year ended December 31, 2006 and 2005, the
                  Company
                  incurred interest expense of $44,000 and $25,000, respectively.
                  During the
                  quarter ended June 30, 2006, the Company repaid the outstanding
                  principal
                  balance and accrued interest totaling
                  $69,000.
  76
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
  (c)
              From
                  January 11, 2006 through June 30, 2006, Ault Glazer Capital Partners,
                  LLC
                  (formerly AGB Acquisition Fund) (the***“Fund”***),
                  a related party, loaned the Company a total of $443,000, all of
                  which was
                  repaid. As consideration for the loans, the Company issued the
                  Fund
                  secured promissory notes with an interest rate of 7% per annum
                  (the***“Fund
                  Notes”***),
                  and entered into a security agreement granting the Fund a security
                  interest in the Company’s personal property and fixtures, inventory,
                  products and proceeds as security for the Company’s obligations under the
                  Fund Notes. During the year ended December 31, 2006, the Company
                  incurred
                  and paid interest expense of $2,000 on the Fund Notes.
  On
        February 8, 2006, the Fund loaned $687,000 to ASG and at December 31, 2006
        the
        entire amount was outstanding. 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, bears interest at the rate of 10% per annum and was
        due on
        September 15, 2006. The ASG Note is in default and classified with current
        liabilities. 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 granted the Fund a security
        interest in all personal property and fixtures located at the ASG Property.
        During the year ended December 31, 2006, the Company incurred interest expense,
        excluding amortization of debt discount, of $61,000 on the ASG Note, all
        of
        which is accrued at December 31, 2006.
 
 As
        of
        December 31, 2006 and December 31, 2005, the Fund loaned $1,495,000 and
        $1,117,000, respectively, 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 bears interest at the rate of 3% above the Prime Rate as
        published in the Wall Street Journal (8.25% at December 31, 2006). All unpaid
        principal, interest and charges under the Real Estate Note are due in full
        on
        July 31, 2010. The Real Estate Note is 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 years ended December 31, 2006 and 2005,
        the
        Company incurred interest expense of $160,000 and 29,000, respectively, on
        the
        Real Estate Note, all of which is accrued at December 31, 2006.
 
 From
        March 7, 2006 through October 16, 2006, the Fund loaned the Company a total
        of
        $524,000, of which $130,000 was repaid. The outstanding balance at December
        31,
        2006 is $394,000. 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 allows
        the
        Company to request advances of up to $500,000 from the Fund. The initial
        term of
        the Revolving Line of Credit is for a period of six months and may be extended
        for one or more additional six month periods upon mutual agreement of the
        parties. Each advance under the Revolving Line of Credit will be evidenced
        by a
        secured promissory note and a security agreement. The secured promissory
        notes
        issued pursuant to the Revolving Line of Credit must be repaid with interest
        at
        the Prime Rate plus 1% within 60 days from issuance and will be convertible
        into
        shares of the Company’s common stock at the option of the Fund at a price of
        $3.10 per share. The obligations of the Company pursuant to such secured
        promissory notes are secured by the Company’s assets, personal property and
        fixtures, inventory, products and proceeds therefrom. During the year ended
        December 31, 2006, the Company incurred interest expense of $16,000 on the
        Revolving Line of Credit, of which $13,000 is accrued at December 31, 2006.
 
 77
 
 **Patient
            Safety Technologies, Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements (continued)**
 (d)
              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 by the scheduled maturity and to date has not been extended,
                  therefore the Caspi Note is recorded in current liabilities. The
                  Caspi
                  Note is in default and therefore accruing interest at the rate
                  of 18% per
                  annum. During the year ended December 31, 2006, the Company incurred
                  interest expense of $130,000 on the Caspi Note, of which $75,000
                  is
                  accrued at December 31, 2006.
 
 (e)
              From
                  September 8, 2006 through September 19, 2006, Mr. Caspi loaned
                  the Company
                  a total of $1,495,000, all of which is outstanding at December
                  31, 2006.
                  As consideration for the loan, the Company issued Mr. Caspi a Convertible
                  Promissory Note in the principal amount of $1,495,000 (the***“Second
                  Caspi Note”***).
                  The Second Caspi Note bears interest at the rate of 12% per annum
                  and is
                  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. During the year ended December 31, 2006, the Company
                  had
                  incurred interest expense, excluding amortization of debt discount,
                  of
                  $56,000 on the Second Caspi Note, all of which is accrued at December
                  31,
                  2006.
 
 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 will be amortized as non-cash interest expense
        over
        the term of the debt using the effective interest method. Through December
        31,
        2006, interest expense of $123,000 has been recorded from the debt discount
        amortization.
 
 (f)
              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 has 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
        will
        be amortized as non-cash interest expense over the term of the debt using
        the
        effective interest method. Through December 31, 2006, interest expense of
        $5,000
        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.
 
 78
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 (g)
              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 accrues 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 is due to be paid upon the
                  earlier of
                  October 10, 2006, or the occurrence of an event of default. Principal
                  and
                  interest on the Kalina Note is convertible into shares of the Company’s
                  common stock at a conversion price of $3.00. The conversion price
                  of the
                  Kalina Note will be adjusted if the Company pays a stock dividend,
                  or
                  subdivides or combines outstanding shares of common stock into
                  a greater
                  or lesser number of shares.
 
 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,
                  which is due on January 31, 2008. 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, 2006, the Company
                  incurred
                  interest expense, excluding amortization of debt discount, of $20,000
                  on
                  the Second Kalina Note, all of which is accrued at December 31,
                  2006.
 
 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 will be amortized as non-cash interest expense
        over
        the term of the debt using the effective interest method. Through December
        31,
        2006, interest expense of $15,000 has been recorded from the debt discount
        amortization.
 
 *Morelli
        Note and Warrant*
 
 On
        June
        6, 2006 the Company entered into a Secured Convertible Note and Warrant Purchase
        Agreement (the ***“Purchase
        Agreement”*** )
        pursuant to which the Company sold a $1,100,000 principal amount Secured
        Convertible Promissory Note (the ***“Morelli
        Note”*** )
        and a
        warrant to purchase 401,460 shares of the Company’s common stock (the ***“Morelli
        Warrant”*** )
        to Alan
        E. Morelli.
 
 The
        Morelli Note accrued interest at the rate of 12% per annum through July 6,
        2006,
        after which the interest rate increased to 15% per annum from July 6, 2006
        through the date the loan was repaid. The principal amount of the Morelli
        Note
        and any accrued but unpaid interest was due to be paid on October 6, 2006,
        or
        the occurrence of an event of default. On August 15, 2006 the Company received
        a
        notice of default regarding the Morelli Note. The notice of default specifically
        cited the Company’s failure to obtain the prior written consent of Mr. Morelli
        to the incurrence of indebtedness and failure to repay the obligations owing
        under the Morelli Note in an amount equal to the proceeds of the indebtedness.
        Upon the occurrence of an event of default the interest rate increased to
        19%
        per annum. During September 2006, from the proceeds of the Second Caspi Note,
        the Company repaid the outstanding principal amount and accrued interest
        of
        $51,000.
 
 79
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 As
        the
        effective conversion price of the Morelli 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 $556,000 based on the intrinsic value of the
        beneficial conversion feature of the note. Since the Morelli Note was
        convertible at the time of issuance, the debt discount as a result of the
        beneficial conversion feature was amortized as non-cash interest
        expense.
 
 On
        the
        date of issuance, the Morelli Warrant had an exercise price of $3.04 per
        share
        and will expire after June 6, 2011. The Company recorded debt discount in
        the
        amount of $472,000 based on the estimated fair value of the warrants. The
        debt
        discount will be amortized as non-cash interest expense over the term of
        the
        debt using the effective interest method. Through December 31, 2006, the
        entire
        amount of debt discount amortization from the Morelli Warrant has been recorded.
 
 In
        August
        2006, prior to the repayment of the Morelli Note, the Company sold shares
        of its
        common stock at $1.25 per share (See Note 13) thereby requiring modifications
        to
        both the Morelli Warrant and Morelli Note. These modifications resulted in
        an
        adjustment to the conversion price of the Morelli Note, an adjustment to
        the
        exercise price of the Morelli Warrant and an increase in the number of shares
        of
        common stock available to purchase upon exercise of the Morelli Warrant.
        These
        modifications were sufficiently different from the initial terms of the Morelli
        Note and Morelli Warrant, requiring the Company to account for the change
        in
        conversion terms as a substantial modification of terms in accordance with
        EITF
        Issue No. 96-19, *Debtor’s
        Accounting and Modification on Exchange of Debt Instruments* .
 
 The
        original notes converted into common stock at a rate of $2.74 per share with
        401,460 warrants to purchase common stock exercisable at $3.04 per share.
        The
        new terms provided conversion into common stock at $1.25 per share with 976,351
        warrants to purchase common stock exercisable at $1.25 per share. On
        extinguishment of the original terms of the Morelli Note and Morelli Warrant,
        the Company recorded non-cash interest expense of
        $880,000 as the estimated difference in the fair value of the Morelli Warrant
        under the original terms to that of the modified terms and
        further recorded entries to record discounts related to the beneficial
        conversion feature totaling $572,000 which was amortized
        as non-cash interest expense .
 
 **12.
        ACCRUED LIABILITIES**
 
 Accrued
        liabilities at December 31, 2006 and 2005 are comprised of the
        following:
  **December
                  31, 2006**
              
              
              **December
                  31, 2005**Accrued
                  officer's severance
              
              $
              —
              
              $
              22,716Accrued
                  interest
              
              
              520,114
              
              
              215,093Accrued
                  professional fees
              
              
              10,000
              
              
              160,000Deferred
                  revenue
              
              
              —
              
              
              103,875Accrued
                  salaries
              
              
              197,495
              
              
              45,833Other
              
              
              96,857
              
              
              21,599$
              824,466
              
              $
              569,116
 
 80
  **Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**
  **13.
        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 TM 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 Manufacturing, which was
        entered into on August 17, 2005; and (c) the Company is obligated to issue
        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, the Company granted
        Health
        West warrants to purchase a total of 175,000 shares of the Company’s common
        stock as discussed in Note 14.
 
 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.
 
 81
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 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.
 
 **14.
        WARRANTS**
 
 In
        April
        2005, the Company entered into a consulting agreement for investor
        communications services and as incentive for entering into the agreement,
        the
        Company agreed to issue a warrant to purchase 100,000 shares of the Company's
        common stock at an exercise price of $5.85, exercisable for 5 years. The
        warrants were valued at $397,000 of which $265,000 was expensed during 2005.
        The
        Company asserts that the investor communications services were not provided
        to
        the extent of the consulting agreement and disputes the grant. Accordingly,
        the
        Company has not expensed the remaining amount of warrants,
        $132,000.
 
 During
        the year ended December 31, 2006, a total of 1,995,959 warrants, at exercise
        prices ranging from $1.25 to $4.50 per share were issued. The warrants were
        valued using the Black-Scholes valuation model assuming 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. Warrants granted during
        the
        year ended December 31, 2005 were valued using the same assumptions with
        the
        exception that the Company used volatility of 83%. As of December 31, 2006,
        a
        total of 3,274,521 warrants, at exercise prices ranging from $1.25 to $6.05
        remain outstanding.
 
 **15.
        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.
 
 82
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 **16.
        STOCK OPTION PLANS**
 
 On
        September 9, 1997, the Company’s stockholders approved two Stock Option Plans: a
        Stock Incentive Plan to be offered to the Company’s consultants, officers and
        employees (including any officer or employee who is also a director of the
        Company) and a Non-Statutory Stock Option Plan (collectively the ***“1997
        Plans”*** )
        to be
        offered to the Company’s “outside” directors, (i.e., those directors who are not
        also officers or employees of the Company). As of December 31, 2006, there
        were
        no outstanding options to purchase the Company’s common stock and no options
        available for future issuance under either the SIP or the SOP.
 
 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.
 
 A
        summary
        of stock option activity for the year ended December 31, 2006 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, 2003**
              
              
              **78,750**
              
              
              **61,875**
              
              **$**
              **3.80**
              
              
              **6.15**Grants
              
              
              (78,750
              )
              
              78,750
              
              $
              0.50
              
              
              9.67Exercises
              
              
              
              
              
              (78,750
              )
              $
              0.50
              
              
              9.58Cancellations
              
              
              56,250
              
              
              (56,250
              )
              $
              3.71
              
              
              5.73**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**
              
              **$**
              **—**Options
                  exercisable at:December
                  31, 2004
              
              
              
              
              
              5,625
              
              $
              4.67
              
              
              5.08
              
              $
              **—**December
                  31, 2005
              
              
              
              
              
              220,125
              
              $
              5.27
              
              
              9.25
              
              $
              —December
                  31, 2006
              
              
              
              
              
              832,625
              
              $
              4.90
              
              
              8.54
              
              $
              —
 
 83
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 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, 2006 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, 2006. There have been nil, 5,625 and 78,750
        options exercised during the years ended December 31, 2006, 2005 and 2004,
        respectively.
 
 A
        summary
        of the changes in the Company’s nonvested options during the year ended December
        31, 2006 is as follows:
 
 **Nonvested
                  Shares**
              
              **Shares**
              
              **Weighted
                  Average Grant Date Fair Value**Nonvested
                  at December 31, 2005
              
              
              823,875
              
              $
              2.36Granted
              
              
              785,000
              
              $
              2.50Vested
              
              
              (612,500
              )
              $
              2.53Cancelled
                  and forfeited
              
              
              (125,000
              )
              $
              2.63Nonvested
                  at December 31, 2006
              
              
              871,375
              
              $
              2.31
  All
        options that the Company granted during 2004 through 2006 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,****2006**
              
              **2005**
              
              **2004**Weighted
                  average risk free interest rate
              
              
              3.75
              %
              
              3.75
              %
              
              3.00
              %Weighted
                  average life (in years)
              
              
              4.16
              
              
              3.0
              
              
              0.1Volatility
              
              
              89
              %
              
              83
              %
              
              102
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %
              
              0
              %Weighted
                  average grant-date fair value per share of options granted
              
              $
              2.50
              
              $
              2.48
              
              $
              0.50
 
 During
        the year ended December 31, 2006, the Company recorded compensation costs
        related to stock options of $1,118,000. As of December 31, 2006, total
        unrecognized compensation cost related to unvested stock options was 941,000.
        The cost is expected to be recognized over a weighted average period of 1.70
        years.
 
 **17.
        RELATED PARTY TRANSACTIONS**
 
 During
        the year ended December 31, 2006 and 2005, the Company paid approximately
        25%
        and 75%, respectively, of the base rent on the corporate offices and The
        Ault
        Glazer Group, Inc. ( ***"Ault
        Glazer"*** ),
        based
        upon their usage of the facilities, paid the remaining base rent. During
        the
        three months ended December 31, 2004 the Company’s corporate offices were
        initially provided at no cost by Ault Glazer. 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, 2006 and December 31, 2005, Ault Glazer, Mr. Ault and the Glazers
        indirectly beneficially own or control approximately 40% and 50%, respectively,
        of the outstanding common stock of the Company and beneficially own
        approximately 98.2% of the outstanding preferred stock of the Company.
 
 84
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 At
        December 31, 2006 and December 31, 2005, the Company had an amount due from
        Strome Securities of nil and $9,000, respectively, recorded in other current
        assets. Until October 31, 2005, the Company maintained a brokerage account
        with
        Strome Securities and until December 31, 2004, Ault was a registered
        representative of Strome Securities. Beginning November 1, 2005, the Company
        moved its brokerage account from Strome Securities to AGB Securities, Inc.,
        a
        related party. A nominal amount of commissions were incurred by the Company
        during the years ended December 31, 2006 and 2005 as a result of trades in
        the
        Company’s brokerage account.
 
 On
        April
        28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
        Tennessee from a related party. The purchase price consisted of $90,000 in
        cash,
        20,444 shares of common stock and 10,221 warrants to purchase common stock
        at an
        exercise price of $4.53 and a 5 year contractual life valued at
        $86,000.
 
 *IPEX,
        Inc.*
 
 On
        June
        30, 2005, the Company formalized the terms of a consulting agreement, consented
        to by IPEX, whereby the Company was retained by the majority shareholder
        of IPEX
        and former President, Chief Executive Officer and director of IPEX ( ***“Majority
        Shareholder”*** ),
        to
        serve as a business consultant to IPEX. At June 30, 2005, Mr. Ault, the
        Company’s Chairman and Chief Executive Officer at that time, was granted an
        irrevocable voting proxy for 18,855,900 shares of IPEX owned by the Majority
        Shareholder (representing approximately 67% of the then outstanding shares
        of
        IPEX). At December 31, 2005, the Company held 7.8% of IPEX’s outstanding shares
        of common stock. On June 30, 2005, the Company agreed with IPEX as to the
        scope
        of such consulting services and the consideration for such services. The
        Company
        initially valued the amount of the consulting services at $1,331,000, which
        was
        due on August 15, 2005. The Company received 500,000 shares of IPEX common
        stock
        in December 2005 as payment for the services. At the time of payment, the
        fair
        market value of IPEX common stock had decreased by approximately 33%.
        Accordingly, the Company reduced the initial value of the consulting services
        by
        the amount of the decrease in the fair market value of IPEX common stock,
        $675,000. As a result of the decrease in the fair market value of IPEX common
        stock, the Company ultimately recognized $656,000 in revenue as a result
        of this
        agreement, of which $104,000 was recognized during the year ended December
        31,
        2006.
 
 The
        Company’s former Chairman and Chief Executive Officer and significant beneficial
        owner of the Company, Milton “Todd” Ault III, served as a director of IPEX.
        Further, the Chief Executive Officer of ASG served as an IPEX director and
        member of IPEX’s Audit Committee from August 2005 through January
        2006.
 
 *Digicorp*
 
 At
        December 31, 2006 and 2005, the Company had an investment in Digicorp recorded
        in long-term investments. The Company’s Chief Executive Officer and Chief
        Financial Officer, William B. Horne, was also Chief Financial Officer of
        Digicorp and 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 years ended December 31, 2006 and 2005, 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, Chief
        Financial Officer and Director, William B. Horne, was also Chief Financial
        Officer of Ault Glazer.
 
 *Due
        from Related Parties*
 
 At
        December 31, 2006 and 2005, the Company had an amount due from related parties
        of nil and $85,000, respectively, recorded in other current assets. This
        amount
        relates to an allocation of expenses from the Company to the related
        parties
 
 85
  **Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**
  **18.
        INCOME TAXES**
 
 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, 2006 and 2005 are as
        follows:
  Deferred
                  tax assets:
              
              **2006**
              
              **2005**Federal
                  net operating loss carryforward
              
              $
              6,931,000
              
              $
              4,000,000State
                  net operating loss carryforward
              
              
              1,041,000
              
              
              279,000Stock
                  based compensation
              
              
              1,840,000
              
              
              1,077,000Other
              
              
              19,000
              
              
              26,000Total
                  deferred tax asset
              
              
              9,831,000
              
              
              5,382,000Deferred
                  tax liability:Book
                  and tax bases difference arising from purchased patents
              
              
              (1,473,066
              )
              
              (1,590,045
              )Total
                  net deferred tax asset
              
              
              8,357,934
              
              
              3,791,955Less
                  valuation allowance
              
              
              (9,831,000
              )
              
              (5,382,000
              )Net
                  deferred tax liability
              
              $
              (1,473,066
              )
              $
              (1,590,045
              )
 
 The
        ultimate realization of deferred tax assets depends upon the generation of
        future taxable income during the periods in which those temporary differences
        become deductible. Based upon the Company’s loss for the year ended December 31,
        2006, the Company has provided a valuation allowance in the amount of
        $9,381,000, an increase of $4,449,000. The amount of deferred tax asset
        considered realizable could change in the near term if projected future taxable
        income is realized. A component of the Company’s deferred tax assets are net
        operating loss carryforwards of approximately $20,386,000 and $11,765,000
        at
        December 31, 2006 and 2005, respectively. A greater than 50% change in the
        ownership of the Company’s common stock can delay or limit the utilization of
        existing net operating loss carryforwards pursuant to the Internal Revenue
        Code
        Section 382. The Company believes that such a change occurred during the
        year
        ended December 31, 2004. Based upon an analysis of purchase transactions
        of the
        Company’s equity securities, the Company believes the net operating loss
        carryforward utilization, attributed to losses incurred prior to December
        31,
        2004, is limited to approximately $755,000 per year. The federal and state
        net
        operating losses will begin to expire in 2011 and 2015, respectively.
 
 Due
        to
        the Company being in a net loss position, the implementation during 2006
        of EITF
        05-8, *Income
        Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion
        Feature* ,
        resulted in a difference of $569,000 between the expected income taxes at
        statutory rates and the amounts presented herein related to the change in
        valuation allowance.
 
 86
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 For
        the
        years ended December 31, 2006, 2005 and 2004, a reconciliation of the
        federal statutory tax rate to the Company's effective tax rate is as follows:
  **2006**
              
              **2005**
              
              **2004**Federal
                  statutory tax rate
              
              
              (34.00)
              %
              
              (34.00)
              %
              
              (34.00)
              %State
                  and local income taxes, net of federal tax Benefit
              
              
              0.01
              
              
              0.01
              
              
              (2.00
              )Non
                  deductible items
              
              
              8.30
              
              
              1.76
              
              
              (0.25
              )Valuation
                  allowance
              
              
              24.83
              
              
              30.61
              
              
              36.25Total
                  effective tax rate
              
              
              (0.86)
              %
              
              (1.62
              )
              
              —
              %
 
 **19.
        COMMITMENTS AND CONTINGENCIES**
 
 *Operating
        Lease*
 
 During
        August 2005, the Company entered into an operating agreement for office space
        for Surgicount.  The lease requires monthly payments of $4,174 from October
        1, 2005 through September 30, 2006 and $4,341 from October 1, 2006 through
        September 30, 2007.  In 2006, the Company formalized a sub-lease agreement
        with AGB & Company, a related party, for use of its corporate office. The
        sub-lease agreement extends through February 2011, with a 5-year extension
        option under certain conditions. Effective March 31, 2007, the Company
        terminated its sub-lease agreement with AGB & Company. Accordingly, future
        minimum annual rent payment of $63,996 due during the year ended December
        31,
        2007 represent the remaining obligation under the Company’s existing operating
        leases.
 
 Rent
        expense during the years ended December 31, 2006, 2005 and 2004 was $131,129,
        $88,368 and $76,276, 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.
 
 87
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 On
        February 3, 2006, WGM filed a lawsuit against the Company. The WGM lawsuit
        attempts to collect upon the $1,000,000 note between the Company and Winstar
        discussed in Note 11. 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.
 
 The
        Company is the owner of U.S. Patent no. 5,931,824 (the '824 Patent) and
        corresponding European Patent 1032911.  The Company became aware of certain
        prior knowledge cited against the then pending European patent application
        which
        had not been considered during prosecution of the U.S. patent application
        which eventually issued as the '824 Patent.  The knowledge was
        successfully distinguished in the European proceeding, and the European patent
        granted.  In order to strengthen the enforceability of the U.S. '824
        Patent, the Company filed a request for reexamination.  Recently, the
        Company received notification from the U. S. Patent Office that a reexamination
        certificate will be granted affirming the validity of the reexamined patent
        with
        certain amendments to the claims.  Company counsel has reviewed the amended
        claims and believes that they will cover the Safety-SpongeTM System as well as a
        broad range of commercially equivalent systems.  In addition to the
        reexamined patent and the European patent, the Company has filed one additional
        U. S. Patent application and one international patent application **** covering
        improved methods and systems for the automated counting and tracking of surgical
        articles, that would provide the Company’s Safety-Sponge TM System
        with an additional level of protection to prevent competitors from attempting
        to
        replicate and market a similar version of the Company’s
        Safety-Sponge TM System.
 
 *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, 2006, approximate future annual base
        compensation under these agreements are as follows:
 
 **Years
                  ended December 31,****2007**
              
              **2008**
              
              **2009**
              
              **2010**
              
              **Total**$
              783,333
              
              $
              575,000
              
              $
              237,500
              
              $
              150,000
              
              $
              1,745,833
 
 **20.
        SEGMENT REPORTING**
 
 The
        Company reports selected segment information in its financial reports to
        shareholders in accordance with SFAS No. 131, *Disclosures
        about Segments of an Enterprise and Related Information.* The
        segment information provided reflects the three distinct lines of business
        within the Company’s organizational structure: medical
        products, which consists of Surgicount, financial services and real estate,
        which consists of AGB
        Properties and car wash services, which consists of Automotive Services
        Group . Unallocated
        corporate expenses are centrally managed at the corporate level and not reviewed
        by the Company’s chief operating decision maker in evaluating results by
        segment.
 
 Transactions
        between segments are not common and are not material to the segment information.
        Some business activities that cannot be classified in the aforementioned
        segments are shown under “corporate”.
 
 88
  **Patient
        Safety Technologies, Inc. and Subsidiaries**
 **Notes
        to Consolidated Financial Statements (continued)**
  Segment
        information for the years ended December 31, 2006, 2005 and 2004 is as follows:
  **2006**
              
              **2005**
              
              **2004****Medical
                  Products**Revenue
              
              $
              140,654
              
              $
              —
              
              $
              —Net
                  loss
              
              $
              (2,685,416
              )
              $
              (2,784,431
              )
              $
              —Total
                  Assets
              
              $
              6,181,473
              
              $
              6,391,607
              
              $
              —**Car
                  Wash Services**Net
                  loss from discontinued segment
              
              $
              (1,647,285
              )
              $
              (61,960
              )
              $
              —Total
                  Assets
              
              $
              3,200,164
              
              $
              1,727,686
              
              $
              —**Financial
                  Services and Real Estate**Revenue
              
              $
              103,875
              
              $
              562,374
              
              
              —Net
                  income (loss)
              
              $
              (1,444,086
              )
              $
              1,743,221
              
              $
              536,454Total
                  Assets
              
              $
              1,590,609
              
              $
              7,494,762
              
              $
              5,808,672**Corporate**Revenue
              
              
              —
              
              
              —
              
              $
              —Net
                  loss
              
              $
              (7,846,365
              )
              $
              (4,804,353
              )
              $
              (2,945,211
              )Total
                  Assets
              
              $
              209,200
              
              $
              419,810
              
              $
              1,125,571**Total**Revenue
              
              $
              244,529
              
              
              562,374
              
              $
              —Net
                  loss
              
              $
              (13,623,152
              )
              $
              (5,907,523
              )
              $
              (2,408,757
              )Total
                  Assets
              
              $
              11,181,446
              
              $
              16,033,865
              
              $
              6,934,243
 
 **21.
        SELECTED QUARTERLY RESULTS (UNAUDITED)**
 
 **March 31**
              
              **June 30**
              
              **September 30**
              
              **December 31****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
              
              $
              (3,241,909
              )
              $
              (1,329,487
              )
              $
              (1,426,040
              )
              $
              (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
              )**2005
                  Quarter Ended**Total
                  assets
              
              $
              11,793,900
              
              $
              11,788,107
              
              $
              10,798,123
              
              $
              16,033,865Revenues
              
              $
              —
              
              $
              586,627
              
              $
              29,693
              
              $
              (53,946
              )Operating
                  loss
              
              $
              (2,094,355
              )
              $
              (1,568,643
              )
              $
              (2,071,751
              )
              $
              (2,060,084
              )Net
                  income (loss)
              
              $
              (1,784,212
              )
              $
              (1,770,433
              )
              $
              (2,155,314
              )
              $
              (197,564
              )Basic
                  and diluted net income (loss) per common share
              
              $
              (0.37
              )
              $
              (0.33
              )
              $
              (0.39
              )
              $
              (0.04
              )
 
 **22.
        SUBSEQUENT EVENTS**
 
 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 will receive $500,000
        in
        product over the course of the next twelve (12) months. The Warrant shall
        have a
        term of five (5) years and shall have an exercise price equal to $2.00 per
        share.
 
 89
 **Patient
          Safety Technologies, Inc. and Subsidiaries**
 **Notes
          to Consolidated Financial Statements (continued)**
 Between
        January 29, 2007 and April 5, 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 these accredited investors an aggregate of 2,104,000
        shares of its common stock and warrants to purchase an additional 1,052,000
        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 $2,630,000.
 
 On
        April
        4, 2007, ASG entered into an agreement for the sale of real property located
        in
        Tuscaloosa, Alabama (the “Tuscaloosa Undeveloped Land”) to Twin Properties, LLC.
        Pursuant to the agreement, ASG is responsible for obtaining title insurance,
        all
        required taxes related to the transaction and providing a marketable title
        in
        fee simple to Twin Properties, LLC. ASG agreed to sell the Tuscaloosa
        Undeveloped Land for a purchase price of $965,000. This transaction is expected
        to close in July 2007.
  On
        April
        26, 2007, ASG entered into a binding term sheet to sell its express car wash
        and
        a parcel of real property, both located in Birmingham, Alabama, to Charles
        H.
        Dellaccio and D.W. Grimsley, Jr. Mr. Grimsley is the Chairman of the Board
        and
        Chief Executive Officer of Automotive Services Group. The aggregate purchase
        price for both properties is $2.25 million.
 
 90




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





Not
      applicable.





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





As
      of the
      end of the period covered by this report, we conducted an evaluation, under
      the
      supervision and with the participation of our chief executive officer and chief
      financial officer of our disclosure controls and procedures (as defined in
      Rule
      13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation,
      our chief executive officer and chief financial officer concluded that our
      disclosure controls and procedures are effective to ensure that all information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is: (1) accumulated and communicated to our management, including
      our chief executive officer and chief financial officer, as appropriate to
      allow
      timely decisions regarding required disclosure; and (2) recorded, processed,
      summarized and reported, within the time periods specified in the Commission's
      rules and forms. There was no change in our internal controls or in other
      factors that could affect these controls during our last fiscal quarter that
      has
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting.




**Item
      9B. Other Information.**





None.




**PART
      III**




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





Pursuant
      to the Company's Amended and Restated Certificate of Incorporation and its
      Bylaws, the number of directors constituting the Board shall be fixed from
      time
      to time by resolution passed by a majority of the Board. The number of directors
      on the Board is currently fixed at seven. The holders of the Series A Preferred
      Stock, voting separately as one class, shall have the right to elect three
      directors at all times during which the Series A Preferred Stock is outstanding
      (the ***“Series
      A Directors”*** ).
      Directors are elected by class for a staggered term of three years for each
      class, with the term of office of one class of directors expiring each year.
      Directors serve until their successors are elected and qualified. No current
      disagreement exists between the Company and any of the current members of the
      Board regarding the operations, policies or practices of the
      Company.





The
      current directors of the company are as follows: David M. Augustine (Class
      I
      Director (Served since 2007) - nominated for re-election to the Board for a
      three-year term expiring in 2010); William B. Horne (Class I Director (Served
      since 2007) - nominated for re-election to the Board for a three-year term
      expiring in 2010); Herbert Langsam (Class II Director - (Served since 2004)
      -
      term expiring in 2008); Wenchen Lin (Class II Director - (Served since 2007)
      -
      term expiring in 2008); Arnold E. Spangler (Class III Director (Served since
      January 7, 2006) - term expiring in 2009); and Louis Glazer, M.D., Ph.G (Class
      III Director (Served since 2004) - term expiring in 2009). All
      of
      the Company’s directors are independent with the exception of William B.
      Horne.





**Common
      Stock Directors**





***Arnold
      Spangler***  (1),
      (2) , ***,*** age 58,
      is the Company’s Chairman and was elected by the Board of Directors to serve as
      a Class III Director of the Company on January 7, 2006 to fill the vacancy
      created by the first resignation of Milton “Todd” Ault, III effective January 9,
      2006. From 1993 through 2005 Mr. Spangler was Managing Director of Mancuso
&
Co., a private merchant banking and equity firm which arranges and participates
      in leveraged buyout acquisitions. Mr. Spangler is currently on advisory boards
      of NYPPE Holdings, LLC and Total Equips, Inc., both private
      companies.




91




***David
      Augustine,*** age
      45,
      was elected by the Board of Directors to serves as a Class I Director of the
      Company on January 24, 2007 to fill the vacancy created by the resignation
      of
      Brig. Gen. Lytle Brown, III effective January 24, 2007. Mr. Augustine has almost
      twenty years experience as a successful legal advisor, managing principal and
      business consultant. Mr. Augustine began his career as an attorney in the
      Mergers and Acquisitions department of Skadden, Arps, Slate, Meagher & Flom,
      representing predominantly Fortune 500 companies. Mr. Augustine also started
      up
      the firm’s restructuring and reorganization department in its Wilmington,
      Delaware office. Mr. Augustine has guided numerous companies through successful
      restructurings both as a business principal and as a legal advisor. He also
      has
      substantial experience in the areas of intellectual property development,
      protection, and licensing.





***William
      B. Horne,*** age 38,
      is the Company’s Chief Executive and Chief Financial Officer and Principal
      Accounting Officer. Mr. Horne was elected by the Board of Directors to serves
      as
      a Class I Director of the Company on January 9, 2007 to fill the vacancy created
      by the resignation of Milton “Todd” Ault III effective January 9, 2007. From
      July 5, 2005 until June 8, 2006, Mr. Horne was also the Chief Financial Officer
      and a director of The Ault Glazer Group, Inc. (f/k/a Ault Glazer Bodnar &
Company, Inc.), which is the managing member of AG Management. Since July 20,
      2005, Mr. Horne has been a director of Digicorp (OTCBB: DGCO). From July 20,
      2005 until April 20, 2007, Mr. Horne was also the Chief Financial Officer of
      Digicorp. From September 30, 2005 until December 29, 2005, Mr. Horne also served
      as Digicorp’s Chief Executive Officer and Chairman of Digicorp’s Board of
      Directors. Since January 2002, Mr. Horne has provided strategic financial
      consulting services to private and public companies. From May 2002 to April
      2005, Mr. Horne held the position of Chief Financial Officer of Alaska Wireless
      Communications, a privately held advanced cellular communications company.
      From
      November 1996 to December 2001, Mr. Horne held the position of Chief Financial
      Officer of The Phoenix Partners, a venture capital limited partnership located
      in Seattle, Washington.





***Wenchen
      Lin,*** age
      51,
      was elected by the Board of Directors to serves as a Class II Director of the
      Company on March 28, 2007 to fill the vacancy created by the resignation of
      Alice Campbell effective January 26, 2007. Mr. Lin has almost twenty years
      experience as the President and founder of A Plus International, a successful
      manufacturer producing a variety of surgical dressings, film and plastic
      products and servicing the custom procedural tray industry on cotton textile
      products. A Plus has established relationships with key market leaders in the
      industries that A Plus services. Mr. Lin began his career serving as
      Vice-President to large trade and shipping companies, such as Trade Diversified,
      Inc. and Brother Trucking Co. and has vast knowledge and experience in oversees
      factories, trade, transport and distribution. Mr. Lin received his MBA from
      Ohio
      University and his accounting degree from Taiwan Suzhou University.





**Series
      A Preferred Stock Directors**





***Louis
      Glazer, M.D., Ph.G.*** ,
      age 76,
      has served as a Class III Director of the Company since October 22, 2004. Dr.
      Glazer also currently serves as a member of AGB & Company IM’s advisory
      board and as an independent biotechnology and medical consultant. Until 2002,
      Dr. Glazer served as the chief anesthesiologist and medical director for the
      Vitreo-Retinal Clinic in Memphis, Tennessee. Prior to that, Dr. Glazer taught
      obstetrics anesthesia at the University of Tennessee, while practicing
      anesthesiology at Baptist East Hospital, Methodist Hospital, St. Francis
      Hospital and Baptist Memorial Hospital in Memphis, Tennessee. Dr. Glazer was
      also responsible for establishing anesthesia programs at Baptist Memorial
      Hospital and Methodist Hospital South in Memphis, Tennessee. Dr. Glazer received
      his B.S. in pharmacy from the University of Oklahoma and his M.D. from the
      University of Bologna School of Medicine in Italy.





***Herbert
      Langsam***  (1),
      (2) ,
      age 76,
      has served as a Class II Director of the Company since October 22, 2004. Mr.
      Langsam also currently serves as president of Medicare Recoveries, Inc., a
      private company located in Oklahoma City, Oklahoma focused on providing Medicare
      claims and recovery services. Mr. Langsam serves as a member of the board of
      trustees for the Geriatric Research Drug Therapy Institute and as an adjunct
      professor at the University of Oklahoma Pharmacy School. Previously, Mr. Langsam
      was the founder, president and chief executive officer of Langsam Health
      Services, a conglomerate of health care companies that serviced 17,000 long-term
      care residents, that was acquired by Omnicare, Inc. in 1991. Mr. Langsam also
      served as the vice president of pharmacy services for Omnicare, Inc. following
      its acquisition of Langsam Health Services. Mr. Langsam received his B.S. in
      pharmacy from the University of Oklahoma.




(1) Member
      of Compensation Committee; (2) Member
      of Audit Committee


92




**Executive
      Officers**





The
      executive officers of the Company as of May 8, 2007 are as follows:




***Name
                and Age***
            
            ***Title***
            
            ***Served
                as an***
              ***Officer
                Since***William
                B. Horne (38)
            
            Chief
                Executive Officer and Chief Financial Officer and Principal Accounting
                Officer
            
            2005Lynne
                Silverstein (36)
            
            Executive
                Vice President and Secretary
            
            2004William
                Adams (51)
            
            President
                and Chief Executive Officer of SurgiCount Medical, Inc.
            
            2005Rick
                Bertran (45)
            
            President
                of SurgiCount Medical, Inc.
            
            2005James
                Schafer (59)
            
            Director
                of Manufacturing of SurgiCount Medical, Inc.
            
            2005




Certain
      family relationships exist among the directors, executive officers and/or
      significant employees of the Company. Specifically, Lynne Silverstein, the
      Executive Vice President and Secretary of the Company, is the step-daughter
      of
      Louis Glazer. Louis Glazer is the Company’s former Chief Executive Officer and a
      Class III Director of the Company. In addition, Louis Glazer and Melanie Glazer
      are husband and wife. Melanie Glazer is the former Manager of a closed wholly
      owned subsidiary Ault Glazer Bodnar Capital Properties, LLC (f/k/a Franklin
      Capital Properties, LLC).





**Executive
      Officers**





***William
      B. Horne,*** age 38,
      Chief Executive and Chief Financial Officer and Principal Accounting Officer.
      For additional information about Mr. Horne, please see the Directors’
biographical information section above.





***Lynne
      Silverstein*** ,
      age 36,
      Executive Vice President and Secretary. From October 2003 until January 2007,
      Ms. Silverstein was also the Chief Executive Officer of The AG Group. Prior
      thereto, she was Director of Operations since January 2001, having joined Ault
      Glazer Bodnar & Company, Inc. in January 1999 as a Manager. From February
      1996 to October 1998 she was employed by STV Communications, a media content
      and
      preview kiosk company, serving as Marketing Director since February 1998. Ms.
      Silverstein received her B.S. in Communications from the University of
      Miami.





***Bill
      Adams,*** age 51,
      President and Chief Executive Officer of SurgiCount Medical, Inc. Mr. Adams
      has
      25 years of experience in the health care industry and the disposable medical
      supply business.  As the President of Health West Marketing since its
      inception in 1983, Mr. Adams pioneered the introduction of custom procedure
      trays into the acute care supply chain.  Additionally, Mr. Adams is one of
      the industry's leaders in taking advantage of global economics through the
      introduction of external manufacturing in China with A
      Plus
      International.  Mr. Adams has been actively involved in the design and
      development of SurgiCount Medical's Safety-Sponge System for several
      years and was instrumental in solidifying SurgiCount’s national distribution and
      manufacturing agreements.





***Richard
      Bertran,*** age 45,
      President of SurgiCount Medical, Inc. From September 2002 until July 2005,
      Mr.
      Bertran was Director of North American Sales for eNGENUITY Technology, a company
      in the visualization and simulation software industry. From 1988 to 1998, Mr.
      Bertran served as Western Regional Sales Manager for Maxxim Medical, a company
      that creates and packages custom surgical packs.




93




***James
      Schafer,*** age 59,
      Chief Operating Officer of SurgiCount Medical, Inc. From October 2004 until
      July
      2005, Mr. Schafer was Supply Chain Manager for Nypro, Inc., a custom injection
      molder serving the medical and telecommunications markets. From February 2004
      until October 2004, Mr. Schafer was Material Manager for C. Brewer, a custom
      injection molder serving the medical, electronic and sports markets. From 2002
      until 2004, Mr. Schafer was a supply chain and inventory management consultant
      for small to mid-sized privately held plastic companies. From 1999 to 2002,
      Mr.
      Schafer was Vice President of Purchasing for United Plastics Group, Inc., a
      manufacturer of custom injection molded plastic parts and sub-assemblies serving
      the automotive, electronic, medical and telecommunications markets.





**Certain
      Significant Employees**





***Darrell
      W. Grimsley, Jr.,*** age 40,
      Chief Executive Officer of Automotive Services Group, LLC. Mr. Grimsley has
      been
      a practicing attorney during the last five years. From May 1, 1999 to present,
      Mr. Grimsley has been managing member of D.W. Grimsley, Jr., LLC, a law firm
      practicing in the areas of credit, toxic torts, employment law, due diligence
      reporting and business consulting and advising. From October 1, 2003, Mr.
      Grimsley has been managing member of The Bankruptcy Group, LLC a law firm
      focusing on business and consumer bankruptcy law. Mr. Grimsley was a director
      of
      Digicorp (OTCBB: DGCO) from July 16, 2005 until December 29, 2005. Mr. Grimsley
      was a director of IPEX, Inc. (OTCBB: IPEX) from August 30, 2005 until February
      2, 2006.





**Audit
      Committee**





The
      primary function of the Audit Committee is to oversee and monitor the Company’s
      accounting and reporting processes and the audits of the Company’s financial
      statements. The Audit Committee is presently composed of two persons, including
      Messrs. Herbert Langsam and Arnold Spangler, each of whom are considered
      independent under Rule 10A-3 under the Securities Exchange Act of 1934, as
      amended, and each of whom is financially literate. Mr. Langsam serves as
      Chairman of the Audit Committee.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires the Company’s directors
      and executive officers and persons who beneficially own more than ten percent
      of
      a registered class of the Company’s equity securities to file with the SEC
      initial reports of ownership and reports of change in ownership of common stock
      and other equity securities of the Company. Officers, directors and greater
      than
      ten percent stockholders are required by SEC regulations to furnish the Company
      with copies of all Section 16(a) forms they file. To the Company’s knowledge,
      the following persons have failed to file, on a timely basis, the identified
      reports required by Section 16(a) of the Exchange Act during the most recent
      fiscal year ended December 31, 2006:




Name
                and Relationship
            
            Number
              of
                late reports
            
            Transactions
                not
              timely
                reported
            
            Known
                failures to
              file
                a required formLouis
                Glazer, M.D., Ph.G., Former Officer and Director
            
            9
            
            13
            
            0William
                B. Horne, Officer and Director
            
            4
            
            4
            
            0Lynne
                Silverstein, Officer
            
            6
            
            7
            
            0Arnold
                Spangler, Director
            
            2
            
            4
            
            0Herbert
                Langsam, Director
            
            5
            
            7
            
            0Bill
                Adams, Officer
            
            0
            
            0
            
            0Milton
                “Todd” Ault, III, Former Officer and Former Director
            
            6
            
            7
            
            0




94




**Item
      11. Executive Compensation.**





The
      following table sets forth information concerning the annual and long-term
      compensation earned by or paid to our Chief Executive Officer and to other
      persons who served as executive officers as at and/or during the fiscal year
      ended December 31, 2006 who earned compensation exceeding $100,000 during 2006
      (the ***“named
      executive officers”*** ),
      for
      services as executive officers for the last three fiscal years.




**SUMMARY
                COMPENSATION TABLE**Name
                and principal position
            
            Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            Stock
                Awards ($)(3)
            
            Option
                Awards ($)(3)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Nonqualified
                Deferred Compensation Earnings ($)
            
            All
                Other Compensation
              ($)(4)
            
            Total
              ($)William
                B. Horne, Chief Executive & Chief Financial Officer(1)
            
            2006
              2005
              2004
            
            150,000
              75,000
              0
            
            0
              750
              0
            
            38,703
              277,536
              0
            
            0
              227,732
              0
            
            0
              0
              0
            
            0
              0
              0
            
            255
              368
              0
            
            188,958
              581,386
              0Bill
                Adams, President & Chief Executive Officer of SurgiCount(2)
            
            2006
              2005
              2004
            
            206,250
              0
              0
            
            0
              0
              0
            
            0
              0
              0
            
            996,302
              0
              0
            
            0
              0
              0
            
            0
              0
              0
            
            822
              0
              0
            
            1,203,374
              0
              0Lynne
                Silverstein, Executive Vice President
            
            2006
              2005
              2004
            
            120,000
              120,000
              0
            
            0
              0
              0
            
            123,000
              158,000
              0
            
            108,085
              131,384
              0
            
            0
              0
              0
            
            0
              0
              0
            
            200
              591
              0
            
            351,285
              409,975
              0Richard
                Bertran, President of SurgiCount
            
            2006
              2005
              2004
            
            200,000
              92,500
              0
            
            0
              750
              0
            
            0
              36,000
              0
            
            0
              343,195
              0
            
            0
              0
              0
            
            0
              0
              0
            
            360
              433
              0
            
            200,360
              47,878
              0James
                Schafer,  Director  of Manufacturing of
                SurgiCount
            
            2006
              2005
              2004
            
            100,000
              39,807
              0
            
            0
              750
              0
            
            0
              50,000
              0
            
            0
              186,324
              0
            
            0
              0
              0
            
            0
              0
              0
            
            342
              361
              0
            
            100,342
              277,242
              0Louis
                Glazer, M.D., Ph.G., Former Chief Executive Officer
            
            2006
              2005
              2004
            
            118,750
              120,000
              0
            
            0
              750
              0
            
            246,000
              316,000
              0
            
            216,169
              262,768
              0
            
            0
              0
              0
            
            0
              0
              0
            
            1,060
              2,582
              0
            
            581,979
              702,100
              0Milton
                “Todd” Ault III, Former Chief Executive Officer
            
            2006
              2005
              2004
            
            180,000
              150,000
              0
            
            0
              750
              0
            
            270,000
              316,000
              0
            
            237,259
              262,768
              0
            
            0
              0
              0
            
            0
              0
              0
            
            184
              1,248
              0
            
            687,443
              730,766
              0





(1)
            Mr.
                Horne was appointed Chief Executive Officer on January 9,
                2007.


(2)
            Mr.
                Adams was appointed President on February 28, 2007 and Chief Executive
                Officer of SurgiCount on April 21, 2006.


(3)
            Represents
                the dollar amount recognized for financial reporting purposes of
                restricted stock grants and stock options awarded in 2006, 2005 and
                2004,
                respectively, computed in accordance with SFAS
                123(R).


(4)
            Primarily
                represents long term disability premiums and life insurance premiums
                paid
                by the Company





95




The
      following table sets forth information with respect to the named executive
      officers concerning the grant of stock options during the fiscal year ended
      December 31, 2006. The Company did not have any outstanding stock appreciation
      rights ( ***“SARs”*** )
      as of
      December 31, 2006.




**GRANTS
                OF PLAN-BASED AWARDS**Estimated
                Future Payouts Under Non-Equity Incentive Plan Awards
            
            Estimated
                Future Payouts Under Equity Incentive Plan Awards
            
            All
                Other Stock Awards: Number of Shares of Stocks
            
            All
              Other Option Awards: Number of Securities
            
            Exercise
                or Base Price of Option
            
            Grant
                Date Fair Value of Stock andName
            
            Grant
                Date
            
            Threshold
                 ($)
            
            Target ($)
            
            Maximum
                 ($)
            
            Threshold ($)
            
            Target ($)
            
            Maximum ($)
            
            or
              Units(#)
            
            Underlying
                Options(#)
            
            Awards
              ($/Sh)
            
            Option
                AwardsWilliam
                B. Home
            
            
            3/29/2006
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            12,648
            
            
            —
            
            
            0
            
            
            38,703Bill
                Adams
            
            
            4/18/2006
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            400,000
            
            
            3.50
            
            
            996,302Lynne
                Silverstein
            
            
            1/31/2006
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            45,000
            (1)
            
            4.10
            
            
            108,0851/31/2006
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            30,000
            
            
            —
            
            
            0
            
            
            123,000Richard
                Bertran
            
            
            —
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            —
            
            
            0
            
            
            0James
                Schafer
            
            
            —
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            —
            
            
            0
            
            
            0Louis
                Glazer, M.D., Ph.G.,
            
            
            1/31/2006
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            90,000
            (2)
            
            4.10
            
            
            216,1691/31/2006
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            60,000
            
            
            —
            
            
            0
            
            
            246,000Milton
                “Todd” Ault III
            
            
            1/09/2006
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            90,000
            (2)
            
            4.50
            
            
            237,2591/09/2006
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            60,000
            
            
            —
            
            
            0
            
            
            270,000





(1)
            15,000
                options were cancelled subsequent to the grant
                date.


(2)
            30,000
                options were cancelled subsequent to the grant
                date.




**OUTSTANDING
                EQUITY AWARDS AT FISCAL YEAR-END**OPTION
                AWARDS
            
            STOCK
                AWARDSName
            
            Number
                of Securities Underlying Unexercised Options (#)
              Exercisable
            
            Number
                of Securities Underlying Unexercised Options (#)
              Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying
                Unexercised
              Unearned
                Options(#)
            
            Option
                Exercise Price
              ($)
            
            Option
                Expiration
              Date
            
            Number
                of Shares or Units of Stock That Have Not Vested (#)
            
            Market
                Value of Shares or Units of Stock That Have Not Vested($)
            
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested (#)
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested(#)William
                B. Horne
            
            
            78,000
            
            
            0
            
            
            0
            
            
            5.267
            
            
            3/30/2015
            
            
            0
            
            
            0
            
            
            0
            
            
            0Bill
                Adams
            
            
            100,000
            
            
            300,000
            
            
            0
            
            
            3.50
            
            
            4/18/2016
            
            
            0
            
            
            0
            
            
            0
            
            
            0Lynne
                Silverstein
            
            
            45,000
              30,000
            
            
            0
              0
            
            
            0
              0
            
            
            5.267
              4.10
            
            
            3/30/2015
              1/31/2016
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0Richard
                Bertran
            
            
            66,667
            
            
            133,333
            
            
            0
            
            
            5.00
            
            
            7/18/2015
            
            
            0
            
            
            0
            
            
            0
            
            
            0James
                Schafer
            
            
            31,250
            
            
            118,750
            
            
            0
            
            
            5.00
            
            
            8/08/2015
            
            
            0
            
            
            0
            
            
            0
            
            
            0Louis
                Glazer, M.D., Ph.G.,
            
            
            75,000
              60,000
            
            
            0
              0
            
            
            0
              0
            
            
            5.267
              4.10
            
            
            3/30/2015
              1/31/2016
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0Milton
                “Todd” Ault III
            
            
            75,000
              60,000
            
            
            0
              0
            
            
            0
              0
            
            
            5.267
              4.10
            
            
            3/30/2015
              1/09/2016
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0




96




**OPTION
                EXERCISES AND STOCK VESTED**OPTION
                AWARDS
            
            STOCK
                AWARDSName
            
            Number
                of
              Shares
                Aquired
              on
                Exercise
              (#)
            
            Value
              Realized
              on
                Exercise
              ($)
            
            Number
                of
              Shares
              Aquired
              on
                Vesting
              (#)
            
            Value
              Realized
              on
                Vesting
              ($)William
                B. Horne
            
            
            0
            
            
            0
            
            
            49,751
            
            
            161,365Bill
                Adams
            
            
            0
            
            
            0
            
            
            0
            
            
            0Lynne
                Silverstein
            
            
            0
            
            
            0
            
            
            48,000
            
            
            205,800Richard
                Bertran
            
            
            0
            
            
            0
            
            
            0
            
            
            0James
                Schafer
            
            
            0
            
            
            0
            
            
            0
            
            
            0Louis
                Glazer, M.D., Ph.G.,
            
            
            0
            
            
            0
            
            
            96,000
            
            
            411,600Milton
                “Todd” Ault III
            
            
            0
            
            
            0
            
            
            96,000
            
            
            435,600




**Pension
      Benefits**





The
      Company does not offer a pension benefit plan.





**Non-Qualified
      Deferred Compensation**





The
      Company does not offer a non-qualified deferred compensation
      plan.





**Compensation
      of Directors**





As
      of
      December 31, 2006, each director of the Company is eligible to receive a fee
      of
      $500 plus reimbursement of expenses incurred in attending each board meeting.
      In
      addition, directors are eligible to receive grants of restricted stock and/or
      stock options pursuant to the Company’s compensation plans which are described
      below. During 2006, the Company did not compensate any of its directors in
      cash. The
      following table provides certain summary information concerning the compensation
      paid to directors, other than William Horne (our Chief Executive Officer),
      Milton “Todd” Ault III and Louis Glazer, M.D., Ph.G. (our former Chief Executive
      Officers), during 2006. All compensation paid to Messrs .
      Horne,
      Ault and Glazer is set forth in the table under “Executive
      Compensation.”




97




**Director
      Compensation**





Name
            
            Fees
                Earned or Paid in Cash ($)
            
            Stock
              Awards
                ($)(5)
            
            Option
              Awards
                ($)(5)
            
            Non-Equity
              Incentive
                Plan
              Compensation
                ($)
            
            Change
                in Pension
              Value
                and Nonqualified
              Deferred
                Compensation
              Earnings
                ($)
            
            All
                Other
              Compensation
                ($)
            
            Total
                ($)Arnold
                Spangler
            
            
            0
            
            
            43,000
            
            
            37,786
            
            
            0
            
            
            0
            
            
            0
            
            
            80,786Herbert
                Langsam
            
            
            0
            
            
            43,000
            
            
            37,786
            
            
            0
            
            
            0
            
            
            0
            
            
            80,786David
                Augustine(1)
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Wenchen
                Lin(2)
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Alice
                Campbell(3)
            
            
            0
            
            
            49,450
            
            
            37,786
            
            
            0
            
            
            0
            
            
            0
            
            
            87,236Brigadier
                General (Ret.) Lytle Brown III(4)
            
            
            0
            
            
            43,000
            
            
            37,786
            
            
            0
            
            
            0
            
            
            0
            
            
            80,786





(1)
            Mr.
                Augustine was appointed as a director effective January 24,
                2007.


(2)
            Mr.
                Lin was appointed as a director effective March 28,
                2007.


(3)
              Ms.
                  Campbell resigned as a director effective January 26,
                  2007.


(4)
            Mr.
                Brown resigned as a director effective January 24,
                2007.


(5)
            Represents
                the dollar amount recognized for financial reporting purposes of
                restricted stock grants and stock options awarded, computed in accordance
                with SFAS 123(R).





**Compensation
      Committee Interlocks and Insider Participation**





The
      Compensation Committee members currently are Messrs. Herbert Langsam and Arnold
      Spangler, each of whom is independent. Each member of the Compensation Committee
      is a “non-employee director” for purposes of Rule 16b-3 under Section 16 of the
      Exchange Act and an “outside director” for purposes of Section 162(m) of the
      Internal Revenue Code. Mr. Langsam serves as the Chairman of the Compensation
      Committee. None of these individuals is a present or former officer or employee
      of the Company.





During
      the last fiscal year, no executive officer of the Company served either as:
      (1)
      a member of the compensation committee (or other board committee performing
      equivalent functions or, in the absence of any such committee, the entire board
      of directors) of another entity, one of whose executive officers served on
      the
      compensation committee (or other board committee performing equivalent functions
      or, in the absence of any such committee, the entire board of directors) of
      the
      Company; (2) a director of another entity, one of whose executive officers
      served on the compensation committee (or other board committee performing
      equivalent functions or, in the absence of any such committee, the entire board
      of directors) of the Company; or (3) a member of the compensation committee
      (or
      other board committee performing equivalent functions or, in the absence of
      any
      such committee, the entire board of directors) of another entity, one of whose
      executive officers served as a director of the Company.





**Employment
      Agreements**





On
      June
      13, 2005, we entered into an employment agreement with William B. Horne as
      Chief
      Financial Officer of the Company and its subsidiaries, which became effective
      on
      July 5, 2005. Mr. Horne’s title subsequently was changed to Chief Executive
      Officer of the Company. The agreement continues for a term of 24 months. The
      agreement will automatically renew for successive one-year terms unless either
      party delivers to the other party written notice of termination at least 30
      days
      before the end of the then current term. Mr. Horne’s base compensation under the
      agreement was $150,000 per year. Effective January 1, 2007 Mr. Horne’s base
      salary was increased to $250,000 per year. Upon entering into the agreement,
      Mr.
      Horne was granted 26,316 shares of restricted stock which vested during the
      first year of the agreement. In addition, Mr. Horne is eligible to receive
      shares of the Company’s common stock or options to purchase shares of the
      Company’s common stock from time to time as determined by the Board of
      Directors. The Company is required to promptly reimburse Mr. Horne for all
      reasonable out-of-pocket business expenses incurred in performing the
      responsibilities under the agreement. Mr. Horne is entitled to participate
      in
      any of the Company’s benefit plans in effect from time to time for employees of
      the Company. Mr. Horne is entitled to three weeks of paid vacation, to be
      scheduled and taken in accordance with the Company’s standard vacation policies.
      In addition, Mr. Horne is entitled to sick leave and holidays at full pay in
      accordance with the Company’s policies established and in effect from time to
      time. The agreement also contains customary provisions for disability, death,
      confidentiality, indemnification and non-competition. Both the Company and
      Mr.
      Horne have the right to voluntarily terminate the employment agreement at any
      time with or without cause. If the Company voluntarily terminates the agreement,
      the Company must pay Mr. Horne a cash sum equal to (a) all accrued base salary
      through the date of termination plus all accrued vacation pay and cash bonuses,
      if any, plus (b) as severance compensation, an amount equal to Mr. Horne’s then
      base salary for the remaining employment term, but only through July 5, 2007.
      If
      Mr. Horne voluntarily terminates the agreement, all unvested restricted stock
      and stock options will be forfeited. In the event of a merger, consolidation,
      sale, or change of control, the surviving or resulting company is required
      to
      honor the terms of the agreement with Mr. Horne.




98




Effective
      July 18, 2005, the Company’s subsidiary SurgiCount entered into an employment
      agreement with Richard Bertran as Executive Vice President of SurgiCount. Mr.
      Bertran’s title subsequently was changed to President of SurgiCount. Mr.
      Bertran’s annual base compensation is $200,000. In addition, Mr. Bertran is
      entitled to receive: (a) options to purchase 200,000 shares of the Company’s
      common stock with a strike price of $5.00 per share, which options will vest
      annually over three years; and (b) 10,000 restricted shares of the Company’s
      common stock as a signing bonus. Mr. Bertran also may receive the following
      stock options upon accomplishing milestones: (a) options to purchase 50,000
      shares of the Company’s common stock when SurgiCount reaches $5 million in
      sales; and (b) options to purchase 50,000 shares of the Company’s common stock
      when Mr. Bertran accomplishes certain other unspecified milestones to be
      mutually agreed upon among Mr. Bertran, SurgiCount’s Chief Executive Officer and
      Health West. Mr. Bertran is also entitled to participate in all of SurgiCount’s
      employee benefit plans in effect from time to time. The employment agreement
      has
      an initial term of three years and will automatically renew for successive
      one-year periods unless sooner terminated. Mr. Bertran and SurgiCount have
      the
      right to terminate the employment agreement at any time during the employment
      term for any reason. SurgiCount may also terminate the employment agreement
      at
      any time for “cause” (as defined in the employment agreement). If the employment
      agreement is voluntarily terminated by Mr. Bertran or if SurgiCount terminates
      the agreement for cause, then all unvested stock options and/or unearned
      milestone bonuses will be forfeited and all obligations of the parties will
      end
      except SurgiCount must continue to reimburse Mr. Bertran for reasonable
      out-of-pocket business expenses related to his employment with SurgiCount,
      Mr.
      Bertan must continue to maintain the confidentiality of any confidential
      information about SurgiCount and SurgiCount may be required to indemnify Mr.
      Bertran for certain liabilities in connection with his employment. If SurgiCount
      voluntarily terminates the employment agreement without cause, then: (a) if
      the
      termination date is before 15 months after the effective date of the employment
      agreement, SurgiCount must pay Mr. Bertran severance compensation in cash equal
      to 15 months of base compensation, plus award the milestone option grants to
      the
      extent the milestones are met within the employment term; (b) if the termination
      date occurs within the final 15 months of the initial term, SurgiCount must
      pay
      Mr. Bertran severance compensation in cash through the remaining initial term
      of
      the agreement; and (c) all unvested stock options will become automatically
      vested.





Effective
      August 8, 2005 the Company’s subsidiary SurgiCount entered into an employment
      agreement with James Schafer as Chief Operating Officer of SurgiCount. The
      employment agreement continues for an initial term of 24 months and will
      automatically renew for successive one-year terms unless either party delivers
      to the other party written notice of termination at least 30 days before the
      end
      of the then current term. Mr. Schafer’s base compensation is $100,000 per year.
      Mr. Schafer will receive restricted stock of the Company annually in an amount
      valued at $50,000. The first $50,000 of restricted stock vested on the effective
      date of the employment agreement and the second $50,000 of restricted stock
      will
      vest on the second year anniversary of the agreement. In addition, Mr. Schafer
      will receive 125,000 stock options of the Company which will vest quarterly
      over
      four years with a strike price of $5.00 per share. SurgiCount is required to
      promptly reimburse Mr. Schafer for all reasonable out-of-pocket business
      expenses incurred in performing his responsibilities. SurgiCount also agreed
      to
      pay Mr. Schafer relocation/moving expenses of $8,000 and an automobile allowance
      of $6,000 per year. Mr. Schafer is entitled to participate in all of
      SurgiCount’s benefit plans in effect from time to time for employees of
      SurgiCount. Mr. Schafer is entitled to three weeks of paid vacation, to be
      scheduled and taken in accordance with SurgiCount’s standard vacation policies.
      In addition, Mr. Schafer is entitled to sick leave and holidays at full pay
      in
      accordance with SurgiCount’s policies established and in effect from time to
      time. The agreement also contains customary provisions for disability, death,
      confidentiality, indemnification and non-competition. Both SurgiCount and Mr.
      Schafer have the right to voluntarily terminate the employment agreement at
      any
      time with or without cause. If SurgiCount voluntarily terminates the agreement,
      SurgiCount must pay Mr. Schafer a cash sum equal to (a) all accrued base salary
      through the date of termination plus all accrued vacation pay and cash bonuses,
      if any, plus (b) as severance compensation, an amount equal to Mr. Schafer’s
      then base salary for 12 months, but if such termination is within the final
      12
      months of employment then Mr. Schafer will receive his base salary for the
      remainder of the term. If Mr. Schafer voluntarily terminates the agreement,
      all
      unvested restricted stock and stock options will be forfeited. In the event
      of a
      merger, consolidation, sale, or change of control, the surviving or resulting
      company is required to honor the terms of the agreement with Mr.
      Schafer.




99




Effective
      April 21, 2006, the Company’s subsidiary SurgiCount entered into an employment
      agreement with William M. Adams to employ Mr. Adams as SurgiCount’s Chief
      Executive Officer. The term of the employment agreement will end effective
      at
      midnight on April 17, 2009 unless extended by the mutual written consent of
      SurgiCount and Mr. Adams. SurgiCount agreed to pay Mr. Adams an annual base
      salary of $300,000 during the term of the employment agreement. In addition,
      Mr.
      Adams is eligible to receive annual bonuses in cash or stock as determined
      by
      the Board of Directors of SurgiCount and/or the Company. Pursuant to the
      employment agreement, the Company granted Mr. Adams options to purchase 300,000
      shares of the Company’s common stock with an exercise price of $3.50 per share.
      One-third of such options will vest annually over three years beginning April
      18, 2007. However, all of the options will vest immediately upon a sale or
      exchange of 50% or more of SurgiCount’s outstanding capital stock or a joint
      venture by SurgiCount with an unaffiliated entity involving 50% or more of
      SurgiCount’s outstanding capital stock. Mr. Adams will also receive $10,000 of
      restricted stock of the Company annually on April 30, 2007, April 18, 2008
      and
      April 18, 2009. Additionally, Mr. Adams will receive options to purchase an
      additional 100,000 shares of common stock of the Company with an exercise price
      of $3.50 per share which will vest upon either of the following events: (a)
      a
      sale or exchange of 50% or more of SurgiCount’s outstanding capital stock or a
      joint venture by SurgiCount with an unaffiliated entity; or (b) if on or prior
      to December 31, 2008, SurgiCount’s cumulative sales from the inception of
      SurgiCount equal or exceed $10 million. Mr. Adams and his family are also
      entitled to participate in any of SurgiCount’s benefit plans in effect from time
      to time for the benefit of SurgiCount’s employees. SurgiCount and Mr. Adams have
      the right to terminate the employment agreement at any time upon 30 days prior
      written notice unless circumstances dictate that such notice cannot reasonably
      be given. SurgiCount has the right to terminate the employment agreement for
      cause in certain circumstances described in the agreement. If SurgiCount
      voluntarily terminates the employment agreement without cause, SurgiCount must
      pay Mr. Adams his accrued compensation through the termination date plus the
      following severance compensation. If the employment agreement is terminated
      by
      the Company without cause prior to the first anniversary of the start date
      of
      employment, SurgiCount must pay Mr. Adams 24 months of his base salary as
      severance compensation. If the employment is terminated by the Company without
      cause after the first anniversary of the start date of employment, SurgiCount
      must pay Mr. Adams his base salary for the remainder of the employment term
      as
      severance compensation. The agreement also contains customary provisions for
      disability, death, confidentiality and non-solicitation.




**Consulting
      Agreements**





On
      April
      5, 2005, the Company entered into a consulting agreement with Health West,
      pursuant to which Health West agreed to help the Company establish a
      comprehensive manufacturing and distribution strategy for the Company’s
      Safety-SpongeTM System worldwide. In consideration for Health West’s services,
      the Company agreed to issue Health West 42,017 shares of common stock, to be
      issued as follows: (a) 10,505 shares were issued upon signing the consulting
      agreement; (b) an additional 15,756 shares were issued as a result of Health
      West’s assistance in structuring a comprehensive manufacturing agreement with A
      Plus Manufacturing, which was entered into on August 17, 2005; and (c) the
      Company has agreed to issue the remaining 15,756 shares for Health West’s
      services in assisting with the development of a regional distribution network
      to
      integrate the Safety-SpongeTM System into the existing acute care supply chain.
      The remaining shares will be issued during 2007. As incentive for entering
      into
      the agreement, the Company issued Health West a callable warrant to purchase
      150,000 shares of common stock with an exercise price of $5.95 per share,
      exercisable for five years. In addition, the Company agreed to issue a callable
      warrant to purchase 25,000 shares of the common stock with an exercise price
      of
      $5.95 per share, exercisable upon assisting the Company with developing a global
      distribution strategy and identification of acquisition candidates. Mr. Adams
      is
      Chief Executive Officer of Health West as well as its President. The Health
      West
      agreement was terminated by the Company’s Board of Directors upon Mr. Adams
      appointment as SurgiCount’s Chief Executive Officer effective as of April 21,
      2006.




100




**Compensation
      Plans**





On
      September 9, 1997, the Company’s stockholders approved two stock option plans: a
      Stock Incentive Plan ( ***“Stock
      Incentive Plan”*** )
      to be
      offered to consultants, officers and employees (including any officer or
      employee who is also a director of the Company) and a Non-Statutory Stock Option
      Plan ( ***“Stock
      Option Plan”*** )
      to be
      offered to “outside” directors ( *i.e.* ,
      those
      directors who are not also officers or employees) (collectively, the ***“1997
      Stock Option Plans”*** ).
      337,500 shares (post 3:1 forward split effective April 5, 2005) of the Company’s
      common stock was reserved for issuance under the 1997 Stock Option Plans, of
      which 202,500 shares was reserved for the Stock Incentive Plan and 135,000
      shares was reserved for the Stock Option Plan. During 2006, the Company
      cancelled the 1997 Stock Option Plans and the remaining 56,250 shares available
      for grant under these plans. There were no outstanding options under the 1997
      Stock Option Plans at the time of their cancellation.




On
      March
      30, 2005, the Company’s stockholders approved the Company’s Stock Option and
      Restricted Stock Plan, which provided for the issuance of a maximum of
      twenty-five percent (25%) of the shares of common stock that were outstanding
      as
      of the date on which the plan was adopted (1,319,082 shares) to be offered
      to the Company’s consultants, officers and employees (including any officer or
      employee who is also a director of the Company). On November 17, 2005 the
      Company’s stockholders approved an Amended and Restated Stock Option and
      Restricted Stock Plan ( ***“Amended
      and Restated Stock Option and Restricted Stock Plan”*** ),
      which
      increased the number of shares authorized for issuance to 2,500,000 shares
      and
      authorized the issuance of warrants to consultants.





Shares
      subject to options that terminate or expire prior to exercise will be available
      for future grants under the plans.





On
      December 31, 2006, there were 13,500 shares of common stock and 1,704,000
      options to purchase shares of common stock outstanding under the Amended and
      Restated Stock Option and Restricted Stock Plan, with 26,026 options, warrants,
      or shares of common stock available for future issuance under the Amended and
      Restated Stock Option and Restricted Stock Plan.





The
      following is a description of the Amended and Restated Stock Option and
      Restricted Stock Plan.





***Amended
      and Restated Stock Option and Restricted Stock Plan***




*Purpose*





The
      purpose of the Amended and Restated Stock Option and Restricted Stock Plan
      is to
      advance the interests of the Company by providing key employees who have
      substantial responsibility for the direction and management of the Company,
      as
      well as certain directors, other employees and consultants with additional
      incentives to exert their best efforts to increase their proprietary interest
      in
      the success of the Company, to reward outstanding performance, and to attract
      and retain persons of outstanding ability.




101




*Type
      of Awards*





The
      Amended and Restated Stock Option and Restricted Stock Plan permits, at the
      discretion of the Compensation Committee, the grant of options to purchase
      common stock (including ISOs or non-ISOs, warrants to purchase common stock
      and
      restricted stock.





*Administration*





The
      Amended and Restated Stock Option and Restricted Stock Plan is administered
      by
      the Company’s Compensation Committee, which is comprised of at least two members
      of the Company’s Board, each of whom is (a) a non-employee director, as
      defined in Rule 16b-3 promulgated under the Exchange Act; (b) an
“outside director” as defined under Section 162(m) of the Internal Revenue
      Code; and (c) an independent director under the rules established by
      AMEX.





*Participants*





The
      Compensation Committee determines and designates those officers, employees,
      non-officer directors and consultants of the Company who are eligible to
      participate in the Amended and Restated Stock Option and Restricted Stock Plan.
      The Compensation Committee also determines the number of options, warrants
      and
      shares of restricted stock to be awarded to each participant. In making these
      determinations, the Compensation Committee takes into account the potential
      contributions of the participant to the success of the Company, and such other
      factors as the Compensation Committee deems relevant to accomplish the purposes
      of the Amended and Restated Stock Option and Restricted Stock Plan.




*Termination.*





All
      rights to exercise options and warrants terminate sixty days after any optionee
      or warrant holder ceases to be a director of the Company or a key employee
      or
      consultant of the Company and/or any of its subsidiaries, and no options or
      warrants will vest after an optionee’s or warrant holder’s termination date.
      Notwithstanding the foregoing, however, if an optionee’s or warrant holder’s
      service as a director of the Company or key employee or consultant terminates
      as
      a result of the optionee’s or warrant holder’s death or his total and permanent
      disability, the optionee, warrant holder or the executors or administrators
      or
      legatees or distributees of the estate, as the case may be and to the extent
      they are permitted transferees, have the right, from time to time within one
      year after the optionee’s or warrant holder’s total and permanent disability or
      death and prior to the expiration of the term of the option or warrant, to
      exercise any portion of the option or warrant not previously exercised, in
      whole
      or in part, as provided in the respective agreement evidencing the award of
      the
      options or warrants. A participant’s rights to shares awarded as restricted
      stock are set forth in the agreement evidencing the award.




102




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




**Equity
      Compensation Plan Information**




The
      following table shows information with respect to equity compensation plans
      under which the Company's common stock is authorized for issuance as of the
      fiscal year ended December 31, 2006.





**Plan
                category**
            
            **Number
                of securities**
              **to
                be issued upon**
              **exercise
                of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            **Weighted
                average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
            
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance under**
              **equity
                compensation**
              **plans
                (excluding**
              **securities
                reflected in**
              **column
                (a)****(a)**
            
            **(b)**
            
            **(c)****Equity
                compensation plans**
              **approved
                by security**
              **holders**(1)
            
            
            1,717,500
            
            $
            4.50
            
            
            26,026**Equity
                compensation plans**
              **not
                approved by security**
              **holders**
            
            
            -0-
            
            
            -0-
            
            
            -0-**Total**
            
            
            1,717,500
            
            $
            4.50
            
            
            26,026




(1)
            Includes
                options to purchase shares of Company common stock under the Amended
                and
                Restated Stock Option and Restricted Stock Plan approved on November
                17,
                2005.





**Security
      Ownership of Certain Beneficial Owners and Management**





The
      following tables set forth certain information with respect to beneficial
      ownership (as that term is defined in the rules and regulations of the SEC)
      of
      the Company’s common stock and preferred stock as of May 8, 2007, by (1) each
      person who is known by the Company to be the beneficial owner of more than
      five
      percent of the outstanding common stock and preferred stock, (2) each director
      of the Company, (3) each current executive officer listed in the Summary
      Compensation Table and (4) all directors and named executive officers of the
      Company as a group. Except as otherwise indicated, to the Company’s knowledge,
      all shares are beneficially owned and investment and voting power is held as
      stated by the persons named as owners. The address for all beneficial owners,
      unless stated otherwise below, is c/o Patient Safety Technologies, Inc., 27555
      Ynez Road, Suite 330, Temecula, CA 92591.




103




**Beneficial
                Ownership****Name
                and Address of Beneficial Owner**
            
            **Number
                of Shares**
              **of
                Common Stock (1)**
            
            **Percent**
              **of
                Class**
            
            **Number
                of Shares**
              **of
                Preferred Stock (2)**
            
            **Percent**
              **of
                Class****Greater
                than 5% Beneficial Owners****:**Ault
                Glazer Asset Management LLC
              1800
                Century Park East, Ste. 200
              Los
                Angeles, California 90067
            
            
            3,312,187
            (3)
            
            31.4
            %
            
            10,750
            (3)
            
            98.2
            %DSAM
                Fund LP
              222
                Broadway, 6thFloor
              New
                York, NY 10038
            
            
            1,230,000
            (4)
            
            11.9
            %
            
            —
            
            
            —Alan
                E. Morelli
              225
                Mantua Road
              Pacific
                Palisades, California 90272
            
            
            1,151,351
            (5)
            
            10.4
            %
            
            —
            
            
            —A
                Plus International, Inc.
              5138
                Eucalyptus Avenue
              Chino,
                California 91710
            
            
            1,100,000
            (6)
            
            10.7
            %
            
            —
            
            
            —Steven
                Bodnar & Bodnar Capital Management LLC
              680
                Old Academy Road
              Fairfield,
                CT 06824
            
            
            843,750
            (7)
            
            8.3
            %
            
            —
            
            
            —**Directors
                and Named Executive Officers****:**Louis
                Glazer, M.D., Ph.G
            
            
            141,600
            (8)
            
            1.4
            %
            
            —
            
            
            —Lynne
                Silverstein
            
            
            146,330
            (9)
            
            1.5
            %
            
            —
            
            
            —William
                B. Horne
            
            
            226,016
            (10)
            
            2.3
            %
            
            —
            
            
            —Richard
                Bertran
            
            
            76,667
            
            
            *
            
            
            —
            
            
            —James
                Schafer
            
            
            56,544
            
            
            *
            
            
            —
            
            
            —Arnold
                Spangler
            
            
            156,250
            (11)
            
            1.6
            %
            
            —
            
            
            —Bill
                Adams
            
            
            186,261
            (12)
            
            1.9
            %
            
            —
            
            
            —Wenchen
                Lin
            
            
            1,100,000
            (6)
            
            10.7
            %
            
            —
            
            
            —David
                Augustine
            
            
            12,500
            (13)
            
            *
            
            
            —
            
            
            —Herbert
                Langsam
            
            
            172,903
            (14)
            
            1.7
            %
            
            —
            
            
            —All
                directors and named executive
              officers
                as a group (10 persons)
            
            
            2,275,071
            
            
            20.9
            %
            
            —
            
            
            —





*
            Represents
                less than 1%




104




(1)
            Applicable
                percentage ownership is based on 9,937,059 shares of common stock
                outstanding as of May 8, 2007, together with securities exercisable
                or
                convertible into shares of common stock within 60 days of May 8,
                2007 for
                each security holder. Beneficial ownership is determined in accordance
                with the rules of the Securities and Exchange Commission and generally
                includes voting or investment power with respect to securities. Shares
                of
                common stock that a person has the right to acquire beneficial ownership
                of upon the exercise or conversion of options, convertible stock,
                warrants
                or other securities that are currently exercisable or convertible
                or that
                will become exercisable or convertible within 60 days of May 8, 2007
                are
                deemed to be beneficially owned by the person holding such securities
                for
                the purpose of computing the percentage of ownership of such person,
                but
                are not treated as outstanding for the purpose of computing the percentage
                ownership of any other person.




(2)
            Applicable
                percentage ownership is based on 10,950 shares of Series A Convertible
                Preferred Stock outstanding. Each share of Series A Convertible Preferred
                Stock is convertible into 22.5 shares of common stock. Except as
                otherwise
                required by law, each holder of Series A Convertible Preferred Stock
                is
                entitled to vote on all matters submitted to our stockholders, voting
                together with the holders of common stock as a single class, with
                each
                shares of Series A Convertible Preferred Stock entitled to one vote
                per
                share.




(3)
            Ault
                Glazer Asset Management LLC (***“AG
                Management”***)
                is a registered Investment Adviser. The securities beneficially owned
                by
                AG Management represents securities held by certain private investment
                funds and individual accounts managed by AG Management. Shares of
                common
                stock beneficially owned includes 241,875 shares of common stock
                issuable upon conversion of 10,750 shares of Series A Convertible
                Preferred Stock. The managing member of AG Management is The Ault
                Glazer
                Group, Inc. (***“The
                AG Group”***).
                Milton “Todd” Ault, III, and Melanie Glazer may be deemed to beneficially
                own the securities held by AG Management due to their relationships
                with
                AG Management: the Company’s former Chairman and former Chief Executive
                Officer, Milton “Todd” Ault, III, is Chairman, Chief Executive Officer and
                President of The AG Group; and Melanie Glazer, the former Manager
                of the
                Company’s closed subsidiary Ault Glazer Bodnar Capital Properties, LLC, is
                a director of The AG Group.




(4)
            Consists
                of: (a) 820,000 shares of common stock; and (b) warrants for purchase
                of
                410,000 shares of common stock.




(5)
            Consists
                of warrants to purchase shares of common
                stock.




(6)
            A
                Plus International, Inc. owns 800,000 shares of common stock and
                warrants to purchase 300,000 shares of common stock.
                Mr. Lin has the power to vote and direct the disposition of all
                securities owned by A Plus International,
                Inc.




(7)
            Pursuant
                to the Schedule 13D filed by Steven Bodnar on December 17, 2004,
                Bodnar Capital Management LLC owns 562,500 shares of common stock and
                warrants to purchase 281,250 shares of common stock.
                Mr. Bodnar has the power to vote and direct the disposition of all
                securities owned by Bodnar Capital Management
                LLC.




(8)
            Consists
                of: (a) 6,600 shares of common stock; (b) 60,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $4.10
                per share that expire on January 31, 2016; and (d) 75,000 shares
                of common
                stock issuable upon exercise of stock options with an exercise price
                of
                $5.27 per share that expire on March 30,
                2015.




(9)
            Consists
                of: (a) 71,330 shares of common stock; (b) 45,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $5.27
                per shares that expire March 30, 2015; and (c) 30,000 shares of common
                stock issuable upon exercise of stock options with an exercise price
                of
                $4.10 per shares that expire January 31,
                2016.




(10)
            Consists
                of: (a) 128,016 shares of common stock; and (b) 78,000 shares of
                common
                stock issuable upon exercise of stock options with an exercise price
                of
                $5.27 per shares that expire March 30, 2015; and (c) warrants for
                purchase
                of 20,000 shares of common stock.




(11)
            Consists
                of: (a) 102,500 shares of common stock; (b) 15,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $4.30
                per share that expire on January 25, 2016; and (c) warrants for purchase
                of 38,750 shares of common stock.




(12)
            Consists
                of: (a) 66,261 shares of common stock; (b) 100,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $3.50
                per share that expire on April 21, 2016; and (c) warrants for purchase
                of
                20,000 shares of common stock.




(13)
            Consists
                of 12,500 shares of common stock issuable upon exercise of stock
                options
                with an exercise price of $1.75 per share that expire on January
                24,
                2017.




(14)
            Consists
                of: (a) 93,403 shares of common stock; (b) 15,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $4.30
                per share that expire on January 25, 2016; (c) 4,500 shares of common
                stock issuable upon exercise of stock options with an exercise price
                of
                $5.27 per share that expire on March 30, 2015; and (d) warrants for
                purchase of 60,000 shares of common
                stock.




105




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





Management
      believes that all of the below transactions were on terms at least as favorable
      as could be obtained from unrelated third parties.





**Severance
      Granted to Former Chief Executive Officer**





Milton
      “Todd” Ault, III resigned as our Chairman and Chief Executive Officer on January
      9, 2006. Subsequent to his resignation our Board of Directors granted Mr. Ault
      severance compensation which includes one year of salary totaling $150,000,
      options to purchase 90,000 shares of the Company’s common stock and 60,000
      shares of the Company’s common stock.




**Related
      Transactions with AGB & Company Inc and its Related
      Entities**





Certain
      of the Company's officers, directors and/or their family members had existing
      responsibilities to act and/or provide services as executive officers,
      directors, owners and/or managers of AG Management and its parent company The
      AG
      Group. While, certain conflicts of interest between the Company and AG
      Management and The AG Group may have occurred from time to time, the Company
      believes that any such conflicts of interest, to the extent they occurred,
      were
      resolved in the Company’s favor. The officers and directors of the Company are
      accountable to the Company and to its stockholders as fiduciaries, which
      requires that the officers and directors exercise good faith and integrity
      in
      handling the Company's affairs. Specifically, the Company’s former Chairman and
      former Chief Executive Officer, Milton “Todd” Ault, III, is Chairman, Chief
      Executive Officer and President of The AG Group, the Company’s current Chief
      Executive Officer, Chief Financial Officer and director, William B. Horne,
      was
      the Chief Financial Officer of The AG Group, and Melanie Glazer, former Manager
      of the Company’s closed subsidiary Ault Glazer Bodnar Capital Properties, LLC,
      is a director of The AG Group.





The
      Board
      does not believe that the Company has any conflicts of interest with the
      business of AG Management or The AG Group other than the past responsibilities
      of Mr. Ault, Mr. Horne and Mrs. Glazer to devote time providing certain
      management and administrative services to The AG Group, AG Management and AG
      Management’s clients from time-to-time. However, subject to applicable law, the
      Company may engage in transactions with The AG Group and AG Management and
      related parties in the future, including but not limited to financing
      transactions, acquisitions and/or joint investments in target industries. These
      related party transactions may raise conflicts of interest and, although the
      Company does not have a formal policy to address such conflicts of interest,
      the
      Audit Committee intends to evaluate relationships and transactions involving
      conflicts of interest on a case by case basis.





The
      Audit
      Committee will conduct a review of all related party transactions for potential
      conflict of interest situations on an ongoing basis, and the approval of the
      Audit Committee will be required for all such transactions. The Audit Committee
      intends that any related party transactions will be on terms and conditions
      no
      less favorable to the Company than those terms and conditions reasonably
      obtainable from third parties and in accordance with applicable
      law.





The
      Company shares office space, telephone, computer, Internet service, office
      supplies and administrative and secretarial support with AG Management at 1800
      Century Park East, Ste. 200, Los Angeles, California 90067. Until recently,
      the
      Company was responsible for paying approximately 25% of the lease expense
      associated with such office space, goods and services, which amounted to
      approximately $8,100 per month. Effective March 31, 2007, the Company had
      consolidated the majority of its operations in the Company’s Temecula office and
      was no longer required to pay lease expense associated with the 1800 Century
      Park East location.




During
      the fiscal years ended December 31, 2006 and 2005, Ault Glazer Capital Partners,
      LLC (formerly AGB Acquisition Fund) (the ***“Fund”*** ),
      a
      subsidiary company of The AG Group, loaned an aggregate of $1,495,000 and
      $1,117,000, respectively, to Automotive Services Group, LLC ( ***“ASG”*** ),
      an
      Alabama limited liability company which is wholly owned by the Company’s wholly
      owned subsidiary Automotive Services Group, Inc. (formerly Ault Glazer Bodnar
      Merchant Capital, Inc.) ( ***“Automotive
      Services Group”*** ).
      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 bears interest at the 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 are due in full
      on
      July 31, 2010 (the maturity date of the Real Estate Note). The Real Estate
      Note
      is secured 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. As of December 31,
      2006
      $1,495,000 was outstanding under the Real Estate Note. Management believes
      the
      loans from the Fund to ASG are on terms at least as favorable as could be
      obtained from an unrelated third party.





106




From
      January 11, 2006 through June 30, 2006, the Fund loaned the Company a total
      of
      $443,000, all of which was repaid. As consideration for the loans, the Company
      issued the Fund secured promissory notes with an interest rate of 7% per annum
      (the ***“Fund
      Notes”*** ),
      and
      entered into a security agreement granting the Fund a security interest in
      the
      Company’s personal property and fixtures, inventory, products and proceeds as
      security for the Company’s obligations under the Fund Notes. During the six
      months ended June 30, 2006, the Company incurred and paid interest expense
      of
      $2,000 on the Fund Notes.




On
      February 8, 2006, the Fund loaned $687,000 to ASG and at December 31, 2006
      the
      entire amount was outstanding. 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, bears interest at the 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. As security for the
      performance of ASG’s obligations pursuant to the ASG Note, ASG granted the Fund
      a security interest in all personal property and fixtures located at the ASG
      Property. During the year ended December 31, 2006, the Company had incurred
      interest expense, excluding amortization of debt discount, of $61,000 on the
      ASG
      Note, all of which is accrued at December 31, 2006.





On
      March
      7, 2006 the Company entered into a Revolving Line of Credit Agreement (the ***“Revolving
      Line of Credit”*** )
      with
      the Fund. The Revolving Line of Credit allows the Company to request advances
      of
      up to a total amount of $500,000 from the Fund. The initial term of the
      Revolving Line of Credit was for a period of six months with the ability to
      extend for one or more additional six month periods upon mutual agreement of
      the
      parties. 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 were required to be repaid
      with
      interest at the Prime Rate plus 1% within 60 days from issuance and will be
      convertible into shares of the Company’s common stock at the option of the Fund
      at a price of $3.10 per share. The obligations of the Company pursuant to such
      secured promissory notes are secured by the Company’s assets, personal property
      and fixtures, inventory, products and proceeds therefrom. As of December 31,
      2006, $394,000 was outstanding under the secured promissory notes issued
      pursuant to the Revolving Line of Credit. Management believes the loans made
      under the Revolving Line of Credit are on terms at least as favorable as could
      be obtained from an unrelated third party.





The
      Company retained Ault Glazer & Co., LLC ( ***“AG
      & Co.”*** )
      as a
      consultant to the Company. AG & Co. is a registered broker-dealer that is
      wholly owned by The AG Group. Mr. Ault, as a principal of AG & Co., has been
      advising the Company with respect to potential capital raising transactions
      and
      other strategic financial matters. Mr. Ault has not been, and does not expect
      to
      be, compensated for such services. However, AG & Co. was successful in
      assisting the Company with completing a series of capital raising transactions
      whereby the Company received $2,286,000 in debt financing during 2006, $298,000
      in equity financing during 2006 and $1,530,000 in equity financing during 2007,
      and as a result the Company agreed to pay AG & Co. aggregate cash fees of
      $215,000, of which $92,000 related to 2006. Additionally, the Company issued
      AG
& Co. 56,340 warrants to purchase shares of common stock at $1.25 per share
      and 116,960 warrants to purchase shares of common stock at $2.00 per share.
      Management believes the fees paid to AG & Co. as a result of its successful
      efforts in assisting the Company to raise both debt and equity capital are
      on
      terms at least as favorable as could be obtained from an unrelated third
      party.





107




**Strome
      Securities, L.P.**





During
      2004 and 2005, Strome Securities, L.P. (“ ***Strome”*** ), a
      registered broker dealer provided the Company with brokerage and execution
      services. Strome provided such services to the Company on market terms which
      had
      been approved by the Board of Directors. Until December 31, 2004 Milton “Todd”
Ault, our former Chairman and former Chief Executive Officer was a registered
      representative of Strome.





**Related
      Transactions with Company Investments**





Certain
      of the Company’s officers, directors and/or their family members have existing
      responsibilities and, in the future, may have additional responsibilities,
      to
      act and/or provide services as executive officers and/or directors of some
      of
      the companies in which we hold investments.





Milton
      “Todd” Ault, III, our former Chairman and former Chief Executive Officer, is a
      director of IPEX, Inc. (OTCBB: IPEX) ( ***“IPEX”*** ),
      in
      which the Company owns 1,045,000 shares of common stock and warrants to purchase
      787,500 shares of common stock. The Company’s investment in IPEX was written
      down to zero in 2006 resulting in a realized loss of $1,445,000. Mr. Ault also
      served as interim Chief Executive Officer of IPEX from May 26, 2005 until July
      13, 2005. From May 28, 2005 until approximately December 14, 2005 Mr. Ault
      held
      an irrevocable proxy to vote 67% of the outstanding shares of IPEX owned by
      the
      former Chief Executive Officer and a founder of IPEX. Darrell W. Grimsley,
      Jr.,
      Chief Executive Officer of ASG, a subsidiary which is wholly owned by Automotive
      Services Group, served as a director of IPEX and a member of its Audit Committee
      from August 30, 2005 until January 30, 2006. Alice M. Campbell, a former member
      of our Board of Directors, served as a director of IPEX and Chairman of its
      audit committee from June 23, 2005 until January 30, 2006. William B. Horne,
      our
      Chief Executive Officer, Chief Financial Officer and director, is currently
      a
      director of our portfolio company Digicorp (OTCBB: DGCO). From September 30,
      2005 until December 29, 2005, Mr. Horne also served as Digicorp’s Chief
      Executive Officer and Chairman of Digicorp’s Board of Directors and from July
      20, 2005 until April 20, 2007 served as Digicorp’s Chief Financial Officer. Ms.
      Campbell also is currently a director of Digicorp. Mr. Ault served as Chief
      Executive Officer of Digicorp from April 26, 2005 until September 30, 2005
      and
      Chairman of Digicorp’s Board of Directors from July 16, 2005 until September 30,
      2005. Melanie Glazer served as a director of Digicorp from December 30, 2004
      until December 29, 2005 and Chairman of Digicorp’s Board of Directors from
      December 30, 2004 until July 16, 2005. Lynne Silverstein served as Secretary
      of
      Digicorp from April 26, 2005 until December 29, 2005. Mr. Grimsley served as
      a
      director of Digicorp from July 16, 2005 until December 29, 2005.





During
      June 2005, IPEX retained the Company to serve as a business consultant to IPEX.
      On June 30, 2005, the Company entered into an agreement documenting the scope
      of
      such consulting services and the consideration for such services. The Company
      agreed to provide the following services to IPEX within the twelve months
      subsequent to June 30, 2005: (a) substantial review of IPEX’s business and
      operations in order to facilitate an analysis of IPEX’s strategic options
      regarding a turnaround of IPEX’s business; (b) providing advice in the following
      areas: (i) identification of financing sources; (ii) providing capital
      introductions of financial institutions and/or strategic investors; (iii)
      evaluation and recommendation of candidates for appointment as officers,
      directors or employees; (iv) making personnel of the Company available to IPEX
      to provide services to IPEX on a temporary or permanent basis; (v) evaluation
      and/or negotiation of merger or sale opportunities, or such other form of
      transaction or endeavor which IPEX may elect to pursue; and (vi) providing
      any
      other services as are mutually agreed upon in writing by the Company and
      Wolfgang Grabher (founder and former majority shareholder of IPEX) from time
      to
      time; and (c) assisting IPEX in installing a new management team. In
      consideration for such services Mr. Grabher transferred 500,000 shares of IPEX
      common stock owned by him to the Company. The Company performed all of the
      services stipulated under the terms of the consulting agreement, including
      but
      not limited to: (i) a review of the business and operations; (ii) the execution
      of two purchase agreements for the purchase of certain intellectual property
      assets; (iii) the hiring of a Chief Executive Officer, Chief Operating Officer
      and a Vice President of Research & Development; and (iv) the appointment of
      two members to the Board of Directors of IPEX.





108




On
      October 25, 2005, the Company sold 16,666 shares of common stock to Jay Rifkin,
      present Chief Executive Officer of the Company’s portfolio company Digicorp, at
      a price of $3.00 per share, resulting in gross proceeds of $50,000. We used
      the
      net proceeds from the private placement transaction primarily for general
      corporate purposes.





The
      Board
      does not believe that the Company has any conflicts of interest with the
      business of any company in which we hold investments other than the
      responsibilities of certain officers and/or directors to devote time providing
      certain management and administrative services to such companies from
      time-to-time. However, subject to applicable law, the Company may engage in
      transactions with one or more of our portfolio companies and related parties
      in
      the future, including but not limited to financing transactions, acquisitions
      and/or joint investments in target industries. These related party transactions
      may raise conflicts of interest and, although the Company does not have a formal
      policy to address such conflicts of interest, the Audit Committee intends to
      evaluate relationships and transactions involving conflicts of interest on
      a
      case by case basis.





The
      Audit
      Committee will conduct a review of all related party transactions for potential
      conflict of interest situations on an ongoing basis, and the approval of the
      Audit Committee will be required for all such transactions. The Audit Committee
      intends that any related party transactions will be on terms and conditions
      no
      less favorable to the Company than those terms and conditions reasonably
      obtainable from third parties and in accordance with applicable
      law.




**SurgiCount
      Acquisition**





On
      February 25, 2005, the Company acquired all of the outstanding securities of
      SurgiCount in exchange for approximately $340,000 in cash payments and 600,000
      shares of common stock issued to Brian Stewart and Dr. William Stewart, the
      holders of 100% of the outstanding capital stock of SurgiCount. As a result
      of
      this transaction, both Brian Stewart and Dr. William Stewart were each initially
      beneficial owners of over 5% of the Company’s outstanding shares of common
      stock. However, recent issuances have diluted each of their ownership interest
      to less than 5% of the Company’s outstanding shares of common stock.





Concurrent
      with the Company’s acquisition of all of the outstanding securities of
      SurgiCount, the Company entered into consulting agreements with Brian Stewart
      and Dr. William Stewart, for a term of 12 months and 18 months, respectively,
      to
      provide services relating to SurgiCount’s business and operations. As
      consideration, Brian Stewart shall was paid $40,000 per year and Dr. William
      Stewart was paid $5,000 per month.





**Springfield,
      Tennessee Land Acquisition**





On
      April
      28, 2005, the Company purchased 0.61 acres of vacant land in Springfield,
      Tennessee from two trusts related to Melanie Glazer, Manager of the Company’s
      subsidiary Franklin Capital Properties, LLC (n/k/a Ault Glazer Bodnar Capital
      Properties, LLC). The purchase price consisted of approximately $90,000 in
      cash,
      20,444 shares of common stock and 10,221 warrants to purchase common stock
      at an
      exercise price of $4.53 and a 5 year contractual life.





**Automotive
      Services Group, LLC**





On
      July
      18, 2005 the Company’s wholly owned subsidiary Automotive Services Group
      purchased 50% of the outstanding equity interests of ASG, from West Highland,
      LLC, an unrelated third party, in exchange for $300,000. The
      remaining 50% interest in ASG was owned by Darrell W. Grimsley until March
      15,
      2006 when Automotive Services Group entered into a Unit Purchase Agreement
      to
      acquire the remaining 50% interest from Mr. Grimsley in exchange for agreeing
      to
      issue 200,000 shares of common stock to Mr. Grimsley. The Company has
      consolidated ASG’s operations in its financial statements since Automotive
      Services Group acquired the initial 50% interest in ASG on July 18, 2005.
      Pursuant to ASG’s operating agreement, Mr. Grimsley had exclusive control over
      ASG’s operations from July 18, 2005 until Automotive Services Group purchased
      the remaining 50% interest on March 15, 2006. Automotive Services Group now
      owns
      100% of the outstanding equity interests in ASG and has exclusive control over
      ASG as its sole managing member. **** ASG
      was
      formed to develop and operate automated car wash sites under the trade name
      “Bubba’s Express Wash.” ASG’s
      first express car wash site, developed in Birmingham, Alabama, had its grand
      opening on March 8, 2006.





109




**Consulting
      Agreement with Health West Marketing**





On
      April
      5, 2005 the Company entered into a consulting agreement with Health West
      Marketing Incorporated, the material terms of which are described on page 89
      of
      this annual report. The Chief Executive Officer of Health West Marketing
      Incorporated, Bill Adams, was appointed Chairman of the Company’s subsidiary
      SurgiCount on November 15, 2005 and Chief Executive Officer of SurgiCount on
      April 21, 2006.





**Loan
      from Bodnar Capital Management, LLC**





On
      April
      7, 2005, Bodnar Capital Management, LLC, a significant shareholder of the
      Company, loaned the Company $1,000,000 in exchange for a $1,000,000 principal
      amount promissory note (the ***“Bodnar
      Note”*** ).
      Steven
      J. Bodnar is managing member of Bodnar Capital Management, LLC. The principal
      amount of the Bodnar Note and interest at the rate of 6% per annum was payable
      on May 31, 2006, the maturity date of the Bodnar Note. The obligations under
      the
      Bodnar Note were secured by all real property owned by the Company. In the
      event
      of default under the Bodnar Note, the entire unpaid principal balance and
      interest became immediately due and payable. The following constituted and
      event
      of default: (1) the filing by the Company for relief under any bankruptcy law;
      (2) the filing of a lien, the issuance of a levy or execution, or the seizure,
      attachment or garnishment, or the entry of judgment on or against the Company
      or
      any of the Company’s property which is not released, satisfied of record or
      bonded within 20 days thereafter; or (3) if the Company creates, incurs, assumes
      or suffers to exist any liability for borrowed money, except borrowings in
      existence or committed on April 7, 2005 and indebtedness to trade creditors
      or
      financial institutions in the ordinary course of business. During
      the quarter ended June 30, 2006, the Company repaid the outstanding principal
      balance and accrued interest totaling $69,000. Management believes the loan from Bodnar Capital Management, LLC is on terms
      at
      least as favorable as could be obtained from an unrelated third
      party.





**Cinapse
      Digital Media**





On
      May
      12, 2005, the Company purchased certain assets from Philip Gatch for use in
      a
      production and post-production media content facility (the ***“Production
      Assets”*** ).
      As
      consideration for the Production Assets the Company issued Mr. Gatch: (1) 17,241
      shares of the Company’s common stock; and (2) warrants to purchase 8,621 shares
      of the Company’s common stock with a three-year term and an exercise price of
      $5.80 per share. Also on May 12, 2005, the Company contributed the Production
      Assets to Cinapse Digital Media, LLC and entered into an operating agreement
      with Mr. Gatch for the operation of Cinapse Digital Media, LLC. Under the
      operating agreement, the Company and Mr. Gatch each owned 50% of the membership
      interests of Cinapse Digital Media, LLC. Upon purchasing the Production Assets,
      the Company was the sole managing member of Cinapse Digital Media, LLC. The
      profits and losses of Cinapse Digital Media, LLC were allocated to the Company
      and Mr. Gatch in proportion with their membership interests. Mr. Gatch also
      was
      appointed President of Cinapse Digital Media LLC, for which he is paid a salary
      of $100,000 per year. On June 30, 2005 the Company appointed Mr. Gatch Chief
      Technology Officer of the Company. Mr. Gatch subsequently resigned from the
      position of Chief Technology Officer on October 14, 2005. On October 14, 2005,
      the Company sold its 50% membership interest in Cinapse digital Media, LLC
      to
      Mr. Gatch in exchange for canceling the 17,241 shares of common stock and
      warrants issued to Mr. Gatch on May 12, 2005.





**Sale
      of Stock to Director**





On
      November 3, 2005, the Company sold 28,653 shares of common stock to Herbert
      Langsam, one of the Company’s current directors, at a price of $3.49 per share,
      resulting in gross proceeds of $100,000. We used the net proceeds from the
      private placement transaction primarily for general corporate
      purposes.





110




During
      March 2007, the Company sold 240,000 shares of common stock and warrants to
      purchase 120,000 shares of common stock to certain current directors and
      officers of the Company, at a price of $1.25 per share, resulting in gross
      proceeds of $300,000. The warrants are exercisable for a period of 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.
      We
      used the net proceeds from the private placement transaction primarily for
      general corporate purposes.





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





*Audit
      Fees*  *.* The
      aggregate fees billed for professional services rendered by Peterson &
Company, LLP (predecessor in interest to Squar, Milner, Peterson, Miranda &
Williamson, LLP) and Rothstein, Kass & Company, P.C. for the fiscal year
      ended December 31, 2006 and Ernst & Young LLP and Rothstein, Kass &
Company, P.C. for the fiscal year ended December 31, 2005 for the audit of
      annual financial statements and review of financial statements included in
      the
      Company’s Forms 10-Q or services that are normally provided in connection with
      statutory and regulatory filings or engagements were approximately $207,500
      and
      $183,650, respectively. The amounts paid or attributable to Peterson &
Company, LLP for the fiscal year ended December 31, 2006 was approximately
      $12,500, the amounts paid or attributable to Rothstein, Kass & Company, P.C.
      were approximately $195,000 and $162,500 for the fiscal years ended December
      31,
      2006 and 2005, respectively, and the amounts paid or attributable to Ernst
&
Young LLP were approximately $21,150 for the fiscal year ended December 31,
      2005.





*Audit-Related
      Fees*  *.* Audit-related fees consist of fees billed for assurance and related services
      that are reasonably related to the performance of the audit or review of the
      Company’s consolidated financial statements and are not reported under *“Audit
      Fees.”* These
      services include attest services that are not required by statute or regulation
      and consultations concerning financial accounting and reporting standards.
      The
      Company incurred audit-related fees of approximately nil and $10,000 for the
      fiscal years ended December 31, 2006 and 2005, respectively.





*Tax
      Fees*  *.* Tax fees
      consist of fees billed for professional services for tax compliance. These
      services include assistance regarding federal, state and local tax compliance.
      The Company incurred tax fees of approximately nil and $25,000 for the fiscal
      years ended December 31, 2006 and 2005, respectively.





*All
      Other Fees*  *.* The
      Company did not incur any other fees for services provided by its principal
      accountants for the fiscal years ended December 31, 2006 and 2005.





**Audit
      Committee’s Pre-Approval Policies and Procedures**





In
      accordance with its Amended and Restated Charter of the Audit Committee, the
      Audit Committee’s policy is to expressly pre-approve all audit and permissible
      non-audit services provided by the Company’s independent public accountants
      before the independent public accountants are engaged by the Company to provide
      any such services. These services may include audit services, audit related
      services, tax services and other related services. Pre-approval is generally
      provided for up to one year and any pre-approval is detailed as to the
      particular service or category of service and is subject to a specific
      budget.




111




**PART
      IV**




**Item
      15. Exhibits and Financial Statement Schedules.**




**Financial
        Statements.** The following financial statements are set forth under Item
        8:
  Report
                  of Squar, Milner, Peterson, Miranda & Williamson, LLPReport
                  of Rothstein, Kass & Company, P.CConsolidated
                  Balance Sheets as of December 31, 2006 and 2005Consolidated
                  Statements of Operations and Comprehensive loss for the years ended
                  December 31, 2006, 2005 and 2004Consolidated
                  Statements of Cash Flows for the years ended December 31, 2006,
                  2005 and
                  2004Consolidated
                  Statements of Stockholders' Equity for the years ended December
                  31, 2006,
                  2005 and 2004Notes
                  to Financial Statements




112




**Exhibits.** The
      following exhibits are filed herewith or incorporated by reference as set forth
      below:




**Exhibit**
              **Number**
            
            **Description**2.1
            
            Agreement
                and Plan of Merger and Reorganization, dated as of February 3, 2005,
                by
                and among Franklin Capital Corporation (n/k/a Patient Safety Technologies,
                Inc.), SurgiCount Acquisition Corp., SurgiCount Medical, Inc., Brian
                Stewart and Dr. William Stewart (Incorporated by reference to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 9, 2005)2.2
            
            Unit
                Purchase Agreement entered into on June 4, 2005 by and between Automotive
                Services Group, LLC, Ault Glazer Bodnar Capital, Inc. (n/k/a Ault
                Glazer
                Bodnar Merchant Capital, Inc.), West Highland, LLC and D.W. Grimsley,
                Jr.
                (Incorporated by reference to the Company’s annual report on Form 10-K for
                the fiscal year ended December 31, 2005, filed with the Securities
                and
                Exchange Commission on April 17, 2006)2.3
            
            Unit
                Purchase Agreement dated March 14, 2006 by and between Automotive
                Services
                Group, LLC, Darell W. Grimsley, Ault Glazer Bodnar Merchant Capital,
                Inc.
                and Patient Safety Technologies, Inc. (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 17, 2006)3.1
            
            Amended
                and Restated Certificate of Incorporation (Incorporated by reference
                to
                the Company’s annual report on Form 10-K for the fiscal year ended
                December 31, 2004, filed with the Securities and Exchange Commission
                on
                March 30, 2005)3.2
            
            Certificate
                of Amendment to Certificate of Incorporation (Incorporated by reference
                to
                Appendix E to the Company’s Definitive Proxy Statement on Schedule 14A,
                filed with the Securities and Exchange Commission on March 2,
                2005)3.3
            
            By-laws
                (Incorporated by reference to the Company’s Form N-2 filed with the
                Securities and Exchange Commission on July 31, 1992)4.1
            
            Certificate
                of Designation of Series A Convertible Preferred Stock (Included
                in
                Amended and Restated Certificate of Incorporation (Exhibit 3.1
                hereto))4.2
            
            $1,000,000
                principal amount Promissory Note dated August 28, 2001 issued to
                Winstar
                Radio Networks, LLC, Winstar Global Media, Inc. or Winstar Radio
                Productions, LLC (Incorporated by reference to the Company’s annual report
                on Form 10-K for the fiscal year ended December 31, 2005, filed with
                the
                Securities and Exchange Commission on April 17, 2006)4.3
            
            $1,000,000
                principal amount Promissory Note dated April 7, 2005 issued to Bodnar
                Capital Management, LLC (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on April 13, 2005)4.4
            
            Form
                of non-callable Warrant issued to James Colen (Incorporated by reference
                to the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on April 26, 2005)4.5
            
            Form
                of callable Warrant issued to James Colen (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on April 26, 2005)4.6
            
            Real
                Estate Note dated July 27, 2005 in the principal amount of $480,000
                issued
                by Automotive Services Group, LLC to Ault Glazer Bodnar Acquisition
                Fund,
                LLC (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on September 29,
                2005)4.7
            
            Addendum
                I dated August 10, 2005 to Real Estate Note issued by Automotive
                Services
                Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on September 29,
                2005)4.8
            
            Addendum
                II to Real Estate Note issued by Automotive Services Group, LLC to
                Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on September 29, 2005)4.9
            
            Addendum
                III to Real Estate Note issued by Automotive Services Group, LLC
                to Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on December 23,
                2005)




113





**Exhibit**
              **Number**
            
            **Description**4.10
            
            Addendum
                IV to Real Estate Note issued by Automotive Services Group, LLC to
                Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on December 23, 2005)4.11
            
            Addendum
                V to Real Estate Note issued by Automotive Services Group, LLC to
                Ault
                Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference to
                the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on December 23, 2005)4.12
            
            Addendum
                VI dated January 10, 2006 to Real Estate Note issued by Automotive
                Services Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 6,
                2006)4.13
            
            Addendum
                VII dated February 1, 2006 to Real Estate Note issued by Automotive
                Services Group, LLC to Ault Glazer Bodnar Acquisition Fund, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 6,
                2006)4.14
            
            Promissory
                Note in the principal amount of $1,000,000 issued January 12, 2006
                by
                Automotive Services Group, LLC to Steven J. Caspi (Incorporated by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on January 18, 2006)4.15
            
            Promissory
                Note dated February 8, 2006 issued by Automotive Services Group,
                LLC to
                Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 14, 2006)4.16
            
            Revolving
                Line of Credit Agreement dated and effective as of March 7, 2006
                by and
                between Ault Glazer Bodnar Acquisition Fund LLC and Patient Safety
                Technologies, Inc. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                March 8, 2006)4.17
            
            Promissory
                Note in the principal amount of $500,000 issued May 1, 2006 by the
                Patient
                Safety Technologies, Inc. to the Herbert Langsam Irrevocable Trust
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 14,
                2006)4.18*
            
            $400,000
                principal amount Convertible Promissory Note issued by Patient Safety
                Technologies, Inc. to Charles J. Kalina III on November 3,
                20064.19
            
            Warrant
                to purchase 85,000 shares of common stock issued by Patient Safety
                Technologies, Inc. to Charles J. Kalina III on July 12, 2006 (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on July 14, 2006)4.20*
            
            Warrant
                to purchase 100,000 shares of common stock issued by Patient Safety
                Technologies, Inc. to Charles J. Kalina III on November 3,
                200610.1
            
            Amended
                and Restated Stock Option and Restricted Stock Plan (Incorporated
                by
                reference to Annex A to the Company’s Revised Definitive Proxy Statement
                on Schedule 14A, filed with the Securities and Exchange Commission
                on
                October 18, 2005)10.2
            
            Stock
                Incentive Plan (Incorporated by reference to the Company’s registration
                statement on Form S-8 (File No. 333-30604), filed with the Securities
                and
                Exchange Commission on February 17, 2000)10.3
            
            Stock
                Option Plan (Incorporated by reference to the Company’s registration
                statement on Form S-8 (File No. 333-30604), filed with the Securities
                and
                Exchange Commission on February 17, 2000)10.4
            
            Employment
                Agreement entered into as of June 13, 2005 by and between Patient
                Safety
                Technologies, Inc. and William B. Horne (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on June 16, 2005)10.5
            
            Employment
                Agreement dated October 31, 2005 between SurgiCount Medical, Inc.,
                Patient
                Safety Technologies, Inc. and Richard Bertran (Incorporated by reference
                to the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on November 2, 2005)10.6
            
            Employment
                Agreement dated November 2, 2005 by and between SurgiCount Medical,
                Inc.,
                Patient Safety Technologies, Inc. and James Schafer (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on November 7,
                2005)





114




**Exhibit**
              **Number**
            
            **Description**10.7
            
            Amended
                Employment Agreement entered into as of January 30, 2006 between
                Automotive Services Group, LLC and D.W. Grimsley, Jr. (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on February 1, 2006)10.8
            
            Employment
                Agreement entered into as of April 21, 2006 between SurgiCount Medical,
                Inc., Patient Safety Technologies, Inc. and William M. Adams (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on April 27, 2006)10.9
            
            Engagement
                Letter dated February 10, 2006 between Analog Ventures, LLC and Patient
                Safety Technologies, Inc. (Incorporated by reference to the Company’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2006,
                filed
                with the Securities and Exchange Commission on May 19,
                2006)10.10
            
            Registration
                Rights Agreement dated as of February 3, 2005 by and among Franklin
                Capital Corporation (n/k/a Patient Safety Technologies, Inc.), Brian
                Stewart and Dr. William Stewart (Incorporated by reference to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 9, 2005)10.11
            
            Amendment
                to Subscription Agreement dated March 2, 2005 by and among Franklin
                Capital Corporation (n/k/a Patient Safety Technologies, Inc.) and
                the
                persons and entities listed on Exhibit A attached thereto (Incorporated
                by
                reference to the Company’s annual report on Form 10-K for the fiscal year
                ended December 31, 2004, filed with the Securities and Exchange Commission
                on March 30, 2005)10.12
            
            Consulting
                Agreement entered into as of April 5, 2005 by and between Health
                West
                Marketing Incorporated and Patient Safety Technologies, Inc. (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on April 11, 2005)10.13
            
            Security
                Agreement dated April 7, 2005 in favor of Bodnar Capital Management,
                LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on April 13,
                2005)10.14
            
            Subscription
                Agreement dated April 22, 2005 between Patient Safety Technologies,
                Inc.
                and James Colen (Incorporated by reference to the Company’s current report
                on Form 8-K filed with the Securities and Exchange Commission on
                April 26,
                2005)10.15
            
            Consulting
                Agreement among Wolfgang Grabher and Patient Safety Technologies,
                Inc.
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on July 7,
                2005)10.16
            
            Agreement
                between Patient Safety Technologies, Inc. and IPEX, Inc. dated July
                7,
                2005 (Incorporated by reference to the Company’s current report on Form
                8-K filed with the Securities and Exchange Commission on July 7,
                2005)10.17
            
            Special
                Expiration Price Options Master Agreement entered into as of July
                19, 2005
                between IXIS Derivatives Inc. and Patient Safety Technologies, Inc.
                (Incorporated by reference to the Company’s Annual Report on Form 10-K
                filed for the year ended December 31, 2005)10.18
            
            Future
                Advance Mortgage Assignment of Rents and Leases and Security Agreement
                dated July 27, 2005 between Automotive Services Group, LLC to Ault
                Glazer
                Bodnar Acquisition Fund, LLC (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on September 29, 2005)10.19
            
            Amendment
                No. 1 dated December 28, 2005 to the Stock Purchase Agreement dated
                as of
                December 29, 2004 among Franklin Capital Corporation and the shareholders
                of Digicorp set forth on the signature pages thereto (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on January 4, 2006)10.20
            
            Assignment
                Agreement made as of December 28, 2005 by and among Patient Safety
                Technologies, Inc., Alan Morelli and Digicorp (Incorporated by reference
                to the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on January 4,
                2006)





115




**Exhibit**
              **Number**
            
            **Description**10.21
            
            Escrow
                Agreement made as of December 28, 2005 by and among Patient Safety
                Technologies, Inc., Alan Morelli, the shareholders of Digicorp set
                forth
                in Schedule A thereto and Sichenzia Ross Friedman Ference LLP
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on January 4,
                2006)10.22
            
            Security
                Agreement by and between Ault Glazer Bodnar Acquisition Fund and
                Patient
                Safety Technologies, Inc. (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on January 18, 2006)10.23
            
            Real
                Estate Mortgage dated January 12, 2006 in favor of Steven J. Caspi
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on January 18,
                2006)10.24
            
            Continuing
                Guaranty dated January 12, 2006 of Patient Safety Technologies in
                connection with the $1,000,000 Promissory Note issued January 12,
                2006 by
                Automotive Services Group, LLC to Steven J. Caspi (Incorporated by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on January 18, 2006)10.25
            
            Real
                Estate Mortgage executed as of February 8, 2006 by Automotive Services
                Group, LLC in favor of Ault Glazer Bodnar Acquisition Fund, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 14,
                2006)10.26
            
            Security
                Agreement dated May 1, 2006, between the Company and the Herbert
                Langsam
                Revocable Trust (Incorporated by reference to the Company’s current report
                on Form 8-K filed with the Securities and Exchange Commission on
                May 5,
                2006)10.27
            
            Separation
                of Employment Agreement dated May 24, 2006 between the Company and
                Milton
                “Todd” Ault III (Incorporated by reference to the Company’s current report
                on Form 8-K filed with the Securities and Exchange Commission on
                May 24,
                2006)10.28
            
            Secured
                Convertible Note and Warrant Purchase Agreement dated June 6, 2006
                between
                the Company and Alan Morelli (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on June 9, 2006)10.29
            
            Registration
                Rights Agreement dated June 6, 2006 by and between Patient Safety
                Technologies, Inc. and Alan E. Morelli (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on June 9, 2006)10.30
            
            Employment
                Agreement dated August 8, 2006 between the Company and Milton “Todd” Ault
                III (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 24,
                2006)10.31
            
            Subscription
                Agreement dated August 30, 2006 between Patient Safety Technologies,
                Inc.
                and Nobu Ventures Inc. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                September 6, 2006)10.32
            
            Secured
                Convertible Note and Warrant Purchase Agreement dated September 8,
                2006
                between the Company and Steven J. Caspi (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 1, 2007)10.33
            
            Pledge
                Agreement and Addendum to Pledge Agreement dated as of September
                8, 2006
                between the Company and Steven J. Caspi (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 1, 2007)10.34
            
            Supply
                Agreement dated November 14, 2006 between SurgiCount Medical, Inc.
                and
                Cardinal Health 200, Inc. (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on November 20, 2006)10.35
            
            Exclusive
                License and Supply Agreement dated January 26, 2007, by and among
                SurgiCount Medical, Inc. and A Plus International, Inc. (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on February 2,
                2007)





116




**Exhibit**
              **Number**
            
            **Description**10.36
            
            Subscription
                Agreement dated January 26, 2007 between Patient Safety Technologies,
                Inc.
                and A Plus International, Inc. (Incorporated by reference to the
                Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on February 2, 2007)10.37
            
            Subscription
                Agreement dated January 29, 2007 between Patient Safety Technologies,
                Inc.
                and Nite Capital, LP. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                February 2, 2007)10.38
            
            Subscription
                Agreement dated January 29, 2007 between Patient Safety Technologies,
                Inc.
                and David Wilstein and Susan Wilstein, as Trustees of the Century
                Trust
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 2,
                2007)10.39*
            
            Form
                of Subscription Agreement entered into between March 7, 2007 to April
                5,
                between Patient Safety Technologies, Inc. and several accredited
                investors14.1
            
            Code
                of Business Conduct and Ethics (Incorporated by reference to Appendix
                E to
                the Company’s Definitive Proxy Statement on Schedule 14A, filed with the
                Securities and Exchange Commission on March 2, 2005)16.1
            
            Letter
                from Peterson & Company, LLP to the SEC dated December 14, 2006
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on December 15,
                2006)16.2
            
            Letter
                from Ernst & Young LLP to the SEC dated August 30, 2005 (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on August 31, 2005)16.3
            
            Letter
                from Ernst & Young LLP to the SEC dated August 30, 2005 (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on August 31, 2005)21.1*
            
            Subsidiaries
                of the Company23.1*
            
            Consent
                of Squar, Milner, Peterson, Miranda & Williamson,
                LLP23.2*
            
            Consent
                of Rothstein, Kass & Company, P.C.31.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(a)
                or
                Rule 15d-14(a)32.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(b)
                or
                Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the
                United
                States Code


*
      Filed
      herewith.





117




**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:
                May 16, 2007
            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/
                Arnold Spangler
            
            Chairman
                of the Board
            
            May
                16, 2007Arnold
                Spangler/s/
                William B. Horne
            
            Chief
                Executive, Chief FinancialWilliam
                B. Horne
            
            Officer
                and Principal Accounting Officer
                and Director
            
            May
                  16, 2007/s/
                David Augustine
            
            Director
            
            May
                16, 2007David
                Augustine/s/
                Louis Glazer
            
            Director
            
            May
                16, 2007Louis
                Glazer, M.D., Ph.G./s/
                Herbert Langsam
            
            Director
            
            May
                16, 2007Herbert
                LangsamDirectorWayne
                Lin





118