**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**










FORM
        10-K **/A**


Amendment
        No. 1





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





FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2005




**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





**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)****1800
                Century Park East, Ste. 200, Los Angeles, CA
                90067****(Address
                of principal executive offices) (Zip
                Code)**





**Registrant’s
      telephone number, including area code: (310) 895-7750**





**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**
              The
                American Stock Exchange





**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  ̈ No x .





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





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




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




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




Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx





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





The
      aggregate market value of common stock held by non-affiliates of the Registrant
      on June 30, 2005, based on the closing price on that date of $3.68 on the
      American Stock Exchange, was $19,371,895. For the purposes of calculating this
      amount only, all directors and executive officers of the Registrant have been
      treated as affiliates.





There
      were 6,205,563 shares of the registrant's common stock outstanding as of March
      27, 2006.








**PATIENT
      SAFETY TECHNOLOGIES, INC.**





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


**ENDED
      DECEMBER 31, 2005**





**TABLE
      OF CONTENTS**





**Page****PART
                  I**Item
                  1. Business
              1Item
                  1A. Risk Factors
              25Item
                  1B. Unresolved Staff Comments
              37Item
                  2. Properties
              37Item
                  3. Legal Proceedings
              37Item
                  4. Submission of Matters to a Vote of Security Holders
              38**PART
                  II**Item
                  5. Market for Registrant’s Common Equity, Related Stockholder Matters and
                  IssuerPurchases
                  of Equity Securities
              39Item
                  6. Selected Financial Data
              43Item
                  7. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              43Item
                  7A. Quantitative and Qualitative Disclosures About Market
                  Risk
              61Item
                  8. Financial Statements and Supplementary Data
              62Item
                  9. Changes In and Disagreements with Accountants on Accounting
                  and
                  Financial Disclosure
              95Item
                  9A. Controls and Procedures
              95Item
                  9B. Other Information
              95**PART
                  III**Item
                  10. Directors and Executive Officers of the Registrant
              95Item
                  11. Executive Compensation
              99Item
                  12. Security Ownership of Certain Beneficial Owners and Management
                  and
                  RelatedStockholder
                  Matters
              107Item
                  13. Certain Relationship and Related Transactions
              109Item
                  14. Principal Accounting Fees and Services
              114**PART
                  IV**Item
                  15. Exhibits, Financial Statement Schedules
              115**SIGNATURES**
              120








**"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”*** )
      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”*** ).





Through
      the first half of 2004 we focused our investment strategy on capital
      appreciation through long-term equity investments in start-up and early stage
      companies in the radio and telecommunications industries. Beginning in June
      2004, we undertook a strategic restructuring and recapitalization plan which
      culminated in a change in control in our management and a shift in our business
      focus away from the radio and telecommunications industries toward the medical
      products, health care solutions, financial services and real estate industries.
      On March 30, 2005, our shareholders voted to withdraw our election to be treated
      as a BDC and on March 31, 2005 we filed an election to withdraw the election
      with the SEC. We are currently engaged in the acquisition of controlling
      interests in companies and research and development of products and services
      focused on the health care and medical products field, particularly the patient
      safety market. 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.





1


On
      February 25, 2005, in furtherance of our restructuring plan, we purchased
      Surgicount Medical, Inc., a California corporation ( ***“Surgicount”*** ),
      from
      Brian Stewart and Dr. William Stewart, the former holders of 100% of the
      outstanding capital stock of Surgicount. Surgicount was not engaged in a
      business, but was used to hold certain assets. The assets acquired in connection
      with the Surgicount acquisition consist primarily of intellectual property
      rights, including one U.S. patent and one European patent, relating to
      Surgicount's Safety-SpongeTM System. The consideration paid to Brian Stewart and
      Dr. William Stewart in connection with the acquisition consisted of $340,000
      in
      cash and 600,000 shares (post 3:1 forward split effective April 5, 2005) of
      common stock. In addition, in the event that prior to the fifth anniversary
      of
      the closing of the acquisition the cumulative gross revenues of Surgicount
      exceed $500,000, Brian Stewart and Dr. William Stewart are entitled to receive
      an additional 50,000 shares of common stock (for a total of 650,000 shares
      of
      common stock). In the event that prior to the fifth anniversary of the closing
      of the acquisition the cumulative gross revenues of Surgicount exceed
      $1,000,000, Brian Stewart and Dr. William Stewart will be entitled to receive
      an
      additional 50,000 shares of common stock (for a total of 700,000 shares of
      common stock).





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
      Safety-SpongeTM System consists of a handheld scanner and bar-coded surgical
      dressings. 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. Surgicount
      is the first acquisition in our plan to become a leader in the patient safety
      market.





We
      currently have five wholly-owned operating subsidiaries: (1) Ault Glazer Bodnar
      Capital Properties, LLC (f/k/a Franklin Capital Properties, LLC), a Delaware
      limited liability company; (2) Patient Safety Consulting Group, LLC (f/k/a
      Franklin Medical Products, LLC), a Delaware limited liability company; (3)
      Surgicount Medical, Inc., a California corporation; (4) Ault Glazer Bodnar
      Merchant Capital, Inc., a Delaware corporation; and (5) Automotive Services
      Group, LLC, an Alabama limited liability company wholly owned by Ault Glazer
      Bodnar Merchant Capital, Inc. Ault Glazer Bodnar Capital Properties, LLC, a
      real
      estate development and management company, Patient Safety Consulting Group,
      LLC,
      a healthcare consulting services company, and Ault Glazer Bodnar Merchant
      Capital, Inc., a holding company formed to hold our non-patient safety related
      assets, all were created to augment our investments in the health care, medical
      products and financial services and real estate industries. Our prior focus
      on
      real estate properties led to the acquisition by Ault Glazer Bodnar Merchant
      Capital, Inc. of Automotive Services Group, LLC,  a
      company
      formed to develop properties for the operation of automated car wash
      sites .
      We
      acquired Automotive Services Group, LLC in an effort to increase shareholder
      value through real estate development. Our
      corporate structure, including our subsidiaries and our interests in public
      and
      private companies that we have purchased, is set forth in the following diagram
      by reporting segment:







2





**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.





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-Sponge TM 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 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, we 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
      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) if Health
      West helps us develop a regional distribution network to integrate the
      Safety-SpongeTM System into the existing acute care supply chain, then we will
      issue Health West the remaining 15,756 shares. As incentive for entering into
      the agreement, we 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, we agreed to issue a callable warrant to purchase
      25,000 (post 3:1 forward stock split) shares of the common stock with an
      exercise price of $5.95 per share, exercisable upon assisting us to develop
      a
      global distribution strategy and identification of acquisition candidates.
      In
      the event of the death of Bill Adams, who is Health West’s Chief Executive
      Officer, the agreement will automatically terminate. We may terminate the
      agreement at any time upon delivery to Health West of notice of a good faith
      determination by our Board of Directors that the agreement should be terminated
      for cause or as a result of disability of Mr. Adams. Health West may voluntarily
      terminate the agreement only after expiration of the initial two-year term
      upon
      providing 30 days prior written notice to us.





3


***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.





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.





4


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.
        In the event we are successful during the in-service sessions we expect to
        begin
        receiving orders for the Safety-Sponge TM System
        sometime in the first half of 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 in final preparations to be rolled out
      into
      the market as a commercial product.





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 function. In addition, we are developing
      relationships with Universities to co-develop and distribute patient safety
      continuing medical education (CME) products as well as University-developed
      patient safety products such as guides, specially designed notepads and bedside
      tools.





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 provides for a monthly cash payment of $2,000 and warrants to purchase
      12,500 shares of our common stock.





5


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 will collect data on how the Safety-Sponge System saves time,
      reduces costs and increases patient safety in the operating room. The study
      will
      also continue 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,
      we
      will provide a research grant to Brigham and Women’s Hospital over the course of
      the clinical trial in the aggregate amount of $430,513 of which $107,628 was
      paid in 2005. We expect the clinical trials will be completed around September
      2006.





***Manufacturing***





While
      we
      have not yet begun commercial manufacturing of the Safety-Sponge TM System,
      we believe that the 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.





In
      order
      to meet the expected demand for bar-coded surgical dressings on August 17,
      2005,
      Surgicount entered into an agreement for A Plus International Inc. ( ***“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 is for a period of five years and will automatically renew for
      successive three-year periods. Either party may terminate the agreement without
      cause at any time after eight years upon delivery of 90 days prior written
      notice.





***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, 2005 or **** 2004
      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.





6


We
      currently own patents issued in the United States and Europe related to the
      Safety-Sponge TM 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 is currently
      undergoing a reexamination proceeding in the U.S. Patent Office.  We have
      also filed one provisional and one non-provisional patent application in the
      United States Patent Office covering improved methods and systems for the
      automated counting and tracking of surgical articles.





Sales
      of
      the Safety-Sponge TM 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.





***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 not 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.





7


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.





**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. All
      of
      our real estate holdings are owned by our subsidiary Ault Glazer Bodnar Capital
      Properties, LLC (f/k/a Franklin Capital Properties, LLC) ( ***“AGB
      Capital Properties”*** )
      except
      for our investment in Automotive Services Group, LLC ( ***“ASG”*** ),
      which
      is wholly owned by our subsidiary Ault Glazer Bodnar Merchant Capital, LLC ( ***“AGB
      Merchant Capital”*** ). 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 AGB Merchant Capital 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 AGB Merchant Capital 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 the Company’s 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. Pursuant to ASG’s operating agreement, Mr. Grimsley had
      exclusive control over ASG’s operations from July 18, 2005 until AGB Merchant
      Capital purchased the remaining 50% interest on March 15, 2006. AGB Merchant
      Capital now owns 100% of the outstanding equity interests in ASG and has
      exclusive control over ASG as its sole managing member. We plan to change the
      name of AGB Merchant Capital to Automotive Services Group, Inc. to reflect
      the
      subsidiaries primary holding in ASG.





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, 0.61 acres of undeveloped land in Springfield,
        Tennessee, and various loans secured by real estate in Heber Springs, Arkansas.
        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 are held by our subsidiary AGB Capital
        Properties. 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, 2005, 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.





8


***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, as of the date of this report 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. Our Board of Directors is currently
      evaluating the available alternatives to determine the most beneficial method
      to
      dispose of ASG and its express car wash business.





***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.





9


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.





10


**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.





**Companies
        which we have a material investment in**





*Digicorp*





At
        December 31, 2005, we had an investment in Digicorp valued at $3,025,398,
        which
        represents 18.9% of our total assets. On December 29, 2004, we entered into
        a
        Common Stock Purchase Agreement with certain shareholders of Digicorp (the ***"Agreement"*** ),
        to
        purchase an aggregate of 3,453,527 shares of Digicorp common stock. We purchased
        2,229,527 of such shares on December 29, 2004 (2,128,740 shares at a price
        of
        $0.135 per share and 100,787 shares at a price of $0.145 per share). We were
        also required to purchase the remaining 1,224,000 shares from the selling
        shareholders 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 amended the
        Agreement and an unrelated third party assumed the obligation to purchase
        1,000,000 of the remaining 1,224,000 shares from the selling shareholders.
        Additionally, we extended loans of approximately $32,500 to the 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. Digicorp’s common stock is traded on the OTC Bulletin
        Board, which reported a closing price, at December 31, 2005, of $1.90. In
        connection with the Agreement, we were entitled to designate two members
        to the
        Board of Directors of Digicorp. Our first designee, Melanie Glazer, who is
        also
        manager of our subsidiary Ault Glazer Bodnar Capital Properties, LLC, was
        appointed on December 29, 2004. Milton “Todd” Ault, III, our former Chairman and
        Chief Executive Officer, was appointed Chief Executive Officer of Digicorp
        on
        April 26, 2005. On July 16, 2005, Alice M. Campbell, one of our directors,
        and
        Mr. Ault was appointed to the Board of Directors of Digicorp. On July 20,
        2005,
        Lynne Silverstein, our President and Secretary, was appointed as a director
        of
        Digicorp, and William B. Horne, our Chief Financial Officer, was appointed
        as a
        director and as Chief Financial Officer of Digicorp. On September 30, 2005,
        Mr.
        Ault resigned from all positions with Digicorp and Mr. Horne was appointed
        as
        the interim Chief Executive Officer. On December 29, 2005, William B. Horne
        resigned as Chief Executive Officer and Lynne Silverstein and Melanie Glazer
        resigned as directors.





Since
        June 30, 1995, Digicorp was in the developmental stage and had no operations
        other than issuing shares of common stock for financing the preparation of
        financial statements and for preparing filings for the SEC. On May 18, 2005,
        Digicorp sold Bodnar Capital Management, LLC 2,941,176 shares of its common
        stock and warrants to purchase an additional 3,000,000 shares of its common
        stock with exercise prices ranging from $0.25 to $1.50 per share. Digicorp
        received gross proceeds of approximately $500,000 from the sale of stock
        and
        warrants to Bodnar Capital Management, LLC. As described above under “Financial
        Condition,” Bodnar Capital Management, LLC also is one of our principal
        stockholders. On October 27, 2005, Bodnar Capital Management, LLC canceled
        the
        warrants to purchase 3,000,000 shares of common stock in exchange for the
        issuance of a warrant to purchase 500,000 shares of Digicorp’s common stock with
        an exercise price of $0.01 per share.





On
        September 19, 2005, upon entering into an asset purchase agreement with Philip
        Gatch, who was appointed Digicorp’s Chief Technology Officer, Digicorp completed
        the initial transaction to transform itself from that of a development stage
        enterprise to a digital media and content delivery company. Digicorp issued
        Mr.
        Gatch 1,000,000 shares of its common stock as consideration for the assets
        purchased, which consisted of the iCodemedia suite of websites and internet
        properties and all related intellectual property (the ***“iCodemedia
        Assets”*** ).
        The
        iCodemedia suite of websites consists of the websites www.icodemedia.com,
        www.iplaylist.com, www.tunecast.com, www.tunebucks.com, www.podpresskit.com
        and
        www.tunespromo.com. Digicorp plans to use these websites and the related
        intellectual property to provide a suite of applications and services to
        enable
        content creators the ability to publish and deliver content to existing and
        next
        generation digital media devices, such as the Apple iPod and the Sony PSP,
        based
        upon the consumers’ expectation for broader and on-demand access to content and
        services.





11


On
        December 29, 2005, Digicorp acquired all of the issued and outstanding capital
        stock of Rebel Crew Films, Inc., a California corporation ( ***“Rebel
        Crew Films”*** ),
        in
        consideration for the issuance of 21,207,080 shares of Digicorp common stock
        (the ***“Purchase
        Price”*** )
        to the
        shareholders of Rebel Crew Films. From the Purchase Price, 4,000,000 shares
        are
        held in escrow pending satisfaction of certain performance milestones. In
        addition, from the Purchase Price, 16,666,667 shares are subject to lock
        up
        agreements as follows: (a) 3,333,333 shares are subject to lockup agreements
        for
        one year; (b) 6,666,667 shares are subject to lockup agreements for two years;
        and (c) 6,666,667 shares, of which the 4,000,000 escrowed shares are a
        component, are subject to lockup agreements for three years.





In
        connection with the acquisition of Rebel Crew Films, on December 29, 2005
        Digicorp entered into a Securities Purchase Agreement with one of the
        shareholders of Rebel Crew Films, Rebel Holdings, LLC, pursuant to which
        Digicorp purchased a $556,306.53 principal amount loan receivable owed by
        Rebel
        Crew Films to Rebel Holdings, LLC in exchange for the issuance of a $556,306.53
        principal amount secured convertible note to Rebel Holdings, LLC. The secured
        convertible note accrues simple interest at the rate of 4.5%, matures on
        December 29, 2010 and is secured by all of Digicorp’s assets now owned or
        hereafter acquired. The secured convertible note is convertible into 500,000
        shares of Digicorp common stock at the rate of $1.112614 per share. Jay Rifkin,
        Digicorp’s Chief Executive Officer and one of its directors, is the sole
        managing member of Rebel Holdings, LLC.





Rebel
        Crew Films was founded in 2001 as a film licensing and distribution company
        of
        Latino home entertainment products. Rebel Crew Films currently maintains
        approximately 300 Spanish language films and serves the some of the nation’s
        largest wholesale, retail, catalog, and e-commerce accounts. Rebel Crew’s titles
        can be found at Wal-Mart, Best Buy, Blockbuster, K-Mart, and hundreds of
        independent video outlets across the United States and Canada. We believe
        that
        the acquisition will allow Digicorp to leverage Rebel Crew Films’ Latino content
        and industry relationships with the iCodemedia Assets to create a compelling
        digital media and content delivery company.





*IPEX,
        Inc.*





ORGANIZATIONAL
        HISTORY





IPEX,
        Inc. (the "Company") was incorporated on June 27, 2002 under the corporate
        laws
        of the State of Nevada as Tamarack Ventures, Inc. ("Tamarack"). Tamarack
        was an
        exploration stage company engaged in the acquisition, and exploration of
        mineral
        properties. Because Tamarack was unable to develop business operations as
        a
        mineral exploration company, Tamarack discontinued operations and on March
        17,
        2005 the Company acquired the business of Administration for International
        Credit and Investment, Inc., an Oregon corporation ("AICI Oregon"). On March
        23,
        2005 the Company changed its name to IPEX, Inc. to reflect the nature of
        its
        changed business through AICI, Inc.





On
        March
        17, 2005, the Company entered into an Agreement and Plan of Merger with AICI,
        Inc., a Nevada corporation and wholly owned subsidiary of the Company, AICI
        Oregon, and the shareholders of AICI Oregon. Pursuant to the Agreement and
        Plan
        of Merger, the Company acquired all of the outstanding equity stock of AICI
        Oregon from its shareholders. Upon completion of the transaction, AICI Oregon
        merged with and into AICI, Inc. and AICI, Inc. survived the merger. As
        consideration for the acquisition of AICI Oregon, the Company issued 21,875,566
        shares of common stock to the AICI Oregon shareholders. Each AICI Oregon
        shareholder received one share of the Company's common stock for each share
        of
        common stock of AICI Oregon that he or she owned. In addition, certain of
        the
        Company's shareholders cancelled an aggregate of 3,500,000 outstanding shares
        of
        the Company's common stock, and such shares were returned to treasury. On
        March
        23, 2005 the Company changed its name to IPEX, Inc. to reflect the nature
        of its
        changed business through AICI, Inc.





12


AICI
        Oregon was incorporated in the State of Oregon on November 23, 1999. From
        inception until February 2004, AICI Oregon had no business operations. On
        February 25, 2004 Jupiter Telecom, Inc., a California corporation in the
        business of providing telecommunications services, was merged with and into
        AICI
        Oregon. AICI Oregon was the surviving entity from that merger. Joseph Lyle
        Putegnat III, AICI Oregon's Vice President of Carrier Sales, was a co-founder
        and the sole shareholder of Jupiter Telecom, Inc. and subsequently became
        an
        officer of AICI Oregon. Pursuant to the merger, Mr. Putegnat received 1,286,809
        shares of common stock of AICI Oregon, which were subsequently exchanged
        for
        1,286,809 shares of the Company's common stock pursuant to the Agreement
        and
        Plan of Merger entered into on March 17, 2005.





ASSET
        ACQUISITION





On
        June
        7, 2005, the Company entered into two separate purchase agreements for the
        purchase of certain intellectual property assets. The purchase of the
        intellectual property assets by the Company closed on June 29,
        2005.





The
        first
        purchase agreement, dated June 7, 2005, is between the Company, RGB Channel
        SRL,
        Massimo Ballerini, B Tech Ltd. and Emanuele Boni (the "RGB Agreement"). Under
        the RGB Agreement, the Company purchased image processing algorithms, encoder
        software, decoder software, digital image enhancement tools and encryption
        algorithms to enhance, compact, store, encrypt, stream and display digital
        image
        content over wireless networks and over the Internet (the "RGB Assets").
        The
        Company purchased the RGB Assets from RGB Channel SRL. At the time of the
        transaction there was no material relationship between RGB Channel SRL and
        the
        Company or any of its affiliates, or any director or officer of the Company,
        or
        any associate of any such director or officer. The purchase price for the
        RGB
        Assets totaled $275,000 cash.





The
        second purchase agreement, dated June 7, 2005, is between the Company, B
        Tech
        Ltd., Massimo Ballerini and Emanuele Boni (the "B Tech Agreement"). Under
        the B
        Tech Agreement, the Company purchased quadratic, circular transform algorithms,
        codes and formulas for image enhancement, compacting and content protection
        applications (the "B Tech Assets"). The purchased technology and formulas
        also
        include the concept of "floating pixels" versus a frame by frame system and
        the
        integration of sound into a digital image to stream live content for wireless
        systems based on 9,6Kbit/s and to be used on full display screens at less
        than
        64Kbit/s (ISDN). The Company purchased the B Tech Assets from B Tech Ltd.,
        Massimo Ballerini and Emanuele Boni. At the time of the transaction there
        was no
        material relationship between B Tech Ltd., Massimo Ballerini or Emanuele
        Boni.
        and the Company or any of its affiliates, or any director orofficer of the
        Company, or any associate of any such director or officer. The purchase price
        for the B Tech Assets consisted of 1,857,585 shares of the Company's common
        stock valued at $6,000,000, which the Company issued during November
        2005.





On
        February 27, 2006 the Company formed a subsidiary named RGB Channel, Inc.,
        a
        Nevada corporation. The Company may transfer the RGB Assets and the B Tech
        Assets to RGB Channel, Inc. and for RGB Channel, Inc. to develop the RGB
        Assets
        and B Tech Assets. Throughout this report, references to the "Company" refer
        to
        IPEX, Inc. together with its wholly owned subsidiaries AICI, Inc. and RGB
        Channel, Inc.





OVERVIEW
        OF BUSINESS





VOIP
        TELECOM





The
        Company operates a Voice over Internet Protocol ("VoIP") network that directs
        long distance telecommunication traffic globally. Customers and suppliers,
        consisting primarily of communications service providers, gain access to
        the
        Company's international routes via the Internet from virtually anywhere in
        the
        world. Using VoIP technology, voice, fax and other information can be sent
        over
        the Internet far more economically than through a traditional fixed-line
        telephone network. The Company's VoIP platforms route international traffic
        based on cost, quality and availability. Its revenues are derived by selling
        its
        telecommunications routes to customers worldwide. Through the Company's VoIP
        platform, customers and suppliers have access to routes and related information
        in nearly every country in the world.





13


RGB
        IMAGING





The
        purchased RGB Assets and B Tech Assets are the foundation of unique digital
        image enhancement and compression technologies that the current management
        believes are patentable for the purposes of producing marketable imaging
        applications. These applications range from still image enhancement to improved
        streaming compression ratios. To date, the Company has devoted marginal
        financial resources to the development of these technologies.





THE
        VOIP
        INDUSTRY





Communications
        Industry





The
        communications industry is characterized by changes driven by deregulation
        in
        telecommunications markets around the world, an increase in and shift of
        minutes
        to wireless and the acceptance of VoIP as an alternative to wireline phone
        service.





VoIP
        permits a user to send voice, fax and other information over the Internet,
        rather than through a traditional fixed-line telephone. VoIP has been used
        as a
        low-cost solution to provide wholesale call completion, or termination, to
        telecommunications services providers. The low cost of launching a
        telecommunications business with VoIP, coupled with deregulation in
        telecommunications markets, has driven fragmentation of communications services
        markets. VoIP is now being used as a way to provide local and long-distance
        phone service to consumers and enterprises. Cable companies and VoIP service
        providers are driving current consumer adoption of VoIP and are expected
        to
        capture a significant share of the overall voice market.





Global
        deregulation, combined with rapid technological advances, has enabled the
        emergence of many new communications service providers in dozens of local
        markets. The Company's management believes that national carriers, in their
        efforts to remain competitive, are focusing their capital spending on
        "last-mile" services such as fixed-line, wireless, and cable. Consequently,
        communications service providers are looking for ways to expand their ability
        to
        serve all of their customers' telecommunication needs, while simultaneously
        reducing the cost of providing international services. Increasingly, the
        world's
        carriers are seeking to outsource international voice traffic to efficient
        VoIP
        companies, such as the Company, whose inherently lower infrastructure and
        transport costs improve a carrier's competitiveness and bottom line, without
        compromising service quality.





The
        principal benefits of VoIP are:





|· | Cost
                  Advantage from Internet Transport. Traditional voice communication
                  networks use circuit-switching technology, which establishes dedicated
                  channels between an originating and terminating point for the duration
                  of
                  a call. Physical facilities (typically fiber and associated equipment)
                  are
                  dedicated to voice traffic between switching nodes, regardless
                  of changes
                  in demand. In contrast, VoIP is based on packet-switching technology.
                  This
                  technology completes a call by digitizing and dividing a speaker's
                  voice
                  into small packets that travel to their destination through networks
                  carrying packets of other Internet traffic, in much the same way
                  as email
                  travels. Using a network of service facilities connected to the
                  Internet
                  for transport is less costly than building a dedicated network
                  as calls
                  share the Internet with other traffic.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· | Cost
                  Advantage from VoIP traffic. The cost of operating the Company's
                  business
                  is almost entirely software based which does not require maintenance
                  or
                  technicians. As a result, the costs are low and the scalability
                  is very
                  high, allowing the Company to compete with non-VoIP telecommunications
                  carriers on a much lower cost structure.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|· | Cost
                  Advantage from Bypass of International Settlement Rates. Traditional
                  international long distance calls are completed through international
                  toll
                  switches that provide access to a terminating network. These networks
                  are
                  often owned by government bodies or telecommunications carriers
                  that
                  charge settlement rates (or tariffs) well in excess of costs. Although
                  these fees are being reduced in many countries as industry deregulation
                  continues, the charges remain significant. Calls routed over the
                  Internet
                  bypass these toll switches, avoiding a significant portion of these
                  fees,
                  which further lowers the cost of completing
                  calls.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14
 
 
 ·
              Positioning
                  for New Services. In contrast to the closed, proprietary structure
                  inherent in a traditional circuit-switched voice network, VoIP
                  embraces an
                  open architecture and open standards, which facilitates innovation
                  at
                  lower cost. Traditional voice networks are designed specifically
                  to
                  provide one basic service, making it difficult and costly to introduce
                  new
                  services over those networks and their proprietary platforms. As
                  data
                  networks convert services into data packets, this allows the exchange
                  of
                  new types of data such as fax, video, IP-television,
                  etc. 
 Outsourcing
          VoIP Services
 
 Given
          the
          advantages of VoIP, many communication carriers have begun to carry some
          portion
          of their voice traffic over IP networks. Despite the move by some large
          carriers
          to develop their own international VoIP infrastructures, many carriers
          are
          interested in outsourcing international traffic to providers such as the
          Company. Some of the reasons that carriers prefer to outsource international
          traffic include:
 
 ·
              the
                  relatively low percentage of revenue that international service
                  represents
                  for many large carriers; 
 ·
              the
                  disproportionate cost and complexity of deploying and supporting
                  international service infrastructure as compared with domestic
                  investment
                  opportunities; 
 ·
              a
                  hesitation to build new networks and cannibalize traffic from their
                  traditional voice networks; 
 ·
              concerns
                  over sufficient in-house VoIP expertise to ensure that voice quality
                  and
                  network reliability are comparable to that of the public-switched
                  telephone network, especially when routing traffic over the Internet
                  versus private networks; and 
 ·
              generally
                  reduced capital budgets for network investment of any
                  kind. 
 The
          global communications services industry continues to evolve, providing
          significant opportunities and creating competitive pressure for market
          participants. The industry is experiencing significant changes, including
          the
          proliferation of wireless and data products and services, increased voice
          and
          data volume, declining unit pricing and the emergence of new participants
          due to
          deregulation and low-cost technologies. The growth in competition and associated
          fragmentation along with declining unit pricing and an industry structure
          that
          is characterized by high fixed costs have resulted in increased pressure
          on
          communications services providers to offer services at a lower cost to
          consumers. Unlike with VoIP, most communications services providers must
          access
          other providers' public switched telephone networks ("PSTN") to send and
          receive
          voice and data traffic. The process of establishing these PSTN interconnections
          is labor-intensive, costly, time-consuming and highly negotiated, which
          leads to
          higher installation, network management, selling, legal, billing and collection
          costs, creating the need and demand for a centralized and efficient
          marketplace.
 
 IPEX'S
          SOLUTION
 
 The
          Company's software platform provides benefits to customers and suppliers.
          By
          routing and clearing voice calls through the platform, buyers and sellers
          can
          access multiple buyers and sellers, increase network utilization, achieve
          better
          pricing and improve profitability and cash flow by reducing the number
          of
          interconnections and reducing selling, legal, billing and collection expenses.
          The availability of routes is also increased since the Company's software
          and
          platforms can handle multiple carriers for one single routing code.
 
 By
          establishing a single interconnection to the Company's platform, communications
          services providers gain immediate targeted access to and a link with multiple
          customers and suppliers. This replaces the lengthy, costly and highly negotiated
          process of searching for and interconnecting to other communications services
          providers on a one-to-one basis and managing each interconnection on an
          ongoing
          basis.


15
 
 The
          Company handles all invoicing for voice calls and media sold on its platform.
          Members receive a single payment or invoice from the Company reflecting
          net
          buying or selling activity. This settlement reduces administrative
          costs.
 
 SALES
          AND
          MARKETING
 
 The
          Company markets and sells its services through a direct sales force. The
          sales
          process frequently involves a trial process, where a small volume of traffic
          is
          run prior to larger volumes being run through the centralized platform.
          The
          Company targets voice services sales efforts at the telecommunications
          industry,
          and, in particular, the market for international wireline, wireless and
          VoIP
          minutes.
 
 INTELLECTUAL
          PROPERTY
 
 To
          date,
          the Company's VoIP operations have not depended in any part on proprietary
          rights or technology. The Company has been licensed one domestic and one
          international patent. These patents are related to trading international
          VoIP
          traffic and determining the best price and quality for routing and pricing
          for
          VoIP calls. The European patent number is EP1131949 and the international
          patent
          application number is WO0031954. The validity of these patents and the
          license
          of the patent rights to the Company have been questioned by independent
          counsel
          hired by the Company's Board of Directors. The Company's current management
          believes that the Company does not have the legal right to use this intellectual
          property. To date, the patents have not been applied to or utilized by
          the
          Company's VoIP platform and their relevance to the Company's business is
          not
          clear.
 
 Related
          to its RGB technologies, the Company owns image processing algorithms,
          encoder
          software, decoder software, digital image enhancement tools and algorithms
          that
          enhance, compact, store, encrypt, stream and display digital image content.
          The
          Company also acquired a trademark on the name Luminaxys. The trademark
          is
          granted for Italy and must be renewed annually.
 
 COMPETITION
 
 The
          global communications services market is highly competitive. The Company
          competes with other wholesale telecommunications carriers worldwide. Many
          of
          these carriers have more resources, longer operating histories and more
          established positions in the telecommunications marketplace, and, in some
          cases,
          have begun to develop Internet telephony capabilities. The Company also
          competes
          with smaller companies, including those that may be specialists in just
          one or
          two routes. The Company additionally competes against its customers' ability
          to
          carry traffic themselves, whereby either retail carriers develop their
          own
          international networks or interconnect with one another and exchange
          international traffic by "meeting" in a major telecommunications hub. The
          Company competes principally on quality of service and price.
 
 GOVERNMENT
          REGULATION
 
 The
          Federal Communications Commission (the "FCC") has jurisdiction over interstate
          and international communications in the United States. The FCC's rules,
          regulations and policies impose obligations on carriers providing
          facilities-based and/or resale telecommunications services. While the FCC
          to
          date has maintained an informal policy that information service providers,
          including Internet telephony providers, are not telecommunications carriers
          for
          regulatory purposes, various entities have challenged this idea, both before
          the
          FCC and at various state government agencies. An adverse ruling could subject
          the Company to licensing requirements and additional fees and
          subsidies
 increasing
          the costs of providing services.


16
 
 EMPLOYEES
 
 As
          of
          April 21, 2006, the Company had nine full time employees and three part
          time
          employees. The Company has not experienced any work stoppages and the Company
          considers relations with its employees to be good.
 
 DESCRIPTION
          OF PROPERTY.
 
 The
          company's principal office and operations during fiscal year 2005 were
          located
          at 9255 Towne Center Drive, Suite 235, San Diego, California 92121. These
          premises consisted of 896 square feet of office space. The related lease
          agreement expired March 31, 2006. Monthly base rent under the lease agreement
          was $2,374.40.
 
 Effective
          March 15, 2006, the Company entered into a new lease agreement for its
          principal
          executive office located at 7825 Fay Avenue, Suite 254, La Jolla, CA 92037.
          The
          premises consist of 600 square feet of office space. The term of the lease
          is
          for six months and automatically renews for another six months at the current
          base rent plus a seven percent increase unless the Company notifies the
          landlord
          on or before July 15, 2006 of its intention not to renew. Base rent under
          the
          lease agreement is $2,400 per month. In addition, the Company pays $645
          per
          month pursuant to the lease agreement for phone lines and equipment rental,
          voicemail, high speed internet and other administrative services.
 
 Effective
          February 28, 2006, the Company entered into an office lease agreement for
          an
          office located at 1900 N.W. Corporate Boulevard, Suite 205W, Boca Raton,
          Florida
          33431. The premises consist of 1,394 rentable square feet of office space.
          The
          term of the lease is for 38 months beginning March 1, 2006. Base rent under
          the
          lease is approximately $1,859 per month.
 
 LEGAL
          PROCEEDINGS.
 
 On
          or
          about October 7, 2005, the Company was informed that it is a party to an
          informal SEC investigation.
 
 The
          Company's subsidiary AICI, Inc., a Nevada corporation, and its predecessor
          Administration for International Credit & Investment, Inc., an Oregon
          corporation, is named in an action filed on or about February 21, 2006
          in the
          Superior Court of the State of California for the County of San Diego (Case
          No.
          GIC 861542). The plaintiff in the action is Triagon Holding AG, against
          defendants Interphotonic, Inc., Wolfgang Grabher, Administration for
          International Credit & Investment, Inc., AICI, Inc., Eureca Marketing GmbH
          and Does 1-50. The complaint alleges fraud, conversion, unjust enrichment
          and
          breach of contract based on allegations, among others, that he was fraudulently
          induced into depositing $2,454,157.98 into an escrow account as an investment
          in
          Interphotonic, Inc. and such money was closed on with out the plaintiff's
          authorization. The plaintiff is seeking damages in the amount of $2,454,157.98
          plus interest at the rate of 10% per annum and costs, as well as a judicial
          accounting, injunctive and declaratory relief.
 
 On
          April
          20, 2006 the Company filed a lawsuit against Inzon Corporation, a Nevada
          corporation, and Does 1-50 in the Superior Court of the State of California
          for
          the County of San Diego (Case No. GIC 864677). The Company is seeking to
          recover
          $525,313.96 plus interest owed to it by the defendants for telecommunications
          services provided by the Company during 2006 pursuant to a carrier services
          agreement.
 
 On
          March
          17, 2005, the Company entered into an Agreement and Plan of Merger with
          AICI,
          Inc., a Nevada corporation and the Company's wholly owned subsidiary, AICI
          Oregon, and the shareholders of AICI Oregon. Pursuant to the Agreement
          and Plan
          of Merger, the Company acquired all of the outstanding equity stock of
          AICI
          Oregon from its shareholders. Upon completion of the transaction, AICI
          Oregon
          merged with and into AICI, Inc. and AICI, Inc. survived the merger. As
          consideration for the acquisition of AICI Oregon, the Company issued 21,875,566
          shares of common stock to the AICI Oregon shareholders. In addition, certain
          of
          the company's shareholders cancelled an aggregate of 3,500,000 outstanding
          shares of the Company's common stock, and such shares were returned to
          treasury.
          The merger was accounted for as a recapitalization of AICI Oregon. Accordingly,
          the Company's historical financial statements prior to March 17, 2005 are
          those
          of AICI.


17
 
 In
          connection with the acquisition of AICI Oregon, on March 18, 2005, the
          Company
          completed a private placement of an aggregate of 3,500,000 shares of common
          stock, 1,750,000 Series A Warrants and 1,750,000 Series B Warrants to 76
          accredited investors for aggregate gross proceeds of $3,500,000. Due to
          prior
          working capital constraints the Company could only maintain selling to
          Tier 3
          customers on a weekly net 5 basis. The additional working capital provided
          by
          the March 18, 2005 private placement allowed the Company to extend credit
          to
          five Tier 2 carriers under net 15 terms and two Tier 1 carriers under net
          30
          terms thereby increasing the number of overall customers.
 
 On
          March
          28, 2005, AICI, Inc., extended a loan in the amount of $400,000 to Joseph
          L.
          Putegnat III, who is a shareholder of the Company, former Vice President
          of
          AICI, Inc. and the former owner of Jupiter Telecom, Inc. a predecessor
          in
          interest to the Company's current business. Although the loan was subsequently
          assigned to a third party, the Company's Audit Committee retained independent
          counsel to investigate the loan to Mr. Putegnat and in June 2005, the Audit
          Committee determined that the loan constituted a "direct or indirect loan
          to a
          director or executive officer (or equivalent thereof)," in violation of
          the
          Sarbanes-Oxley Act of 2002 and Section 13(k) of the Securities Exchange
          Act of
          1934, as amended. As a result of the investigation and the findings, the
          Company
          experienced significant turnover in its management and its Board of Directors.
          Effective May 21, 2005, the Company's majority shareholder, former Chairman,
          Chief Executive Officer and President, Wolfgang Grabher, was put on temporary
          leave of absence and the Company's Chief Financial Officer, Russell Ingledew
          began serving as Acting President until May 26, 2005 when the Board of
          Directors
          appointed Milton "Todd" Ault, III as a director and as the Company's Interim
          Chief Executive Officer. On June 23, 2005, the Company appointed new members
          to
          its Audit Committee and in July 2005 hired then director and Audit Committee
          member, Gerald Beckwith as Chief Executive Officer, and a new Chief Operating
          Officer, Sothi Thillairajah. Mr. Beckwith subsequently resigned on February
          15,
          2006 and Mr. Thillairajah was appointed Chief Executive Officer and a director
          of the Company.
 
 During
          the course of the investigation into Mr. Putegnat's loan, the Audit Committee
          determined to have independent counsel also investigate other potential
          securities violations alleged by former counsel to the Company, including
          whether the disclosure made by the Company to investors in its March 18,
          2005
          private placement was inaccurate or misleading. On October 7, 2005 the
          Company
          announced that the SEC had begun an informal investigation of the Company.
          On
          December 2, 2005, after completing the Company' internal investigation,
          the
          Audit Committee determined that the offering memorandum used in connection
          with
          the Company's March 18, 2005 private placement, as well as the Company's
          Form
          8-K dated March 16, 2005, either misstated or omitted certain material
          information. As a result, on December 19, 2005 the Company amended the
          March 16,
          2005 Form 8-K in an attempt to correct the disclosure and, as recommended
          by the
          Audit Committee, the Company obtained restitution from Mr. Grabher by requiring
          him to return a significant number of shares of the Company's common stock
          to
          treasury. On December 14, 2005, the Company entered into a Return to Treasury
          Agreement with Mr. Grabher, pursuant to which Mr. Grabher agreed to surrender
          14,855,900 shares of the Company's common stock within ten business days
          of
          December 14, 2005 to be retired and returned to treasury. Such shares
          represented 49.4% of the Company's outstanding shares of common stock based
          on
          approximately 30,100,621 shares outstanding as of December 14, 2005. Mr.
          Grabher
          returned the 14,855,900 shares to the Company on February 2, 2006.
 
 As
          a
          result of the foregoing, the Company incurred substantial legal expenses
          totaling $549,400 during the fiscal year ended December 31, 2005, as well
          as
          additional business and administrative expenses as detailed in the following
          sections. These expenses, combined with continuing losses, have caused
          significant deterioration of the Company's financial condition. The Company's
          resources continue to be negatively impacted by continuing issues related
          to the
          events and changes in management described above.
 
 During
          2005, the Company failed to develop a disciplined and sustainable credit
          risk
          management system for the telecommunications business. The result was a
          bad debt
          expense of $411,606 for the fiscal year ended December 31, 2005. The Company
          spent less than $100,000 on developing a proprietary exchange platform
          during
          the fiscal year ended December 31, 2005.
  On
          June
          29, 2005, the Company purchased certain digital imaging related intellectual
          property assets (i.e., the RGB Assets and the B Tech Assets). The Company
          intends to develop digital image enhancement and compression software
          applications based on a licensing model. Less than $100,000 was spent on
          the
          development of these technologies during the fiscal year ended December
          31,
          2005. Current management believes that the maximum value of these assets
          may be
          realized through the separation of these assets into its recently formed
          subsidiary RGB Channel, Inc. However, as of the date this annual report
          was
          filed with the SEC the Company has not transferred the assets to RGB Channel,
          Inc.


18
 
 The
          Company has incurred losses during each the past two fiscal years. For
          the years
          ended December 31, 2005 and 2004, the Company generated revenue of $12,332,093
          and $6,716,114, respectively, and incurred net losses of $6,843,098 and
          $398,620, respectively. At December 31, 2005, the Company had a working
          capital
          deficiency of $167,391 and an accumulated deficit of $7,241,718. These
          factors
          raise substantial doubt about the Company's ability to continue as a going
          concern.
 
 The
          Company received $800,000 from a private placement of 10% Secured Convertible
          Notes to accredited investors in the first quarter of 2006. Based on the
          Company's current cash and other current assets including accounts receivable
          and available for sale securities, management believes the Company has
          sufficient liquidity to fund operations for the next month. Beyond that,
          additional funding is required for the Company to continue as a going concern.
          Management believes the Company will require an additional $4,000,000 to
          develop
          its VoIP operations and the RGB technology and to continue operations for
          the
          twelve months subsequent to the date this report is filed. The Company
          intends
          to seek outside debt and/or equity financing through private placements
          to
          accredited investors and may request
          voluntary exercise of outstanding warrants. The Company has no definitive
          plans
          or agreements in place to obtain such additional financing and the Company
          cannot guarantee that any additional equity or debt financing will be available
          in sufficient amounts or on acceptable terms when needed. If such financing
          is
          not available in sufficient amounts or on acceptable terms, the Company
          may have
          to discontinue operations. In addition, any equity financing obtained may
          result
          in dilution to existing stockholders and may involve securities that have
          rights, preferences, or privileges that are senior to the Company's common
          stock, and any debt financing obtained must be repaid regardless of whether
          or
          not the Company generates profits or cash flows from
 its
          business activities and may worsen the Company's financial
          condition.
  At
          December 31, 2005, the Company's cash and cash equivalents totaled $297,232.
          Cash (including cash equivalents) used in operating activities was $2,673,732
          for the year ended December 31, 2005 compared to cash provided by operating
          activities of $110,470 in the year ended December 31, 2004. The increase
          in cash
          used during 2005 resulted primarily from increased expenses during 2005
          that
          included legal expenses of $549,400, executive cash compensation of $287,704
          and
          Board of Directors compensation of $4,500, telecommunications employee
          and
          consultant salaries of $454,720, accounting fees of $106,519 and auditor's
          fees
          of $128,694. In addition, a former director was paid $116,000 for monies
          that he
          claimed were owed to him and $70,000 was paid pursuant to a four month
          consulting contract with the former AICI Vice President and Jupiter Telecom
          owner.
 
 Accounts
          receivable, net at December 31, 2005 was $1,151,555 as compared to $181,519
          on
          December 31, 2004. The increase in accounts receivable is attributable
          to the
          increase in telecommunications traffic on longer payment cycles as result
          of the
          Company extending higher levels of credit.
 
 Net
          cash
          used in investing activities for the year ended December 31, 2005 was $412,651
          compared to net cash provided by investing activities of $5,564 for the
          year
          ended December 31, 2004. The change in net cash used in investing activities
          is
          attributable to $158,033 used for the purchase of property and equipment
          and
          $333,700 for the purchase of intellectual property rights, including legal
          fees
          of $58,700. As discussed further under Item 1. Description of Business,
          on June
          29, 2005 the Company purchased certain intellectual property assets from
          RGB
          Channel SRL for $275,000.
 
 As
          of
          December 31, 2005 trade payables were $1,396,687 as compared to $562,599
          as of
          December 31, 2004. The increase in trade payables is attributable to the
          increase in telecommunications traffic on extended payment term. Specifically,
          a
          tier 1 supplier provided the Company with 30 net 30 payment terms and the
          Company in turn directed 30% of its telecom traffic to this supplier by
          year end
          2005.


19
 
 Net
          cash
          provided by financing activities was $3,382,857 for the year ended December
          31,
          2005 compared to cash used by financing activities of $115,275 for the
          year
          ended December 31,2004. The financing activities during 2005 include proceeds
          from a stock subscription for $142,837 and a private placement completed
          on
          March 18, 2005 of 3,500,000 shares of common stock, 1,750,000 Series A
          Warrants
          and 1,750,000 Series B Warrants to 76 accredited investors for proceeds
          of
          $3,240,020. The Company's private placement of 10% Secured Convertible
          Notes
          caused an adjustment to the exercise price and the number of shares purchasable
          pursuant to the Series A and Series B Warrants. The current exercise price
          of
          the Series A and Series B Warrants is $1.00 per share, and there are now
          2,625,000 shares purchasable pursuant to outstanding Series A Warrants
          and
          3,500,000 shares purchasable pursuant to outstanding Series B Warrants.
          The
          common stock, Series A and Series B Warrants were sold as Units, with each
          Unit
          consisting of two shares of common stock, one Series A Warrant and one
          Series B
          Warrant, for a per Unit purchase price of $2.00. Each Series A Warrant
          initially
          entitled the holder to purchase one share of common stock at $1.50 per
          share,
          exercisable for a period of five years. Each Series B Warrant initially
          entitled
          the holder to purchase one share of common stock at $2.00 per share, exercisable
          for a period of five years.
 
 The
          Series A Warrants are callable by the Company in the event its common stock
          trades at or above $2.00 for ten consecutive trading days. The Series B
          Warrants
          are callable by the Company in the event its common stock trades at or
          above
          $2.50 for ten consecutive trading days. However, the right to call the
          Series A
          and Series B Warrants is subject to the following additional conditions:
          (1) the
          Company may not call more than 25% of the warrants during any 30 day period;
          (2)
          the Company must simultaneously call all Series A and Series B Warrants
          on the
          same terms; and (3) the Company may not call the warrants unless all of
          the
          shares of common stock issuable thereunder either (a) are registered pursuant
          to
          an effective registration statement or (b) may be sold under Rule 144(k)
          under
          the Securities Act of 1933.
 
 If
          at any
          time until the earlier of (A) the date that 50% of the shares underlying
          the
          outstanding Series A and Series B Warrants have been sold by warrant holders
          or
          (B) two years after the actual effective date of a registration statement
          registering the resale of the common stock and common stock issuable upon
          exercise of warrants, the Company issues or sells, or is deemed to have
          issued
          or sold, any shares of common stock for no consideration or for a consideration
          per share less than the exercise price in effect immediately prior to the
          time
          of such issue or sale, then and in each such case the then-existing exercise
          price will be reduced to the lowest price per share at which any share
          of common
          stock was issued or sold or deemed to be issued or sold. This adjustment
          will
          not apply in the case of the issuance of capital stock, options or convertible
          securities issued to directors, officers, employees or consultants pursuant
          to
          an equity compensation program approved by the Company's Board of Directors.
          The
          Company's private placement of 10% Secured Convertible Notes caused an
          adjustment to the exercise price and the number of shares purchasable pursuant
          to the Series A and Series B Warrants.
 
 Sales
          for
          the year ended December 31, 2005 rose by 84% to $12,332,093 as compared
          to sales
          of $6,716,114 from the prior year ended December 31, 2004. Due to prior
          working
          capital constraints the Company could only maintain selling to Tier 3 customers
          on a weekly net 5 basis. The additional working capital provided by the
          private
          placement on March 18, 2005 allowed the Company to extend credit to five
          Tier 2
          carriers under net 15 terms and two Tier 1 carriers under net 30 terms
          thereby
          increasing the number of overall customers. The 84% increase in sales is
          almost
          entirely attributable to the extension of credit that was made possible
          by the
          increase in working capital. The addition of a few new Tier 3 customers
          added
          marginally to the increase in sales.
 
 Cost
          of
          sales for the year ended December 31, 2005 rose by 83% to $12,212,362 as
          compared to cost of sales of $6,685,163 from the prior year ended December
          31,
          2004. The increase in cost of sales is directly attributable to the increase
          in
          sales. The cost of sales as a percentage of sales for the year ended December
          31, 2005 remained relatively constant at 99% compared to 100% for the year
          ended
          December 31, 2004. The failure to achieve a greater improvement in gross
          margin
          reflects the Company's inability to secure more attractive rates from suppliers.
          It also reflects bandwidth costs of $85,493 paid to the Company's switch
          collocation facility provider.


20
 
 Gross
          profit for the year ended December 31, 2005 was $119,731 as compared to
          $30,951
          from the prior year ended December 31, 2004. The increase in gross profit
          is
          attributable to the modest increase in gross margin on increased telecom
          traffic.
 
 Selling,
          general and administrative expenses for the year ended December 31, 2005
          were
          $5,527,204 compared to $428,863 for the year ended December 31, 2004,
          representing an increase of $5,098,341, or 1,189%. For the year ended December
          31, 2005 selling, general and administrative expenses include non-cash
          expenses
          of $656,251 related to a consulting agreement between a related party,
          Patient
          Safety Technologies, Inc. and Wolfgang Grabher, the company's former President
          and Chief Executive Officer, to which the company was designated the third
          party
          beneficiary. Other non-cash selling, general and administrative expenses
          include
          stock based compensation expense of $1,974,519 related to options and other
          equity instruments granted and an impairment loss of $1,522,130 recorded
          in
          connection with the write off of goodwill. Additional expenses during 2005
          include: legal expenses of $549,400, bad debt expenses of $411,606, executive
          wages of $287,704, and telecommunications employee and consultant salaries
          totaling $454,720. Accrued expenses also include services provided in 2005
          by
          former directors and executives and a prepaid four month consulting contract
          with the former AICI Vice President and Jupiter Telecom owner.
 
 Net
          loss
          for the year ended December 31, 2005 was $6,843,098 compared to the net
          loss of
          $398,620 for the year ended December 31, 2004. The net loss for the year
          ended
          is primarily attributable to the increased expenses discussed
          above.
 
 On
          August
          9, 2005, the Company entered into a binding letter of intent to acquire
          all of
          the issued and outstanding shares of capital stock of Vinculum Communications,
          Inc., a privately owned Delaware corporation ("Vinculum"). Vinculum is
          a San
          Diego, California-based international long distance carrier that offers
          termination services to long distance carriers worldwide. The closing date
          for
          the acquisition was scheduled to occur no later than September 30, 2005,
          unless
          extended by mutual consent of the parties. Pursuant to the terms of the
          letter
          of intent, the Company was to pay an aggregate of $14.5 million for the
          acquisition of Vinculum, paid as follows: (a) $1 million in cash; (b) $11.7
          million in shares of common stock; and (c) $1.8 million of convertible
          notes. On
          December 21, 2005, the Company entered into an agreement with Vinculum
          to
          terminate the letter of intent and all transactions contemplated pursuant
          to the
          letter of intent and the Company paid Vinculum $55,000 which represents
          reimbursement of expenses incurred by Vinculum in connection with the
          negotiation of and due diligence associated with the letter of intent and
          the
          proposed acquisition. The Company previously advanced $75,000 to Vinculum
          as a
          pre-pay deposit for VoIP traffic. The $55,000 payment was deducted from
          the
          $75,000 advance, resulting in an outstanding principal sum of $20,000 owed
          by
          Vinculum to the Company and was repaid immediately. The parties mutually
          released each other from all claims which they may have against each other
          to
          the date of the termination agreement.
 
 March
          21,
          2006 Private Placement
 
 On
          March
          21, 2006 the Company entered into a Securities Purchase Agreement for the
          sale
          of $800,000 principal amount of 10% Secured Convertible Notes to four accredited
          investors. The sale of the 10% Secured Convertible Notes closed on March
          21,
          2006. The 10% Secured Convertible Notes bear interest at the rate of 10%
          per
          annum and mature one year from the date of issuance. On the maturity date
          the
          outstanding principal amount of the 10% Secured Convertible Notes will
          automatically convert into shares of common stock of the Company's wholly
          owned
          subsidiary RGB Channel, Inc., a Nevada corporation. Before the maturity
          date the
          holders may convert the outstanding principal amount of the Notes into
          either
          shares of the Company's common stock or shares of common stock of the Company's
          subsidiary RGB Channel, Inc. If converted into shares of the Company's
          common
          stock the conversion price of the Notes is $1.00 per share (the "IPEX Conversion
          Price"). If converted into shares of common stock of RGB Channel, Inc.
          the
          conversion price will equal the lesser of (the "RGB Conversion Price"):
          (a)
          $0.50, or (b) the price at which, at any time while the Notes are outstanding, RGB
          Channel, Inc. sells shares of its common stock or any other securities
          convertible into or exchangeable for RGB Channel, Inc. common stock.


21
 
 The
          conversion price of the 10% Secured Convertible Notes is subject to adjustment
          in the event the Company issues shares of its common stock or securities
          convertible into or exchangeable for shares of its common stock at a price
          less
          than the IPEX Conversion Price, if the Company pays a stock dividend, subdivides
          or combines outstanding shares of common stock into a greater or lesser
          number
          of shares, or takes any other actions that would otherwise result in dilution
          of
          the holders' position. In addition, if at any time when the 10% Secured
          Convertible Notes are outstanding there is a period of 60 trading days
          during
          which the volume weighted average price of the Company's common stock is
          less
          than $1.00 per share, then: (a) there will be a one time adjustment to
          the IPEX
          Conversion Price to equal the lowest volume weighted average price of the
          Company's common stock during such 60-trading day period; and (b) there
          will be
          a one time adjustment to the RGB Conversion Price to equal 50% of the lowest
          volume weighted average price of the Company's common stock during such
          60-trading day trading period.
 
 At
          December 31, 2005, we held 1,045,000 shares of common stock and warrants
          to
          purchase 225,000 shares of common stock at $1.50 per share and warrants
          to
          purchase 225,000 shares of common stock at $2.00 per share of IPEX, Inc.
          (“ ***IPEX”*** ),
          valued
          at $1,243,550, which represents 7.8% of our total assets. As described
          below the
          exercise price of these warrants was adjusted to $1.00 per share on March
          21,
          2006. IPEX's common stock is traded on the OTC Bulletin Board, which reported
          a
          closing price, at December 31, 2005, of $2.38. The warrants are exercisable
          for
          a period of five years and are callable by IPEX in certain instances. On
          June
          23, 2005, Alice M. Campbell, who is one of our directors, was appointed
          to the
          Board of Directors of IPEX. In addition, from May 26, 2005 until July 20,
          2005,
          Milton “Todd” Ault, III, our former Chairman and Chief Executive Officer, served
          as interim Chief Executive Officer of IPEX and Mr. Ault has been a director
          of
          IPEX since May 26, 2005.
 
 The
          Company’s initial investment into IPEX occurred On March 2, 2005 in the amount
          of $450,000. This investment was part of the private placement that IPEX
          completed on March 18, 2005. The total amount of IPEX’s private placement was
          for 3,500,000 shares of common stock, 1,750,000 Series A Warrants and 1,750,000
          Series B Warrants for aggregate proceeds of $3,500,000, less issuance costs
          of
          $259,980, resulting in net realized proceeds of $3,240,020. The common
          stock,
          Series A and Series B Warrants were sold as Units, with each Unit consisting
          of
          two shares of common stock, one series A Warrant and one Series B Warrant.
          Each
          Series A Warrant entitles the holder to purchase one share of common stock
          at
          $1.50 per share, exercisable for a period of five years. Each Series B
          Warrant
          entitles the holder to purchase one share of common stock at $2.00 per
          share,
          exercisable for a period of five years. Subsequent to the effectiveness
          of a
          registration statement covering the re-sale of shares underlying the warrants,
          the Series A and Series B Warrants are callable by IPEX, under certain
          circumstances, if IPEX's common stock trades at or above $2.00 and $2.50,
          respectively, for ten consecutive trading days. In such event IPEX must
          give us
          30 days prior written notice of its intention to call the warrants after
          which
          it has the right to repurchase the warrants at a purchase price of $0.01
          per
          share of common stock then purchasable pursuant to the warrants. During
          such 30
          day notice period we would have the right to exercise the warrants. As
          of March
          31, 2006 IPEX has not filed a registration statement covering the re-sale
          of the
          shares underlying the warrants and accordingly IPEX does not have a right
          to
          call them.
 
 Pursuant
          to two separate asset purchase agreements entered into during 2005, in
          consideration for $6,000,000 of IPEX common stock and $275,000 cash, IPEX
          purchased certain intellectual property assets that may be used to enhance,
          compact, store, encrypt, stream and display digital image content over
          wireless
          networks and over the Internet and for image enhancement, compacting and
          content
          protection applications. On March 21, 2006 IPEX reported that it is in
          the
          process of transferring ownership of such assets to its subsidiary RGB
          Channel,
          Inc.
 
 On
          March
          21, 2006 IPEX sold $800,000 principal amount of 10% secured convertible
          notes to
          four accredited investors in a private placement transaction. The 10% secured
          convertible notes are convertible into either IPEX common stock at a price
          of
          $1.00 per share or into common stock of IPEX’s subsidiary RGB Channel, Inc. at a
          conversion price equal to the lesser of (a) $0.50, or (b) the price at
          which, at
          any time while the 10% secured convertible notes are outstanding, RGB Channel,
          Inc. sells shares of its common stock or any other securities convertible
          into
          or exchangeable for RGB Channel, Inc. common stock. The sale by IPEX of
          the 10%
          secured convertible notes caused an adjustment to the exercise price of
          the
          Series A Warrants and the Series B Warrants to equal $1.00 per share and
          an
          increase in the number of shares of common stock purchasable under such
          Series A
          and B Warrants. Pursuant to such warrants that we own, we are now entitled
          to
          purchase a total of 787,500 shares of IPEX common stock at an exercise
          price of
          $1.00 per share.


22
 
 IPEX
          operates a Voice over Internet Protocol ( ***"VoIP"*** )
          routing
          platform that directs telecommunication traffic. VoIP permits a user to
          send
          voice, fax and other information over the Internet, rather than through
          a
          regular telephone network system based on switches. IPEX’s VoIP network directs
          long distance telecommunication traffic globally. Customers and suppliers,
          consisting primarily of communications service providers, gain access to
          IPEX’s
          international routes via the Internet from virtually anywhere in the world.
          We
          believe that using VoIP technology, voice, fax and other information can
          be sent
          over the Internet far more economically than through a traditional fixed-line
          telephone network. IPEX’s platforms route international traffic based on cost,
          quality and availability. IPEX’s revenues are derived by selling its
          telecommunications routes to customers worldwide. We believe that, through
          IPEX’s VoIP platform, customers and suppliers have access to routes and related
          information. The cost of operating IPEX’s business is almost entirely software
          based which does not require maintenance or technicians. As a result, we
          believe
          the costs are low and the scalability is very high, allowing IPEX to compete
          with non-VoIP telecommunications carriers on a much lower cost
          structure.
 
 The
          communications industry is characterized by changes driven by deregulation
          in
          telecommunications markets around the world, an increase in and shift of
          minutes
          to wireless and the acceptance of VoIP as an alternative to wireline phone
          service. VoIP has been used as a low-cost solution to provide wholesale
          call
          completion, or termination, to telecommunications services providers. We
          believe
          that the low cost of launching a telecommunications business with VoIP,
          coupled
          with deregulation in telecommunications markets, has driven fragmentation
          of
          communications services markets. VoIP is now being used as a way to provide
          local and long-distance phone service to consumers and enterprises. We
          believe
          that cable companies and VoIP service providers are driving current consumer
          adoption of VoIP and are expected to capture a significant share of the
          overall
          voice market. These factors have enabled the emergence of many new
          communications service providers in dozens of local markets. IPEX believes
          that
          national carriers are focusing their capital spending on services such
          as
          fixed-line, wireless, and cable. Consequently, communications service providers
          are looking for ways to expand their ability to serve all of their customers'
          telecommunication needs, while simultaneously reducing the cost of providing
          international services. Increasingly, the world's carriers are seeking
          to
          outsource international voice traffic to efficient VoIP companies to improve
          a
          carrier's competitiveness and bottom line.
 
 Traditional
          voice communication networks use circuit-switching technology, which establishes
          dedicated channels between an originating and terminating point for the
          duration
          of a call. Physical facilities are dedicated to voice traffic between switching
          nodes, regardless of changes in demand. In contrast, VoIP is based on
          packet-switching technology. This technology completes a call by digitizing
          and
          dividing a speaker's voice into small packets that travel to their destination
          through networks carrying packets of other Internet traffic, in much the
          same
          way as email travels. We believe that using a network of service facilities
          connected to the Internet for transport is less costly than building a
          dedicated
          network as calls share the Internet with other traffic.
 
 Traditional
          international long distance calls are completed through international toll
          switches that provide access to a terminating network. These networks are
          often
          owned by government bodies or telecommunications carriers that charge settlement
          rates (or tariffs) well in excess of costs. Although these fees are being
          reduced in many countries as industry deregulation continues, the charges
          remain
          significant. Calls routed over the Internet bypass these toll switches,
          avoiding
          a significant portion of these fees, which we believe further lowers the
          cost of
          completing calls.
 
 In
          contrast to the closed, proprietary structure inherent in a traditional
          circuit-switched voice network, VoIP embraces an open architecture and
          open
          standards, which we believe facilitates innovation at lower cost. Traditional
          voice networks are designed specifically to provide one basic service,
          which we
          believe makes it difficult and costly to introduce new services over those
          networks and their proprietary platforms. As data networks convert services
          into
          data packets, this allows the exchange of new types of data such as fax,
          video,
          IP-television, etc.
 
 IPEX’s
          software platform provides benefits to customers and suppliers. By routing
          and
          clearing voice calls through the platform, buyers and sellers can access
          multiple buyers and sellers, increase network utilization, achieve better
          pricing and improve profitability and cash flow by reducing the number
          of
          interconnections and reducing selling, legal, billing and collection expenses.
          By establishing a single interconnection to IPEX's platform, communications
          services providers gain immediate targeted access to and a link with multiple
          customers and suppliers. This replaces the lengthy, costly and highly negotiated
          process of searching for and interconnecting to other communications services
          providers on a one-to-one basis and managing each interconnection on an
          ongoing
          basis.


23
 
 The
          global communications services market is highly competitive. The Company
          competes with other wholesale telecommunications carriers worldwide. Many
          of
          these carriers have more resources, longer operating histories and more
          established positions in the telecommunications marketplace. The Company
          also
          competes with smaller companies, including those that may be specialists
          in just
          one or two routes. The Company additionally competes against its customers'
          ability to carry traffic themselves, whereby either retail carriers develop
          their own international networks or interconnect with one another and exchange
          international traffic by "meeting" in a major telecommunications hub. The
          Company competes principally on quality of service and price.
 
 As
          reflected in IPEX’s September 30, 2005 Form 10-Q, sales for the nine months
          ended September 30, 2005 rose to $8,346,775 as compared to sales of $4,387,882
          from the prior year's nine months ended September 30, 2004. Trading revenues
          represent fees generated from minutes purchased through IPEX’s VoIP exchange
          platform. Revenues from VoIP activities are recognized in the period minutes
          are
          delivered through the telecom exchange platform. In the past, due to prior
          working capital constraints, IPEX could only maintain selling to customers
          on a
          weekly net 5 basis ( ***“Tier
          3 carriers”*** ).
          The
          additional working capital provided by the private placement completed
          in March
          2005 allowed IPEX to extend credit to customers under net 15 terms ( ***“Tier
          2 carriers”*** )
          and
          customers on net 30 terms ( ***“Tier
          1 carriers”*** )
          therefore increasing the number of overall customers.
 
 IPEX’s
          cost of sales as a percentage of sales for the quarter ended September
          30, 2005
          remained relatively constant at 96% compared to 96% for the quarter ended
          September 30, 2004. Net loss for the three months ended September 30, 2005
          and
          2004 was $338,000 and $150,000, respectively. The increase in IPEX’s net loss
          for the three months ended September 30, 2005 is primarily due to increased
          salaries and wages related to management personnel .
  **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, 1800 Century Park East, Ste. 200, Los Angeles, California
      90067. 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., 1800 Century Park East, Ste.
      200,
      Los Angeles, California 90067 or by calling (310) 895-7750. 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.


24


**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 not made any sales or generated any revenue to date from our Safety-SpongeTM
System and a substantial amount of our revenue during 2005 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.**





We
      have
      not made any sales or generated any revenue to date from our Safety-SpongeTM
System. Further, of our $562,374 of revenue during the fiscal year ended
      December 31, 2005, $552,375 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 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,
      health care solutions, financial services and real estate 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.





25


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.





**The
      Company and our subsidiaries may have to take actions that are disruptive to
      our
      business strategy to avoid registration under the 1940
      Act.**





The
      1940
      Act generally requires 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, 2005, 37 .9%
      of
      our assets on a consolidated basis with subsidiaries were comprised of
      investment securities. If
      the
      Company 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
      the Company to register as an investment company. 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 former Chief Executive Officer, Ms. Silverstein is our President and
      Secretary, Mr. Glazer is our present Chairman and Chief Executive Officer and
      the Chief Health and Science Officer of our subsidiary Patient Safety Consulting
      Group, LLC, and Ms. Glazer is the Manager of our 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 e quity
      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.





26


**Should
      the value of our patents be less than their purchase price, we could incur
      significant impairment charges.**





At
      December 31, 2005, patents received in the acquisition of Surgicount Medical,
      Inc., net of accumulated amortization, represented $4,413,791, or 27.5%, 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,
      sales and editorial 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.





27


**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.





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 have existing
      responsibilities and, in the future, may have additional responsibilities,
      to
      act and/or provide services as executive officers, directors, owners and/or
      managers of Ault Glazer Bodnar & Company Investment Management LLC and/or
      some of the companies in which we invest. We currently share office space with
      Ault Glazer Bodnar & Company Investment Management LLC. William B. Horne,
      our Chief Financial Officer, and Melanie Glazer, Manager of our subsidiary
      Ault
      Glazer Bodnar Capital Properties, LLC, are principals of Ault Glazer Bodnar
      & Company Investment Management LLC. Mr. Horne devotes approximately 85% of
      his time to our business, based on a 60-hour, 6-day workweek. Mrs. Glazer works
      full time for Ault Glazer Bodnar Capital Properties, LLC. Mrs. Glazer is married
      to Louis Glazer, M.D., Ph.G., our current Chairman and Chief Executive Officer
      and Chief Health and Science Officer of Patient Safety Consulting Group, LLC.
      Our former Chairman and Chief Executive Officer, Milton “Todd” Ault, III, also
      is a principal of Ault Glazer Bodnar & Company Investment Management LLC.
      Accordingly, certain conflicts of interest may arise from time to time with
      our
      officers, directors and Ault Glazer Bodnar & Company Investment Management
      LLC.





28


Certain
      conflicts of interest may also arise from time to time with our officers,
      directors and the companies in which we invest. Of our $562,374 of revenue
      during the fiscal year ended December 31, 2005, $552,375 resulted from a
      contract to provide management consulting services to our portfolio company
      IPEX, Inc. Mr. Ault 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, as of March 14, 2006, is wholly owned by Ault Glazer Bodnar
      Merchant Capital, 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 served
      as a director of IPEX, Inc. and Chairman of its Audit Committee from June 23,
      2005 until January 30, 2006. Mr. Horne is currently Chief Financial Officer
      and
      a director of our portfolio company 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. One of our directors and Audit
      Committee Chairman, 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. 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. 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.





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 Ault Glazer Bodnar & Company Investment Management LLC,
      other than certain of our officers’ responsibility to devote their time to
      provide management and administrative services to Ault Glazer Bodnar &
Company Investment Management LLC and its clients from time-to-time. Similarly,
      our Board of Directors does not believe that it has 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 Ault Glazer Bodnar
      & Company Investment Management LLC 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.**





Although
      our present Chairman and Chief Executive Officer, Louis Glazer, M.D., Ph.G.,
      has
      extensive experience in the medical field, he has limited experience managing
      and operating a public company. In addition, prior to the change in control
      that
      occurred in October 2004, other members of our current senior management were
      primarily engaged in operating a private investment management firm. In this
      capacity they developed a general understanding of the administrative and
      regulatory environment in which public companies operate. However, 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 we are presently searching for a new Chief Executive Officer to
      replace Dr. Louis Glazer. If we are not able to retain a new Chief Executive
      Officer with significant professional experience in the patient safety or
      medical markets and pubic market experience, 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 has 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. Our future
      success is dependent on our ability to attract and retain such a candidate.
      Although we do not believe we have experienced any losses or negative effects
      from Mr. Ault’s resignation and we do not expect any adverse consequences from
      the resignation of Dr. Glazer, if we are not able to retain a new Chief
      Executive Officer with significant professional experience in the patient safety
      or medical markets and public market experience, we may have difficulty
      implementing our business strategy.





29


**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
      March 26, 2006, Milton “Todd” Ault, III, our former Chief Executive Officer and
      Chairman, beneficially owned approximately 26.6% 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-SpongeTM System, the loss of which may interrupt our
      operations.**





On
      August
      17, 2005, Surgicount entered into an agreement for A Plus International Inc.
      to
      be the exclusive manufacturer and provider of Surgicount’s Safety-SpongeTM
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 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.





30


**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.





31


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.





**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 $1,000,000. 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.





32


**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, 2005, 40.9% of the Company’s assets on a
      consolidated basis with subsidiaries were 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. Although we only recognized a $50,000
      impairment charge for the fiscal year ended December 31, 2005, 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. ****





**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.





33


**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
      trades 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 revenues from 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 rents we expect to receive and the occupancy
      levels at our properties may not materialize as a result of adverse changes
      in
      any of these factors. If our rental revenue fails 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 rents decline.





34


**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 listed on the
      American Stock Exchange ( ***“AMEX”*** ).
      As of
      March 27, 2006, the average daily trading volume of our common stock over the
      past three months was approximately 11,589 shares. The last reported sales
      price
      for our common stock on March 27, 2006, was $3.09 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.





35


**If
      we fail to meet continued listing standards of AMEX, our common stock may be
      delisted which would have a material adverse effect on the price of our common
      stock.**





Our
      common stock is currently traded on AMEX under the symbol “PST”. In order for
      our securities to be eligible for continued listing on AMEX, we must remain
      in
      compliance with certain listing standards. On June 24, 2004, we received a
      letter from AMEX inquiring as to our ability to remain listed. Specifically,
      AMEX indicated that our common stock was subject to delisting under sections
      1003(a)(i) and 1003(a)(ii) of AMEX’s Company Guide because our stockholders’
equity was below the level required by AMEX’s continued listing standards. Our
      stockholders’ equity fell below the required standard due to years of continued
      losses. On September 15, 2004, AMEX notified us that it had accepted our
      proposed plan to comply with AMEX’s continued listing standards. Significant
      events which increased our stockholders’ equity in excess
      of
      AMEX’s continued listing standards were the completion of an approximately $4
      million equity financing combined with the acquisition of Surgicount Medical,
      Inc. which was done primarily through the issuance of common stock. AMEX will
      normally consider suspending dealings in, or removing from the listing of,
      securities of a company under Section 1003(a)(i) for a company that has
      stockholders' equity of less than $2,000,000 if such company has sustained
      losses from continuing operations and/or net losses in two of its three most
      recent fiscal years; or under Section 1003(a)(ii) for a company that has
      stockholders' equity of less than $4,000,000 if such company has sustained
      losses from continuing operations and/or net losses in three of its four most
      recent fiscal years. As of June 30, 2005, our second consecutive quarter in
      which our stockholders’ equity was in excess of $4,000,000, we believe we have
      re-gained compliance with AMEX’s continued listing requirements. As of December
      31, 2005 our stockholders’ equity was still in excess of that required
      under Section 1003(a)(ii) of AMEX’s Company Guide. If we were to again become
      noncompliant with AMEX’s continued listing requirements, our common stock may be
      delisted which would have a material adverse affect on the price and liquidity
      of our common stock.





**If
      we are delisted from AMEX, our common stock may be 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.





36


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.





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





Not
      applicable.





**Item
      2. Properties.**





We
      do not
      own any real estate or other physical properties materially important to our
      operation. Our headquarters are located at 1800 Century Park East, Ste. 200,
      Los
      Angeles, California 90067, where we occupy our office space with AGB &
Company IM. We are responsible for paying approximately 25% of the lease expense
      associated with our headquarters, which amounts to approximately $8,100 per
      month. Our office space is currently approximately 12,000 square feet.





Our
      indirect wholly owned subsidiary, ASG owns property in Birmingham, Alabama.
      At
      December 31, 2005, the property was under development to
      build
      ASG’s first automated car wash site. Development was completed in March 2006 and
      ASG held its grand opening on March 8, 2006. The
      fair
      value of this property, as carried in our financial statements, is approximately
      $1.1 million.





In
      addition, we also have several real estate investments in our wholly-owned
      subsidiary Ault Glazer Bodnar Capital Properties, LLC. These investments range
      in fair value, as carried in our financial statements, from $50,000 to $250,000
      and are comprised of approximately 8.5 acres of undeveloped land in Heber
      Springs, Arkansas, 0.61 acres of undeveloped land in Springfield, Tennessee,
      and
      various loans secured by real estate in Heber Springs, Arkansas. Based upon
      the
      number of real estate investments, and related fair values, 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 against us, Sunshine Wireless, LLC ( ***“Sunshine”*** ),
      and
      four other defendants affiliated with Winstar Communications, Inc. in the
      Superior Court of the State of California for the county of Los Angeles, Central
      District. The plaintiffs are attempting to collect a federal default judgment
      of
      $5,014,000 entered against Winstar Global Media, Inc. ( ***“WGM”*** ),
      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 against us was
      dismissed on the merits. The Court had previously granted our motion to dismiss
      the Complaint, but granted plaintiffs leave to amend their Complaint. On March
      13, 2006, plaintiffs filed their Amended Complaint asserting similar claims.
      Our
      response to the Amended Complaint is due April 26, 2006. An unfavorable outcome
      in the lawsuit may have a material adverse effect on our business, financial
      condition and results of operations. We believe the lawsuit is without merit
      and
      we intend to vigorously defend against the lawsuit.





37


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 has a right of offset against certain representations
      and
      warranties made by Winstar and we believe the amount of the offsets exceed
      the
      amount of the note. On March 23, 2006, the Company filed its Answer and raised
      its affirmative defenses and asserted its offsets. The Court recently held
      a
      scheduling conference, and the case is now in the discovery phase. We intend
      to
      vigorously defend against the lawsuit.





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





The
      following proposals were submitted to shareholders at our annual meeting of
      stockholders held November 17, 2005 and were approved by a majority of the
      shares present at the meeting.





1.
      To
      elect two Class II Directors, Alice M. Campbell and Herbert Langsam, to hold
      office for a three-year term expiring in 2008, or until their successors have
      been duly elected and qualified or until their earlier death, resignation or
      removal, in accordance with the Company’s bylaws, as amended. This proposal was
      approved. Results of the voting were as follows:





**No.
                of Shares****Shares
                For**
            
            **Shares
                Withheld**
            
            **Broker
                non-votes**Common
                Stock
            
            4,509,885
            
            24,984
            
            N/APreferred
                Stock
            
            10,750
            
            0
            
            N/ACommon
                Stock and Preferred Stock
            
            4,520,635
            
            24,984





2.
      To
      ratify the appointment by the Board of Directors of Rothstein, Kass &
Company, P.C. to serve as independent auditors for the fiscal year ended
      December 31, 2005. This proposal was approved. Results of the voting were as
      follows:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock
            
            4,527,123
            
            5,589
            
            2,157
            
            0Preferred
                Stock
            
            10,750
            
            0
            
            0
            
            0Common
                Stock and Preferred Stock
            
            4,537,873
            
            5,589
            
            2,157
            
            0






38


3.
      To
      authorize and approve the Company’s Amended and Restated Stock Option and
      Restricted Stock Plan. This proposal was approved. Results of the voting were
      as
      follows:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock
            
            3,047,682
            
            51,362
            
            2,692
            
            1,433,133Preferred
                Stock
            
            10,750
            
            0
            
            0
            
            0Common
                Stock and Preferred Stock
            
            3,058,432
            
            51,362
            
            2,692
            
            1,433,133





4.
      To
      ratify certain consulting agreements pursuant to which the Company agreed to
      issue shares of the Company’s common stock and warrants. This proposal was
      approved. Results of the voting were as follows:





**No.
                of Shares****Shares
                For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                non-votes**Common
                Stock
            
            3,053,772
            
            45,527
            
            2,437
            
            1,433,133Preferred
                Stock
            
            10,750
            
            0
            
            0
            
            0Common
                Stock and Preferred Stock
            
            3,064,522
            
            45,527
            
            2,437
            
            1,433,133





No
      other
      matters were submitted to a vote of security holders during the quarter ended
      December 31, 2005.





**PART
      II**





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





**Stock
      Transfer Agent**





Mellon
      Investor Services, 480 Washington Boulevard, 29th Floor, Jersey City, New Jersey
      (Telephone (800) 522-6645) 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 is 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
                2005
            
            Fiscal
                2004Fiscal
                Quarter
            
            High
            
            Low
            
            High
            
            Low
            
            High
            
            LowFirst
                Quarter Ended March 31
            
            $
            4.70
            
            $
            2.27
            
            $
            7.33*
            
            $
            4.18*
            
            $
            0.51*
            
            $
            0.35*Second
                Quarter Ended June 30
            
            
            ---
            
            
            ---
            
            $
            6.23
            
            $
            3.20
            
            $
            2.97*
            
            $
            0.30*Third
                Quarter Ended September 30
            
            
            ---
            
            
            ---
            
            $
            3.90
            
            $
            2.90
            
            $
            4.92*
            
            $
            1.07*Fourth
                Quarter Ended December 31
            
            
            ---
            
            
            ---
            
            $
            4.64
            
            $
            3.21
            
            $
            4.25*
            
            $
            3.07*





*
      Prices
      adjusted to reflect a 3:1 forward stock split effective April 5,
      2005.





**Dividends**





The
      Company paid $19,163, $76,650, and $76,652 in dividends to preferred
      stockholders during 2005, 2004 and 2003, 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.





39


**Stockholders**





As
      of
      March 26, 2006, there were approximately 638 registered shareholders of record
      of the Company’s common stock. The Company has 25,000,000 shares of common stock
      authorized, of which 6,995,276 are issued and 5,820,401 shares are outstanding
      at March 26, 2006. The Company has 1,000,000 shares of convertible preferred
      stock authorized, of which 10,950 were issued and outstanding at March 26,
      2006.





**Recent
      Sales of Unregistered Securities**





The
      Company sold the following equity securities during the fiscal year ended
      December 31, 2005 that were not registered under the Securities Act of 1933,
      as
      amended (the ***“Securities
      Act”*** ).





On
      February 25, 2005, the Company purchased all of the issued and outstanding
      capital stock of Surgicount Medical, Inc. in exchange for $340,000 in cash
      and
      600,000 shares (post 3:1 forward split effective April 5, 2005) of common stock
      issued equally to Brian Stewart and Dr. William Stewart, the former owners
      of
      Surgicount Medical, Inc. In addition, in the event that prior to the fifth
      anniversary of the closing of the acquisition the cumulative gross revenues
      of
      Surgicount exceed $500,000, Brian Stewart and Dr. William Stewart are entitled
      to receive an additional 50,000 shares of common stock (for a total of 650,000
      shares of common stock). In the event that prior to the fifth anniversary of
      the
      closing of the acquisition the cumulative gross revenues of Surgicount exceed
      $1,000,000, Brian Stewart and Dr. William Stewart will be entitled to receive
      an
      additional 50,000 shares of common stock (for a total of 700,000 shares of
      common stock). The assets acquired in connection with the Surgicount acquisition
      consist primarily of intellectual property rights, including one U.S. patent
      and
      one European patent, relating to Surgicount's Safety-SpongeTM System. The
      foregoing issuances were made 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 are accredited investors, and transfer of the securities
      is
      restricted in accordance with the requirements of the Securities
      Act.





On
        October 18, 2004, the Company entered into a consulting agreement with Aegis
        Securities Corp. (the ***“Aegis
        Agreement”*** ).
        Under
        the Aegis Agreement, the Company retained Aegis Securities Corp. to advise
        the
        Company in connection with the Company’s acquisition of Surgicount Medical, Inc.
        The Company issued 150,000 warrants, valued at $536,578, to Aegis Securities
        Corp. 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 Aegis Warrants have an exercise price
        of
        $5.267 per share and expire on March 30, 2010. These securities will be issued
        pursuant to Section 4(2) of the Securities Act of 1933, as amended. These
        securities were issued in reliance upon the exemption provided by Section
        4(2)
        of the Securities Act. No advertising or general solicitation was employed
        in
        offering the securities, the sales were made to a limited number of persons,
        and
        transfer of the securities is restricted in accordance with the requirements
        of
        the Securities Act.





On
        March
        30, 2005, the Company issued 27,000 warrants to purchase shares of common
        stock
        at $5.27 per share to a consultant. The warrants are immediately exercisable
        and
        have a five-year life. The warrants were valued at $96,585 and expensed at
        the
        time of issuance. These securities will be issued pursuant to Section 4(2)
        of
        the Securities Act of 1933, as amended. These securities were issued in reliance
        upon the exemption provided by Section 4(2) of the Securities Act. No
        advertising or general solicitation was employed in offering the securities,
        the
        sales were made to a limited number of persons, and transfer of the securities
        is restricted in accordance with the requirements of the Securities
        Act.





On
        April
        4, 2005, the Company entered into a consulting agreement with Crescent
        Communications (the ***“Crescent
        Agreement”*** ).
        The
        Company retained Crescent Communications to provide investor communications
        services. The Company agreed to pay Crescent Communications $8,000 per month
        for
        Crescent Communications’ services under the Crescent Agreement for a minimum
        term of six months. In addition to the $8,000 per month, the Company agreed
        to
        issue Crescent Communications or its nominee warrants to purchase 100,000
        shares
        of the Company’s common stock (the ***“Crescent
        Warrants”*** )
        valued
        at $397,340, of which $264,893 was expensed during 2005. The Crescent Warrants
        have an exercise price of $5.85 per share and expire on April 1,
        2010.  These
        securities will be issued pursuant to Section 4(2) of the Securities Act
        of
        1933, as amended. These securities were issued in reliance upon the exemption
        provided by Section 4(2) of the Securities Act. No advertising or general
        solicitation was employed in offering the securities, the sales were made
        to a
        limited number of persons, and transfer of the securities is restricted in
        accordance with the requirements of the Securities Act.





40


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 the Company establish a
      comprehensive manufacturing and distribution strategy for its Safety-SpongeTM
System worldwide. As consideration for Health West's services, the Company
      issued Health West 42,017 shares of the Company's common stock, as follows:
      (a)
      10,505 shares were issued upon signing the agreement; (b) the Company issued
      Health West 15,756 shares in December 2005 when Health West helped the Company
      structure a comprehensive manufacturing agreement with A Plus Manufacturing;
      and
      (c) the Company will issue Health West an additional 15,756 shares when Health
      West helps the Company develop a regional distribution network to integrate
      the
      Safety-Sponge(TM) System into the existing acute care supply chain. As incentive
      for entering into the agreement, the Company issued Health West a callable
      warrant to purchase 150,000 (post 3:1 forward stock split) shares of the
      Company's common stock at an exercise price of $5.95, exercisable for 5 years.
      In addition, the Company agreed to issue a callable warrant to purchase 25,000
      (post 3:1 forward stock split) shares of the Company's common stock at an
      exercise price of $5.95, exercisable upon meeting specified milestones. These
      securities will be issued pursuant to Section 4(2) of the Securities Act of
      1933, as amended. These securities were issued in reliance upon the exemption
      provided by Section 4(2) of the Securities Act. No advertising or general
      solicitation was employed in offering the securities, the sales were made to
      a
      limited number of persons, and transfer of the securities is restricted in
      accordance with the requirements of the Securities Act.





On
      April
      22, 2005, the Company sold 20,000 shares of common stock and warrants to
      purchase an additional 20,000 shares of common stock to James Colen. 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. 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
      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. The common stock and
      warrants in this transaction were issued 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
      May
      12, 2005, the Company purchased certain assets from Philip Gatch, the Company’s
      former Chief Technology Officer, for use in a production and post-production
      media content facility. As consideration for the assets the Company issued
      Mr.
      Gatch: (1) 17,241 shares of common stock; and (2) warrants to purchase 8,621
      shares of common stock with a five-year term and an exercise price of $5.80
      per
      share. The Company subsequently contributed the assets purchased from Mr. Gatch
      to Cinapse Digital Media, LLC of which the Company held a 50% ownership
      interest. On October 14, 2005, the Company sold its 50% interest in Cinapse
      Digital Media, LLC in exchange for the cancellation of the 17,241 shares of
      common stock and the warrants to purchase 8,621 shares of common stock issued
      in
      the asset purchase. The common stock and warrants in the asset purchase were
      issued 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.





41


On
      July
      19, 2005, the Company sold 38,000 shares of common stock to an unaffiliated
      accredited investor in exchange for 12,000 shares of common stock of Tuxis
      Corporation valued at approximately $102,000. 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
          September 15, 2005, the Company issued 12,500 warrants to purchase shares
          of
          common stock at $3.55 per share to a consultant. The warrants are immediately
          exercisable and have a three-year life. The warrants were valued at $24,600,
          of
          which $17,302 was expensed during 2005. These securities will be issued
          pursuant
          to Section 4(2) of the Securities Act of 1933, as amended. These securities
          were
          issued in reliance upon the exemption provided by Section 4(2) of the Securities
          Act. No advertising or general solicitation was employed in offering the
          securities, the sales were made to a limited number of persons, and transfer
          of
          the securities is restricted in accordance with the requirements of the
          Securities Act.
 
 On
          October 12, 2005, the Company issued 25,000 warrants to purchase shares
          of
          common stock at $3.26 per share to a consultant. The warrants are immediately
          exercisable and have a three-year life. The warrants were valued at $45,180,
          of
          which $11,295 was expensed during 2005. These securities will be issued
          pursuant
          to Section 4(2) of the Securities Act of 1933, as amended. These securities
          were
          issued in reliance upon the exemption provided by Section 4(2) of the Securities
          Act. No advertising or general solicitation was employed in offering the
          securities, the sales were made to a limited number of persons, and transfer
          of
          the securities is restricted in accordance with the requirements of the
          Securities Act.


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. 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
      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. These securities were sold pursuant
      to
      Rule 506 promulgated under the Securities Act of 1933, as amended. 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.





42


**Item
      6. Selected Financial Data.**





The
      following selected financial data for the fiscal year ended December 31, 2005,
      2004, 2003, 2002 and 2001 are derived from our financial statements which have
      been audited by Ernst & Young, LLP (December 31, 2001 through December 31,
      2003) and Rothstein Kass (December 31, 2004 and 2005), 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,**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**Total
                assets
            
            $
            16,033,865
            
            $
            6,934,243
            
            $
            3,258,032
            
            $
            4,632,338
            
            $
            4,098,866Liabilities
            
            $
            6,659,923
            
            $
            3,367,974
            
            $
            1,233,894
            
            $
            1,364,798
            
            $
            1,177,121Net
                assets
            
            $
            9,120,950
            
            $
            3,566,269
            
            $
            2,024,138
            
            $
            3,267,540
            
            $
            2,921,745Shares
                outstanding
            
            
            5,672,445
            
            
            4,670,703
            
            
            3,060,300
            
            
            3,148,800
            
            
            3,224,100**OPERATING
                DATA****for
                the year ended December 31,**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
            
            
            **2001**Revenues
                from related parties
            
            $
            562,374
            
            $
            —
            
            $
            180,000
            
            $
            450,000
            
            $
            120,000Interest,
                dividend income and other, net
            
            $
            42,476
            
            $
            11,056
            
            $
            3,159
            
            $
            5,081
            
            $
            72,697Operating
                expenses
            
            $
            8,493,493
            
            $
            2,923,983
            
            $
            1,236,623
            
            $
            1,950,049
            
            $
            1,567,394Realized
                gains on investments, net
            
            $
            2,014,369
            
            $
            1,591,156
            
            $
            430,883
            
            $
            237,327
            
            $
            522,131Unrealized
                gains (losses) on marketable securities, net
            
            $
            32,335
            
            $
            (1,054,702
            )
            $
            (475,605
            )
            $
            1,663,304
            
            $
            (1,553,756
            )Net
                gain (loss) attributable to common shareholders
            
            $
            (5,983,223
            )
            $
            (2,485,407
            )
            $
            (1,217,741
            )
            $
            255,110
            
            $
            (2,533,460
            )Basic
                and diluted net income (loss) per common share
            
            $
            (1.11
            )
            $
            (0.75
            )
            $
            (0.39
            )
            $
            0.08
            
            $
            (0.78
            )





**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.*





43


**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, 2005,
      37.9% of our assets on a consolidated basis with subsidiaries were comprised
      of
“investment securities” within the meaning of the 1940 Act which
      could require us to re-register as an investment company under the 1940
      Act. **** 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 safe harbor applies. 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 accounting for our
      assets under GAAP.





We
      intend
      to operate as a holding company with a primary focus on the acquisition of
      controlling interests in companies and research and development of products
      and
      services focused on 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 is continuing to evaluate available alternatives to determine
      the most beneficial method to divest ASG and our other real estate assets.





SurgiCount
      Medical, Inc., developer of the Safety-Sponge TM System,
      Patient Safety Consulting Group, LLC, a healthcare consulting services company,
      Ault Glazer Bodnar Merchant Capital, Inc., a holding company for our non-patient
      safety related assets, Ault Glazer Bodnar Capital Properties, LLC, a real estate
      development and management company, and 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. We are
      in
      the process of changing the name of Ault Glazer Bodnar Merchant Capital, Inc.
      to
      Automotive Services Group, Inc. to reflect its sole focus of developing and
      operating automated car wash sites. The non-patient safety related assets that
      we previously planned to transfer to Ault Glazer Bodnar Merchant Capital will
      remain with the parent holding company until such time as they have been
      divested. Currently, we are evaluating ways in which to monetize these non-core
      assets. However, the divesture of any assets will be dependent on a number
      of
      factors including: (1) lack of a liquid market to dispose of such assets; (2)
      potential adverse tax effects from a disposition; or (3) our Board of Directors
      and management may change their decision to dispose of certain of the assets.





Our
      principal executive offices are located at 1800 Century Park East, Suite 200,
      Los Angeles, California 90067. Our telephone number is (310) 895-7750. 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. Our most critical accounting policy
      relates to the valuation of our investments in non-marketable equity securities.





44


In
      the
      past we invested in illiquid equity securities acquired directly from issuers
      in
      private transactions. Our investments are generally subject to restrictions
      on
      resale or otherwise are illiquid and generally have no established trading
      market. Additionally, many of the securities that we have invested in 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 a number of the companies
      we have invested in may fail. Their success (or lack thereof) is dependent
      upon
      product development, market acceptance, operational efficiency and other key
      business success factors. In addition, depending on their future prospects,
      they
      may not be able to raise additional funds when needed or they 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 $50,000 in impairments during
      year ended December 31, 2005 and no impairments during the year ended December
      31, 2004.





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.





**Accounting
      Developments**





In
      December 2004, Statement of Financial Accounting Standards ( ***"SFAS"*** )
      No.
      123(R), " *Share-Based
      Payment* ,"
      which
      addresses the accounting for employee stock options, was issued. SFAS 123(R)
      revises the disclosure provisions of SFAS 123, " *Accounting
      for Stock Based Compensation* "
      and
      supercedes Accounting Principles Board ( ***"APB"*** )
      Opinion
      No. 25, " *Accounting
      for Stock Issued to Employees* ."
      SFAS
      123(R) requires that the cost of all employee stock options, as well as other
      equity-based compensation arrangements, be reflected in the financial statements
      based on the estimated fair value of the awards. We elected early adoption
      of
      SFAS No. 123(R) as of January 1, 2005.


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





45


**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      and marketable securities were $1,003,173 at December 31, 2005, versus
      $4,334,123 at December 31, 2004. Total current liabilities were $3,953,040
      at
      December 31, 2005, versus $3,367,974 at December 31, 2004. Included in current
      liabilities at December 31, 2005 and December 31, 2004 is a note payable, and
      accrued interest on such note, payable to Winstar Communications, Inc.
      ( ***“Winstar”*** )
      in the
      amount of $938,573 and $1,004,962, respectively. As discussed in Note 9 in
      the notes to the accompanying consolidated financial statements filed with
      this
      Form 10-K, 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 is extended
      until
      the lawsuit discussed in Note 17 is settled. The note payable has a right of
      offset against certain representations and warranties made by Winstar and we
      believe the amount of the offsets exceed the amount of the note payable. It
      is
      our contention that the initial lawsuit filed on October 15, 2001, impaired
      our
      ability to raise capital. This inability to raise capital ultimately resulted
      in
      the premature liquidation of our investment in Excelsior Radio Networks, Inc.
      ( ***“Excelsior”*** )
      at a
      price that was significantly less than what we would have realized had we been
      able to hold our investment until its subsequent sale to an unrelated third
      party. Winstar does not agree with this belief and on February 3, 2006 Winstar
      Global Media, Inc. ( ***“WGM”*** )
      filed a
      lawsuit claiming that we were in default under the terms of the note.
      Accordingly, the only offsets against the principal balance of the note
      reflected in the accompanying financial statements relate to legal fees
      attributed to our defense of the lawsuits filed against us. As of December
      31,
      2005, we had incurred approximately $203,446 in legal fees attributed to our
      defense of lawsuits
      filed by Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. and the
      representations and warranties made by Winstar Radio Networks, Inc. These fees
      have been offset against the note with the remaining principal balance of
      $796,554 reflected as a note payable on the accompanying balance
      sheet.





At
      December 31, 2005 and December 31, 2004, we had $79,373 and $846,404,
      respectively, in cash and cash equivalents. 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 mispriced domestic public equities and instruments.
      In
      the past short selling was a component of the strategy and these trades
      typically ranged, in any particular month, from 0% to 20% of the total trading
      activity. The making of such investments entails risks related to the loss
      of
      investment and price volatility. Such investments entail risks including the
      loss of investment and price volatility. We have not engaged in the practice
      of
      short selling since the quarter ended September 30, 2005, and do not expect
      short selling to become a significant component of our strategy in the future.





In
        August
        2005, we entered into an agreement with the financial institution IXIS
        Derivatives Inc. ( ***“IXIS”*** ).
        The
        agreement states the terms of the financial contracts that we have entered
        into
        with IXIS to borrow against securities. We have relied upon the proceeds
        from
        such borrowings with IXIS to cover a portion of our working capital needs.
        The
        financial contracts, which extend for 53 weeks, are 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 financial contracts. To the extent the financial
        contracts are terminated early, we do not incur a premium for the amount
        of time
        that the financial contracts are terminated. The agreement also provides
        that in
        addition to the securities held by IXIS, we pledge a total of 25% of the
        value
        of the securities in cash. The pledged cash is reduced daily by the amount
        of
        the earned premium and protects IXIS 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 requires us to fund additional monies,
        such that 25% of the initial borrowing, as adjusted by the earned premium,
        is
        covered. If we fail to fund additional monies, IXIS has the right to liquidate
        the pledged securities. In the event the proceeds from liquidation are
        insufficient to cover the amount of the borrowings, IXIS’ sole recourse is
        against the pledged cash. During December 2005, we received proceeds from
        our
        stock appreciation rights in our holding in Excelsior for $847,072, these
        proceeds provided us with a sufficient level of cash to terminate the financial
        contracts with IXIS prior to year-end. During January 2006, we entered into
        a
        new financial contract with IXIS to borrow against securities.





46


We
      had a
      working capital deficit of approximately $1,707,227 at December 31, 2005 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 President and Secretary, Lynne Silverstein,
      to our current Chairman and Chief Executive Officer and the Chief Health and
      Science Officer of our subsidiary Patient Safety Consulting Group, LLC, Louis
      Glazer, and to the Manager of our 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 Bodnar Acquisition Fund, LLC ( ***"AGB
      Acquisition Fund*** ").
      Ault
      Glazer Bodnar & Company Investment Management, LLC ( ***“AGB
      & Company IM”*** )
      is the
      managing member of AGB Acquisition Fund. The managing member of AGB &
Company IM is Ault Glazer Bodnar & Company, Inc. ( ***“AGB
      & Company”*** ).
      The
      Company’s former Chairman and Chief Executive Officer, Milton “Todd” Ault, III,
      is Chairman, Chief Executive Officer and President of AGB &
Company.





On
      April
      7, 2005, we issued a $1,000,000 promissory note (the ***"Note"*** )
      to
      Bodnar Capital Management, LLC, in consideration of a $1,000,000 loan from
      Bodnar Capital Management, LLC. Steven J. Bodnar is a managing member of Bodnar
      Capital Management, LLC. Mr. Bodnar, through Bodnar Capital Management, LLC,
      is
      one of our principal stockholders. The principal amount of the Note and interest
      at the rate of 6% per annum is due on May 31, 2006. The obligations under the
      Note are secured by all real property owned by us.





As
        of
        December 31, 2005, AGB Acquisition Fund had loaned an aggregate of approximately
        $1,117,000 to ASG. The loans were advanced 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 ***"ASG
        Note"*** ).
        The
        ASG Note bears interest at the rate of 3% above the Prime Rate as published
        in
        the Wall Street Journal (7.25% at December 31, 2005). All unpaid principal,
        interest and charges under the ASG Note are due in full on July 31, 2010.
        The
        ASG 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.





From
        January 11, 2006 through March 6, 2006 AGB Acquisition Fund loaned us a total
        $442,750 to cover a portion of our operating expenses, of which $340,750
        was
        repaid on February 8, 2006. As consideration for the outstanding balance
        of
        $102,000, we issued AGB Acquisition Fund secured promissory notes in the
        principal amount of $102,000 (the “Notes”), and entered into a security
        agreement granting AGB Acquisition Fund a security interest our personal
        property and fixtures, inventory, products and proceeds as security for our
        obligations under the Notes. The Notes accrue interest at the rate of 7%
        per
        annum, which together with principal are due to be repaid sixty days from
        the
        dates the notes were issued and will begin to expire on April 24, 2006. At
        our
        option, payments of principal and interest may be paid by exchange of any
        securities owned by us valued on the day before the maturity date of the
        Note.





On
        February 8, 2006, AGB Acquisition Fund loaned $686,945 to ASG to purchase
        land
        for an additional car wash facility. As consideration for the loan, ASG issued
        AGB Acquisition Fund a secured promissory note in the principal amount of
        $686,945 (the “Note”) and granted a real estate mortgage in favor of AGB
        Acquisition Fund relating to certain real property located in Jefferson County,
        Alabama (the “Property”). The Note bears interest at the rate of 10% per annum
        and is due on April 10, 2006, or within 30 days thereafter. 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 allocated approximately $44,000 as the estimated value of the
        warrants. As security for the performance of ASG’s obligations pursuant to the
        Note, ASG granted AGB Acquisition Fund a security interest in all personal
        property and fixtures located at the Property.





On
        March
        7, 2006 we entered into a Revolving Line of Credit Agreement (the “Revolving
        Line of Credit”) with AGB Acquisition Fund. 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 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 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
        will
        be secured by our assets, personal property and fixtures, inventory, products
        and proceeds therefrom.





47


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, 2005.
      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.





On
      November 3, 2004, we sold an aggregate of 1,216,875 shares of common stock
      and
      warrants to purchase an aggregate of 608,430 shares of common stock in a private
      placement transaction to certain accredited investors. Pursuant to the terms
      of
      the private placement, we held additional closings on November 15, 2004,
      December 2, 2004, and on December 27, 2004, and sold an aggregate of 300,825
      additional shares of common stock and warrants to purchase an aggregate of
      150,411 shares of common stock. We received aggregate net proceeds of $3,924,786
      from all the closings. We used the net proceeds from the private placement
      transaction primarily for general corporate purposes and in buying controlling
      equity stakes in companies and/or assets in the medical products, health care
      solutions, financial services and real estate industries. We filed a
      registration statement with the SEC on May 3, 2005 registering the resale of
      the
      shares of common stock (including the shares of common stock issuable upon
      exercise of the warrants) sold in the private placement transactions on a
      continuous or delayed basis under the Securities Act of 1933. We are required
      to
      use our reasonable best efforts to cause the registration statement to become
      effective within 90 days after the date we filed such registration statement
      with the SEC.





On
      April
      22, 2005, we sold 20,000 shares of common stock and warrants to purchase an
      additional 20,000 shares of common stock to James Colen. 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 our
      common stock equals or exceeds $7.50 for at least five consecutive trading
      days,
      we, 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.
      We
      received gross proceeds of $100,000 from the sale of stock and
      warrants.





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. 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





As
      of
      December 31, 2005, other than our office lease, we had no commitments not
      reflected in our consolidated financial statements. As in prior acquisitions,
      we
      intend to use a combination of common stock and warrants as the primary means
      to
      acquire companies. Accordingly, our need to raise significant amounts of cash
      for acquisitions can be minimized, provided the companies we acquire are willing
      to accept non-cash forms of consideration.





Cash
      and
      cash equivalents decreased by $767,031 to $79,373 for the year ended December
      31, 2005, compared to an increase of $622,179 for the year ended December 31,
      2004.




Operating
      activities used $1,719,252 of cash for the year ended December 31, 2005,
      compared to using $2,456,061 for the year ended December 31, 2004.




Operating
      activities for the year ended December 31, 2005, exclusive of changes in
      operating assets and liabilities, used $3,900,292 of cash, as the Company's
      net
      cash used in operating activities of $1,719,252 included non-cash charges for
      depreciation and amortization of $285,728, realized gains of $2,014,369,
      unrealized gains of $32,335 and stock based compensation of $4,504,286. For
      the
      year ended December 31, 2004, operating activities, exclusive of changes in
      operating assets and liabilities, used $2,939,254 of cash, as the Company's
      net
      cash used in operating activities of $2,456,061 included non-cash charges for
      depreciation and amortization of $863, realized gains of $1,591,156, unrealized
      losses of $1,054,702 and stock based compensation of $5,094.




48


Changes
        in operating assets and liabilities produced cash of $2,181,040 for the year
        ended December 31, 2005, principally 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 our receivables from investments. 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 year ended December 31, 2005, the Company 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. 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. During times when
        we were
        heavily invested in marketable investment securities our liquidity position
        was
        significantly reduced. To the extent we have a need for an excess cash balance
        to meet our financial obligations the amount of securities purchased on margin
        will either decrease or disappear altogether. However, if we are in a position
        where we have excess cash with no immediate need for liquidity, and we believe
        opportunities exist to maximize the short-term return on such assets then
        we may
        purchase marketable securities on margin **.** Receivables from investments experienced a significant increase which was
        primarily due to a receivable in the amount of approximately $900,000 recorded
        as a result of the sale of our stock appreciation rights in Excelsior. During
        2005 we recognized a gain of $1,747,072 from these stock appreciation rights,
        of
        which $900,000 was received during February 2006. For the year ended December
        31, 2004, changes in operating assets and liabilities produced cash of $483,193
        primarily due to an increase in the level of accounts payable and accrued
        expenses and amounts due broker which were partially offset by increases
        in
        accounts receivable.




The
      principal factor in the $793,586 of cash used in investing activities in the
      year ended December 31, 2005 was due to our investments in ASG and Surgicount
      in
      the total amount of $732,398, an investment in our first automated car wash
      site
      by our subsidiary, ASG, in the amount of $603,865, and other long-term
      investments of $603,173. 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 $847,072 and repayment on loans secured by
      real
      estate of $350,465. The principal factor in the $788,518 of cash used in
      investing activities in the year ended December 31, 2004 was due to investments
      in Ault Glazer Bodnar Capital Properties of $738,518.





Cash
      provided by financing activities for the year ended December 31, 2005, of
      $1,745,807 resulted primarily from the proceeds from notes payable of $1,621,627
      and the net proceeds from issuance of common stock of $250,000 and payment
      of
      preferred dividends of $19,163. Cash provided by financing activities for the
      year ended December 31, 2004, of $3,866,758 resulted primarily from the net
      proceeds from issuance of common stock of $3,924,786 and payment of preferred
      dividends of $76,650. Additionally, during the years ended December 31, 2005
      and
      2004 the note payable was offset by certain payments made allowed for in the
      note payable.





**Investments**





Our
      financial condition is partially dependent on the success of our investments.
      Short selling has been a component of the Company’s investment strategy in the
      past and these trades have ranged, in any particular month, from 0% to 20%
      of
      total trading activity. The making of such investments entails 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 short selling
      to
      become a significant component of our strategy 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, 2005.





49


A
      summary
      of our investment portfolio, which is valued at $6,560,731 and represents 40.9%
      of our total assets is reflected below. Excluding our real estate investments,
      our investment portfolio represents 37.9% of our total assets. The investment
      portfolio is comprised of marketable securities of $923,800 and long-term
      investments of $5,636,931. Our investments in marketable securities that are
      bought and held principally for the purpose of selling them in the near-term
      are
      classified as trading securities. Our remaining investments are classified
      as
      long-term investments.




**December
                31,**
            
            
            **December
                31,****2005**
            
            
            **2004**Alacra
                Corporation
            
            $
            1,000,000
            
            $
            1,000,000Digicorp
            
            
            3,025,398
            
            
            532,435IPEX,
                Inc.
            
            
            1,243,550Real
                Estate
            
            
            481,033
            
            
            738,518China
                Nurse
            
            
            
            
            
            50,000Tuxis
                Corporation
            
            
            746,580U.S.
                Treasuries
            
            
            
            
            
            2,016,406Other
            
            
            64,170
            
            
            1,471,313$
            6,560,731
            
            $
            5,808,672





*Alacra
      Corporation*





At
      December 31, 2005, we had an investment in Alacra Corporation ( ***“Alacra”*** ),
      valued
      at $1,000,000, which represents 6.2% 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, 2005 revenues of approximately $16.5 million, were in
      excess of the prior year’s revenues by approximately 45%. At December 31, 2005,
      Alacra had total assets of approximately $3.5 million with total liabilities
      of
      approximately $6.0 million. Deferred revenue, which represents subscription
      revenues are amortized over the term of the contract, which is generally one
      year, and represented approximately $2.9 million of the total liabilities.
      The
      Company has the right to have the preferred stock redeemed by Alacra for face
      value plus accrued dividends beginning on December 31, 2006. 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.





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.





50


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.





*Excelsior
      Radio Networks, Inc.*





During
      the period from August 12, 2003 through October 22, 2004, we liquidated our
      investment in Excelsior Radio Networks, Inc. ( ***“Excelsior”*** ).
      We
      sold a total of 1,476,804 shares and warrants to purchase 87,111 shares of
      Excelsior common stock. Excelsior produces and syndicates programs and services
      heard on more than 2,000 radio stations nationwide across most major formats.
      Through its Dial Communications Global Media sales subsidiary, Excelsior sells
      the advertising inventory radio stations provide in exchange for the Excelsior
      content. The programming and content includes prep services as well as long
      form
      and short form programming. Additionally, Dial Communications Global Media
      has a
      number of independent producer clients, which range from talk and music programs
      to news and traffic services.





We
      had
      stock appreciation rights on various sales transactions of Excelsior common
      stock to Sunshine Wireless, LLC ( **“Sunshine”** )
      and
      Quince Associates, LP ( **“Quince”** ).
      During
      2005 Excelsior was sold to Lincolnshire Management for approximately
      $60,000,000. When Excelsior was sold we became entitled to additional proceeds
      from these stock appreciation rights. During the year ended December 31, 2005
      we
      recognized a gain of $1,747,072 as a result of the stock appreciation rights.
      Of
      this amount we received $847,072 in cash during the year ended December 31,
      2005
      and an additional cash payment of $900,000 during January 2006.





*China
      Nurse, LLC*





During
      the year ended December 31, 2005, we wrote off our investment in China Nurse
      LLC
      ( ***"China
      Nurse"*** ).
      The
      amount of the loss was $50,000. We
      made
      our initial investment in China Nurse on November 23, 2004, when we entered
      into
      a strategic relationship with China Nurse. In connection with this strategic
      relationship, we agreed to provide referrals and other assistance and we made
      a
      capital investment in cash of $50,000 in China Nurse. China Nurse is a
      developmental stage international nurse-recruiting firm based in New York that
      focuses on recruiting and training qualified nurses from China and Taiwan for
      job placement with hospitals and other health care facilities in the United
      States. China Nurse intends to create an opportunity for hospitals and other
      health care providers to efficiently recruit skilled professionals from China
      and Taiwan through its customized approach to matching the qualifications of
      the
      nurses with the specific needs of U.S. clients. The primary purpose for this
      strategic investment was in anticipation of leveraging the relationships that
      China Nurse developed during the ordinary course of its business for our patient
      safety products. During the year ended December 31, 2005, we determined that
      this investment was completely impaired since China Nurse was unable to secure
      additional interest both in the form of additional investment and from hospitals
      and health care facilities in the United States.





*Digicorp*





At
      December 31, 2005, we had an investment in Digicorp valued at $3,025,398, which
      represents 18.9% of our total assets. On December 29, 2004, we entered into
      a
      Common Stock Purchase Agreement with certain shareholders of Digicorp (the ***"Agreement"*** ),
      to
      purchase an aggregate of 3,453,527 shares of Digicorp common stock. We purchased
      2,229,527 of such shares on December 29, 2004 (2,128,740 shares at a price
      of
      $0.135 per share and 100,787 shares at a price of $0.145 per share). We were
      also required to purchase the remaining 1,224,000 shares from the selling
      shareholders 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 amended the
      Agreement and an unrelated third party assumed the obligation to purchase
      1,000,000 of the remaining 1,224,000 shares from the selling shareholders.
      Additionally, we extended loans of approximately $32,500 to the 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. Digicorp’s common stock is traded on the OTC Bulletin
      Board, which reported a closing price, at December 31, 2005, of $1.90. In
      connection with the Agreement, we were entitled to designate two members to
      the
      Board of Directors of Digicorp. Our first designee, Melanie Glazer, who is
      also
      manager of our subsidiary Ault Glazer Bodnar Capital Properties, LLC, was
      appointed on December 29, 2004. Milton “Todd” Ault, III, our former Chairman and
      Chief Executive Officer, was appointed Chief Executive Officer of Digicorp
      on
      April 26, 2005. On July 16, 2005, Alice M. Campbell, one of our directors,
      and
      Mr. Ault was appointed to the Board of Directors of Digicorp. On July 20, 2005,
      Lynne Silverstein, our President and Secretary, was appointed as a director
      of
      Digicorp, and William B. Horne, our Chief Financial Officer, was appointed
      as a
      director and as Chief Financial Officer of Digicorp. On September 30, 2005,
      Mr.
      Ault resigned from all positions with Digicorp and Mr. Horne was appointed
      as
      the interim Chief Executive Officer. On December 29, 2005, William B. Horne
      resigned as Chief Executive Officer and Lynne Silverstein and Melanie Glazer
      resigned as directors.





51


Since
      June 30, 1995, Digicorp was in the developmental stage and had no operations
      other than issuing shares of common stock for financing the preparation of
      financial statements and for preparing filings for the SEC. On May 18, 2005,
      Digicorp sold Bodnar Capital Management, LLC 2,941,176 shares of its common
      stock and warrants to purchase an additional 3,000,000 shares of its common
      stock with exercise prices ranging from $0.25 to $1.50 per share. Digicorp
      received gross proceeds of approximately $500,000 from the sale of stock and
      warrants to Bodnar Capital Management, LLC. As described above under “Financial
      Condition,” Bodnar Capital Management, LLC also is one of our principal
      stockholders. On October 27, 2005, Bodnar Capital Management, LLC canceled
      the
      warrants to purchase 3,000,000 shares of common stock in exchange for the
      issuance of a warrant to purchase 500,000 shares of Digicorp’s common stock with
      an exercise price of $0.01 per share.





On
      September 19, 2005, upon entering into an asset purchase agreement with Philip
      Gatch, who was appointed Digicorp’s Chief Technology Officer, Digicorp completed
      the initial transaction to transform itself from that of a development stage
      enterprise to a digital media and content delivery company. Digicorp issued
      Mr.
      Gatch 1,000,000 shares of its common stock as consideration for the assets
      purchased, which consisted of the iCodemedia suite of websites and internet
      properties and all related intellectual property (the ***“iCodemedia
      Assets”*** ).
      The
      iCodemedia suite of websites consists of the websites www.icodemedia.com,
      www.iplaylist.com, www.tunecast.com, www.tunebucks.com, www.podpresskit.com
      and
      www.tunespromo.com. Digicorp plans to use these websites and the related
      intellectual property to provide a suite of applications and services to enable
      content creators the ability to publish and deliver content to existing and
      next
      generation digital media devices, such as the Apple iPod and the Sony PSP,
      based
      upon the consumers’ expectation for broader and on-demand access to content and
      services.





On
      December 29, 2005, Digicorp acquired all of the issued and outstanding capital
      stock of Rebel Crew Films, Inc., a California corporation ( ***“Rebel
      Crew Films”*** ),
      in
      consideration for the issuance of 21,207,080 shares of Digicorp common stock
      (the ***“Purchase
      Price”*** )
      to the
      shareholders of Rebel Crew Films. From the Purchase Price, 4,000,000 shares
      are
      held in escrow pending satisfaction of certain performance milestones. In
      addition, from the Purchase Price, 16,666,667 shares are subject to lock up
      agreements as follows: (a) 3,333,333 shares are subject to lockup agreements
      for
      one year; (b) 6,666,667 shares are subject to lockup agreements for two years;
      and (c) 6,666,667 shares, of which the 4,000,000 escrowed shares are a
      component, are subject to lockup agreements for three years.





In
      connection with the acquisition of Rebel Crew Films, on December 29, 2005
      Digicorp entered into a Securities Purchase Agreement with one of the
      shareholders of Rebel Crew Films, Rebel Holdings, LLC, pursuant to which
      Digicorp purchased a $556,306.53 principal amount loan receivable owed by Rebel
      Crew Films to Rebel Holdings, LLC in exchange for the issuance of a $556,306.53
      principal amount secured convertible note to Rebel Holdings, LLC. The secured
      convertible note accrues simple interest at the rate of 4.5%, matures on
      December 29, 2010 and is secured by all of Digicorp’s assets now owned or
      hereafter acquired. The secured convertible note is convertible into 500,000
      shares of Digicorp common stock at the rate of $1.112614 per share. Jay Rifkin,
      Digicorp’s Chief Executive Officer and one of its directors, is the sole
      managing member of Rebel Holdings, LLC.





52


Rebel
      Crew Films was founded in 2001 as a film licensing and distribution company
      of
      Latino home entertainment products. Rebel Crew Films currently maintains
      approximately 300 Spanish language films and serves the some of the nation’s
      largest wholesale, retail, catalog, and e-commerce accounts. Rebel Crew’s titles
      can be found at Wal-Mart, Best Buy, Blockbuster, K-Mart, and hundreds of
      independent video outlets across the United States and Canada. We believe that
      the acquisition will allow Digicorp to leverage Rebel Crew Films’ Latino content
      and industry relationships with the iCodemedia Assets to create a compelling
      digital media and content delivery company.





*IPEX,
      Inc.*





At
      December 31, 2005, we held 1,045,000 shares of common stock and warrants to
      purchase 225,000 shares of common stock at $1.50 per share and warrants to
      purchase 225,000 shares of common stock at $2.00 per share of IPEX, Inc.
      (“ ***IPEX”*** ),
      valued
      at $1,243,550, which represents 7.8% of our total assets. As described below
      the
      exercise price of these warrants was adjusted to $1.00 per share on March 21,
      2006. IPEX's common stock is traded on the OTC Bulletin Board, which reported
      a
      closing price, at December 31, 2005, of $2.38. The warrants are exercisable
      for
      a period of five years and are callable by IPEX in certain instances. On June
      23, 2005, Alice M. Campbell, who is one of our directors, was appointed to
      the
      Board of Directors of IPEX. In addition, from May 26, 2005 until July 20, 2005,
      Milton “Todd” Ault, III, our former Chairman and Chief Executive Officer, served
      as interim Chief Executive Officer of IPEX and Mr. Ault has been a director
      of
      IPEX since May 26, 2005.





The
      Company’s initial investment into IPEX occurred On March 2, 2005 in the amount
      of $450,000. This investment was part of the private placement that IPEX
      completed on March 18, 2005. The total amount of IPEX’s private placement was
      for 3,500,000 shares of common stock, 1,750,000 Series A Warrants and 1,750,000
      Series B Warrants for aggregate proceeds of $3,500,000, less issuance costs
      of
      $259,980, resulting in net realized proceeds of $3,240,020. The common stock,
      Series A and Series B Warrants were sold as Units, with each Unit consisting
      of
      two shares of common stock, one series A Warrant and one Series B Warrant.
      Each
      Series A Warrant entitles the holder to purchase one share of common stock
      at
      $1.50 per share, exercisable for a period of five years. Each Series B Warrant
      entitles the holder to purchase one share of common stock at $2.00 per share,
      exercisable for a period of five years. Subsequent to the effectiveness of
      a
      registration statement covering the re-sale of shares underlying the warrants,
      the Series A and Series B Warrants are callable by IPEX, under certain
      circumstances, if IPEX's common stock trades at or above $2.00 and $2.50,
      respectively, for ten consecutive trading days. In such event IPEX must give
      us
      30 days prior written notice of its intention to call the warrants after which
      it has the right to repurchase the warrants at a purchase price of $0.01 per
      share of common stock then purchasable pursuant to the warrants. During such
      30
      day notice period we would have the right to exercise the warrants. As of March
      31, 2006 IPEX has not filed a registration statement covering the re-sale of
      the
      shares underlying the warrants and accordingly IPEX does not have a right to
      call them.





Pursuant
        to two separate asset purchase agreements entered into during 2005, in
        consideration for $6,000,000 of IPEX common stock and $275,000 cash, IPEX
        purchased certain intellectual property assets that may be used to enhance,
        compact, store, encrypt, stream and display digital image content over wireless
        networks and over the Internet and for image enhancement, compacting and
        content
        protection applications. On March 21, 2006 IPEX reported that it is in the
        process of transferring ownership of such assets to its subsidiary RGB Channel,
        Inc.





On
      March
      21, 2006 IPEX sold $800,000 principal amount of 10% secured convertible notes
      to
      four accredited investors in a private placement transaction. The 10% secured
      convertible notes are convertible into either IPEX common stock at a price
      of
      $1.00 per share or into common stock of IPEX’s subsidiary RGB Channel, Inc. at a
      conversion price equal to the lesser of (a) $0.50, or (b) the price at which,
      at
      any time while the 10% secured convertible notes are outstanding, RGB Channel,
      Inc. sells shares of its common stock or any other securities convertible into
      or exchangeable for RGB Channel, Inc. common stock. The sale by IPEX of the
      10%
      secured convertible notes caused an adjustment to the exercise price of the
      Series A Warrants and the Series B Warrants to equal $1.00 per share and an
      increase in the number of shares of common stock purchasable under such Series
      A
      and B Warrants. Pursuant to such warrants that we own, we are now entitled
      to
      purchase a total of 787,500 shares of IPEX common stock at an exercise price
      of
      $1.00 per share.





53
 
 IPEX
          operates a Voice over Internet Protocol ( ***"VoIP"*** )
          routing
          platform that directs telecommunication traffic. VoIP permits a user to
          send
          voice, fax and other information over the Internet, rather than through
          a
          regular telephone network system based on switches. IPEX’s VoIP network directs
          long distance telecommunication traffic globally. Customers and suppliers,
          consisting primarily of communications service providers, gain access to
          IPEX’s
          international routes via the Internet from virtually anywhere in the world.
          We
          believe that using VoIP technology, voice, fax and other information can
          be sent
          over the Internet far more economically than through a traditional fixed-line
          telephone network. IPEX’s platforms route international traffic based on cost,
          quality and availability. IPEX’s revenues are derived by selling its
          telecommunications routes to customers worldwide. We believe that, through
          IPEX’s VoIP platform, customers and suppliers have access to routes and related
          information. The cost of operating IPEX’s business is almost entirely software
          based which does not require maintenance or technicians. As a result, we
          believe
          the costs are low and the scalability is very high, allowing IPEX to compete
          with non-VoIP telecommunications carriers on a much lower cost
          structure.
 
 The
          communications industry is characterized by changes driven by deregulation
          in
          telecommunications markets around the world, an increase in and shift of
          minutes
          to wireless and the acceptance of VoIP as an alternative to wireline phone
          service. VoIP has been used as a low-cost solution to provide wholesale
          call
          completion, or termination, to telecommunications services providers. We
          believe
          that the low cost of launching a telecommunications business with VoIP,
          coupled
          with deregulation in telecommunications markets, has driven fragmentation
          of
          communications services markets. VoIP is now being used as a way to provide
          local and long-distance phone service to consumers and enterprises. We
          believe
          that cable companies and VoIP service providers are driving current consumer
          adoption of VoIP and are expected to capture a significant share of the
          overall
          voice market. These factors have enabled the emergence of many new
          communications service providers in dozens of local markets. IPEX believes
          that
          national carriers are focusing their capital spending on services such
          as
          fixed-line, wireless, and cable. Consequently, communications service providers
          are looking for ways to expand their ability to serve all of their customers'
          telecommunication needs, while simultaneously reducing the cost of providing
          international services. Increasingly, the world's carriers are seeking
          to
          outsource international voice traffic to efficient VoIP companies to improve
          a
          carrier's competitiveness and bottom line.
 
 Traditional
          voice communication networks use circuit-switching technology, which establishes
          dedicated channels between an originating and terminating point for the
          duration
          of a call. Physical facilities are dedicated to voice traffic between switching
          nodes, regardless of changes in demand. In contrast, VoIP is based on
          packet-switching technology. This technology completes a call by digitizing
          and
          dividing a speaker's voice into small packets that travel to their destination
          through networks carrying packets of other Internet traffic, in much the
          same
          way as email travels. We believe that using a network of service facilities
          connected to the Internet for transport is less costly than building a
          dedicated
          network as calls share the Internet with other traffic.
 
 Traditional
          international long distance calls are completed through international toll
          switches that provide access to a terminating network. These networks are
          often
          owned by government bodies or telecommunications carriers that charge settlement
          rates (or tariffs) well in excess of costs. Although these fees are being
          reduced in many countries as industry deregulation continues, the charges
          remain
          significant. Calls routed over the Internet bypass these toll switches,
          avoiding
          a significant portion of these fees, which we believe further lowers the
          cost of
          completing calls.
 
 In
          contrast to the closed, proprietary structure inherent in a traditional
          circuit-switched voice network, VoIP embraces an open architecture and
          open
          standards, which we believe facilitates innovation at lower cost. Traditional
          voice networks are designed specifically to provide one basic service,
          which we
          believe makes it difficult and costly to introduce new services over those
          networks and their proprietary platforms. As data networks convert services
          into
          data packets, this allows the exchange of new types of data such as fax,
          video,
          IP-television, etc.


54
 
 IPEX’s
                software platform provides benefits to customers and suppliers. By
                routing and
                clearing voice calls through the platform, buyers and sellers can
                access
                multiple buyers and sellers, increase network utilization, achieve
                better
                pricing and improve profitability and cash flow by reducing the number
                of
                interconnections and reducing selling, legal, billing and collection
                expenses.
                By establishing a single interconnection to IPEX's platform, communications
                services providers gain immediate targeted access to and a link with
                multiple
                customers and suppliers. This replaces the lengthy, costly and highly
                negotiated
                process of searching for and interconnecting to other communications
                services
                providers on a one-to-one basis and managing each interconnection
                on an ongoing
                basis.
 
 The
                global communications services market is highly competitive. The
                Company
                competes with other wholesale telecommunications carriers worldwide.
                Many of
                these carriers have more resources, longer operating histories and
                more
                established positions in the telecommunications marketplace. The
                Company also
                competes with smaller companies, including those that may be specialists
                in just
                one or two routes. The Company additionally competes against its
                customers'
                ability to carry traffic themselves, whereby either retail carriers
                develop
                their own international networks or interconnect with one another
                and exchange
                international traffic by "meeting" in a major telecommunications
                hub. The
                Company competes principally on quality of service and
                price.
 As
            reflected in IPEX’s September 30, 2005 Form 10-Q, sales for the nine months
            ended September 30, 2005 rose to $8,346,775 as compared to sales of $4,387,882
            from the prior year's nine months ended September 30, 2004. Trading revenues
            represent fees generated from minutes purchased through IPEX’s VoIP exchange
            platform. Revenues from VoIP activities are recognized in the period
            minutes are
            delivered through the telecom exchange platform. In the past, due to
            prior
            working capital constraints, IPEX could only maintain selling to customers
            on a
            weekly net 5 basis ( ***“Tier
            3 carriers”*** ).
            The
            additional working capital provided by the private placement completed
            in March
            2005 allowed IPEX to extend credit to customers under net 15 terms ( ***“Tier
            2 carriers”*** )
            and
            customers on net 30 terms ( ***“Tier
            1 carriers”*** )
            therefore increasing the number of overall customers.
 
 IPEX’s
            cost of sales as a percentage of sales for the quarter ended September
            30, 2005
            remained relatively constant at 96% compared to 96% for the quarter ended
            September 30, 2004. Net loss for the three months ended September 30,
            2005 and
            2004 was $338,000 and $150,000, respectively. The increase in IPEX’s net loss
            for the three months ended September 30, 2005 is primarily due to increased
            salaries and wages related to management personnel .


*Tuxis
      Corporation*




At
      December 31, 2005, we held 108,200 shares of common stock of Tuxis Corporation
      ( ***“Tuxis”*** )
      valued
      at $746,580, which represents 4.7% of our total assets. Tuxis, a real estate
      holding company, is a Maryland corporation currently registered under the 1940
      Act as a closed-end management investment company. Tuxis previously received
      Board of Directors and shareholder approval to change the nature of its business
      so as to cease to be an investment company and on May 3, 2004, filed an
      application with the SEC to de-register as an investment company. Tuxis’ common
      stock is traded on the American
      Stock Exchange ,
      which
      reported a closing price, at December 31, 2005, of $7.50. At September 30,
      2005,
      Tuxis had reportable net assets of approximately $8.6 million. During the
      quarter ended March 31, 2006, we liquidated the majority of our shares of Tuxis
      common stock.





*Ault
      Glazer Bodnar Capital Properties, LLC*





At
      December 31, 2005, we had several real estate investments, valued at $481,033,
      which represents 3.0% of our total assets. We hold our real estate investments
      in Ault Glazer Bodnar Capital Properties, LLC ***(“AGB
      Properties”)*** ,
      a
      Delaware limited liability company and a wholly owned subsidiary. AGB Properties
      is in the process of liquidating its real estate holdings. AGB Properties’
primary focus was on the acquisition and management of income producing real
      estate holdings. AGB Properties real estate holdings consist of approximately
      8.5 acres of undeveloped land in Heber Springs, Arkansas, 0.61 acres of
      undeveloped land in Springfield, Tennessee, and various loans secured by real
      estate in Heber Springs, Arkansas. During the year ended December 31, 2005,
      we
      liquidated properties with a cost basis of approximately $113,000, which
      resulted in a gain of approximately $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.





55


**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.





“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 $562,374, $0, and $180,000 for the years ended December
      31, 2005, 2004 and 2003, respectively. Revenues for the year ended December
      31,
      2003 relate to management fees earned by us from Excelsior, a related party.
      The
      management agreement with Excelsior expired on December 31, 2003, thus, we
      have
      not recognized any revenues from this source during the years ended December
      31,
      2005 and 2004.





Although
      none of the revenues that we recognized during the year ended December 31,
      2005
      related to sales of our Safety-Sponge TM System
      we
      expect to begin recognizing revenues from the Safety-Sponge TM System
      during the three month period ending June 30, 2006 based in part upon the
      results of initial usage of the Safety-Sponge TM System
      in
      hospital operating rooms. We expect these revenues will initially have an
      insignificant impact on our results of operations, however, during the three
      month period ending December 31, 2006 we expect that revenues from our
      Safety-Sponge TM System
      will provide a material source of funds to cover a portion of our operating
      costs.




56


The
      revenue earned during the year ended December 31, 2005 was the result of a
      consulting agreement, consented to by IPEX, whereby Wolfgang Grabher, the
      majority shareholder of IPEX, former President, former Chief Executive Officer
      and former director of IPEX, retained us to serve as a business consultant
      to
      IPEX. In consideration for the services, Mr. Grabher personally agreed to pay
      us
      either 500,000 shares of common stock of IPEX, or $1,500,000 in cash, as a
      non-refundable consulting fee. Whether the consulting fee was paid in the form
      of IPEX common stock or cash was the sole discretion of Mr. Grabher. Although
      the determination of whether we would receive IPEX common stock or cash was
      in
      the discretion of Mr. Grabher, we operated under the assumption that we would
      most likely receive 500,000 shares of IPEX common stock as payment for the
      services and in December 2005 did in fact receive the 500,000 shares. Mr.
      Grabher owned 18,855,900 shares of IPEX's 28,195,566 outstanding shares of
      common stock and in May 2005 granted Mr. Ault, our former Chairman and former
      Chief Executive Officer, an irrevocable voting proxy for his shares for a period
      of three years or earlier if independent counsel hired by IPEX clears Mr.
      Grabher of any wrongdoings in connection with IPEX’s operations, if Mr. Ault
      releases the proxy or if Mr. Grabher sells the subject shares. IPEX’s audit
      committee determined that the offering memorandum used in connection with IPEX’s
      March 18, 2005 private placement (described above under “Investments”) and in
      IPEX’s Form 8-K dated March 16, 2005 either misstated or omitted certain
      material information and Mr. Grabher is alleged to have been involved in
      drafting those documents. The irrevocable voting proxy was granted to Mr. Ault
      while he served as interim Chief Executive Officer and a director of IPEX in
      order to distance Mr. Grabher from control over IPEX amid allegations of
      wrongdoing. The irrevocable voting proxy was terminated by agreement between
      Messrs. Ault and Grabher during December 2005 **.** On
      December 14, 2005 Mr. Grabher agreed to surrender 14,855,900 of the shares
      of
      IPEX common stock owned by him to IPEX to be retired and returned to treasury.
      Such shares represented 49.4% of IPEX’s outstanding shares of common stock at
      the time. At December 31, 2005, we held 7.8% of IPEX’s outstanding shares of
      common stock. On June 30, 2005, we agreed with IPEX as to the scope of such
      consulting services and the consideration for such services. We have provided
      and/or will provide if reasonably necessary within the 12 month period ending
      June 30, 2006, the following services to IPEX: (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 our personnel 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 with Mr. Grabher from time
      to
      time; and (c) assisting IPEX in installing a new management team. Our former
      Chairman and former Chief Executive Officer, Mr. Ault, has been a director
      of
      IPEX since May 26, 2005 and Mr. Ault served as interim Chief Executive Officer
      of IPEX from May 26, 2005 until July 13, 2005. Darrell W. Grimsley, Jr., Chief
      Executive Officer of our indirect wholly owned subsidiary Automotive Services
      Group, LLC, 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 member of
      our
      Board of Directors and our audit and compensation committees, served as a
      director of IPEX and chairman of its audit committee from June 23, 2005 until
      January 30, 2006.





At
      December 31, 2005, we had performed a significant amount 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) 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, none of which would be deemed
      related parties; and (iv) IPEX’s appointment of two new members to its Board of
      Directors. We have deferred approximately $103,875 of revenue relating to this
      consulting agreement which management expects will be substantially recognized
      during the three months ending March 31, 2006.





**Expenses**





Operating
      expenses were $8,493,493, 2,923,983, and $1,236,623 for the years ended December
      31, 2005, December 31, 2004 and December 31, 2003, respectively.





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 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, and up until October 2005, the
      financial services and real estate industries. 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.





57


Printing,
      Amex stock exchange, and transfer agent fees for the year ended December 31,
      2005 increased by $49,949, $62,033 and $54,846, 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 $851,653
      increase reflected in general and administrative expenses for the year ended
      December 31, 2005. An increase in travel related expenses of $239,639, sample
      product of $62,147, and a research grant to Brigham and Women’s Hospital of
      $107,628, 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 will collect data on how the Safety-Sponge System saves time, reduces
      costs and increases patient safety in the operating room. The study will also
      continue 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 $430,513 of which $107,628 was paid in 2005. We anticipate
      that the remaining amount of the research grant, of $322,885 will be paid during
      the nine months ended September 30, 2006. 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 $3,282,404. The most significant component of employee compensation
      is stock based compensation expense. For the year ended December 31, 2005,
      we
      recorded approximately $1,596,825 relating to grants of nonqualified stock
      options and $1,519,849 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 $5,094. 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 $3,111,580. The remaining
      increase in employee compensation of $170,824 is attributed to an increase
      in
      salaries and benefits of $661,816, 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.





At
      December 31, 2005, three of our executives were covered under employment
      agreements. Our Chief Financial Officer, William B. Horne, is covered under
      a
      two year employment agreement with annual base compensation of $150,000; 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. 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. We believe,
      as
      with all our operating expenses, that our existing cash resources, together
      with
      proceeds from investments and anticipated revenues from our operations, should
      be adequate to fund our salary obligations.





58


The
      second largest component of our operating expenses is professional fees, which
      increased by $1,038,892. As in the case of employee compensation, stock based
      compensation expense is the most significant component of professional fees
      for
      year ended December 31, 2005. We incurred approximately $918,132 relating to
      the
      issuance of warrants and $469,480 related to restricted stock awards to our
      consultants performing services for us.





A
      significant amount of the warrants relate to a consulting agreement that we
      entered into in April 2005 with Health West Marketing Incorporated ( ***“Health
      West”*** )
      where
      we agreed, as an incentive for entering into the agreement, 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 $527,958
      related to these warrants. In addition to the warrants, we have recognized
      expenses of $156,253 related to the issuance and future issuance of 26,261
      shares of our common stock, as follows: (a) 10,505 shares valued at $62,505
      were
      issued upon signing the agreement; and (b) on August 17, 2005, we entered into
      a
      comprehensive manufacturing agreement with A Plus Manufacturing and as a result
      issued 15,756 shares, valued at $93,748, to Health West. In the event that
      Health West helps us develop a regional distribution network to integrate the
      Safety-Sponge TM System
      into the existing acute care supply chain we will then issue Health West an
      additional 15,756 shares and at that time recognize an additional expense of
      $93,748.





In
      addition to the stock based compensation that we recognized as a result of
      our
      agreement with Health West, we have issued additional warrants to purchase
      shares of common stock and granted restricted shares of common stock to various
      consultants performing services for us. These services have primarily related
      to
      investor relations and legal services.





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%, 3.75%, three to five years and 83%, respectively. The
      restricted stock awards were valued at the closing price on the date the
      restricted shares were granted. The overall increase in expenses related to
      the
      issuance of stock options, warrants and restricted stock awards amounted to
      $4,499,192.





We
      also
      issued 150,000 warrants, valued at $536,578, 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 $4,684,576, 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.





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





We
      had
      interest income of $42,476, $11,056 and $3,159 for the years ended December
      31,
      2005, December 31, 2004, and December 31, 2003, respectively.





59


The
      increase in interest income for the year ended December 31, 2005 when compared
      to December 31, 2004, was primarily the result of an increased amount of fixed
      income investments held throughout the period. At March 31, 2005, we held in
      marketable securities approximately $2.5 million in U.S. Treasuries which were
      liquidated during the three month period ended June 30, 2005. During the prior
      years our primary contributing asset to interest income was our cash balance
      which was insignificant since we did not raise capital through the issuance
      of
      equity securities until November 2005.





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





During
      the years ended December 31, 2005, we realized net gains of $2,014,369 primarily
      from our stock appreciation rights in our holding in Excelsior for $1,747,072.





During
      the year ended December 31, 2004, we realized net gains of $1,591,156. We
      realized a gain of $1,448,014 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 $143,142 from the sale of marketable securities.





During
      the year ended December 31, 2003, we realized net gains of $430,883. We realized
      a gain of $432,900 from the sale of 568,000 shares of Excelsior Radio Networks,
      Inc. common stock which was offset by a loss of $2,017 from the sale of
      marketable securities.





We
      have
      relied and we continue to rely to a large extent upon proceeds from sales of
      investments rather than investment income to defray a significant portion of
      our
      operating expenses. Because such sales cannot be predicted with certainty,
      we
      attempt to maintain adequate working capital to provide for fiscal periods
      when
      there are no such sales.





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





Unrealized
      appreciation of investments increased by $32,335 during the year ended December
      31, 2005, due to the price appreciation of our marketable securities.





Unrealized
      appreciation of investments decreased by $1,054,702 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. 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.





Unrealized
      appreciation of investments decreased by $475,605 during the year ended December
      31, 2003, primarily due to the sale of a portion of the Company’s holdings of
      Excelsior offset by the increased valuation of Excelsior.





**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
      all of our restricted holdings in IPEX and Digicorp as available-for-sale.
      At
      December 31, 2005, the unrealized gains (losses) on our restricted holdings
      in
      IPEX and Digicorp amounted to ($327,749) and $2,702,607, respectively. We did
      not hold any investments classified as available-for-sale at either December
      31,
      2004 or December 31, 2003.





**Taxes**





We
      are
      taxed under Title 26, Chapter 1, Subchapter C of the Internal Revenue Code
      of
      1986, as amended, and therefore subject to federal income tax on the portion
      of
      our taxable income.





At
      December 31, 2005, we had a net operating loss carryforward of approximately
      $11.8 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.





60


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.





**Contractual
      Obligations**





The
      following table sets forth information relating to our contractual obligations
      as of December 31, 2005:




**Contractual
                obligations**
            
            **Payments
                Due by Period****Less
                than****Total**
            
            **1 year**
            
            **1-3 years**
            
            **3-5 years**Operating
                lease obligations
            
            $
            605,622
            
            $
            131,258
            
            $
            347,253
            
            $
            127,111Note
                Payable to Bodnar Capital Management, LLC
            
            
            1,000,000
            
            
            1,000,000
            
            
            —
            
            
            —Note
                Payable to Winstar (1)
            
            
            796,554
            
            
            796,554
            
            
            —
            
            
            —Note
                Payable to Ault Glazer Bodnar Acq. Fund, LLC,
            
            
            1,116,838
            
            
            —
            
            
            —
            
            
            1,116,838Employment
                Agreements
            
            
            1,658,333
            
            
            600,000
            
            
            908,333
            
            
            150,000Clinical
                Trial Research Grant
            
            
            322,885
            
            
            322,885
            
            
            —
            
            
            —**Total**
            **$**
            **5,500,232**
            
            **$**
            **2,850,697**
            
            **$**
            **1,255,586**
            
            **$**
            **1,393,949**





(1)
      We
      initially purchased Excelsior securities on August 28, 2001. As part of the
      purchase price we issued a $1,000,000 note. This note was due February 28,
      2002
      with interest at 3.54% but has a right of set-off against certain
      representations and warranties made by Winstar Radio Networks, Inc. The due
      date
      of the note has been extended indefinitely until the action described under
      Item
      3. Legal Proceedings is settled.





**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."





61


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





**PATIENT
      SAFETY TECHNOLOGIES, INC.**


**INDEX
      TO FINANCIAL STATEMENTS**





Report
                    of Rothstein, Kass & Company, P.C
                63Report
                    of Ernst & Young LLP
                64Consolidated
                    Balance Sheets as ofDecember
                    31, 2005 and 2004
                65Consolidated
                    Statements of Operations and Comprehensive lossfor
                    the years ended December 31, 2005, 2004 and 2003
                66Consolidated
                    Statements of Cash Flows for the yearsended
                    December 31, 2005, 2004 and 2003
                67
                    - 68Consolidated
                    Statements of Stockholders’Equity for the yearsended
                    December 31, 2005, 2004 and 2003
                69Notes
                    to Financial Statements
                70
                    - 94




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





62


**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


63


REPORT
      OF
      ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM




To
      the
      Stockholders and Board of Directors


Franklin
      Capital Corporation





We
      have
      audited Patient Safety Technologies, Inc. formerly Franklin Capital Corporation
      statements of operations, cash flows and shareholder’ equity for the year ended
      December 31, 2003. These financial statements are the responsibility of the
      Corporation’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. We were not engaged to perform
      an
      audit of the Company’s internal control over financial reporting. Our audit
      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 assessing the accounting principles used
      and significant estimates made by management, and evaluating the overall
      financial statement presentation. We believe that our audit provide a reasonable
      basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, Patient Safety Technologies, Inc. formerly Franklin Capital
      Corporation’s results of operations, cash flows and changes in stockholders’
equity for the year ended December 31, 2003, in conformity with U.S. generally
      accepted accounting principles.














March
      5,
      2004





64
 
 **PATIENT
                        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                        Balance Sheets**
  **December
                        31,**
                    
                    **December
                        31,****2005**
                    
                    **2004
                        *****ASSETS****CURRENT
                        ASSETS**Cash
                        and cash equivalents
                    
                    $
                    79,373
                    
                    $
                    846,404Receivables
                        from investments
                    
                    
                    934,031Marketable
                        securities
                    
                    
                    923,800
                    
                    
                    3,487,719Inventories
                    
                    
                    77,481Prepaid
                        expenses
                    
                    
                    112,734
                    
                    
                    156,012Other
                        current assets
                    
                    
                    118,394
                    
                    
                    99,498**TOTAL
                        CURRENT ASSETS**
                    
                    
                    2,245,813
                    
                    
                    4,589,633Restricted
                        certificate of deposit
                    
                    
                    87,500Property
                        and equipment, net
                    
                    
                    1,348,275
                    
                    
                    23,657Goodwill
                    
                    
                    2,301,555Patents,
                        net
                    
                    
                    4,413,791Long-term
                        investments
                    
                    
                    5,636,931
                    
                    
                    2,320,953**TOTAL
                        ASSETS**
                    
                    $
                    16,033,865
                    
                    $
                    6,934,243**LIABILITIES
                        AND STOCKHOLDERS' EQUITY****CURRENT
                        LIABILITIES**Notes
                        payable, current portion
                    
                    $
                    1,796,554
                    
                    $
                    892,530Accounts
                        payable
                    
                    
                    785,507
                    
                    
                    400,725Accrued
                        liabilities
                    
                    
                    569,116
                    
                    
                    538,843Marketable
                        securities, sold short
                    
                    
                    
                    
                    
                    1,075,100Due
                        to broker
                    
                    
                    801,863
                    
                    
                    460,776**TOTAL
                        CURRENT LIABILITIES**
                    
                    
                    3,953,040
                    
                    
                    3,367,974**LONG
                        TERM LIABILITIES**Notes
                        payable, less current portion
                    
                    
                    1,116,838Deferred
                        tax liabilities
                    
                    
                    1,590,045**TOTAL
                        LONG TERM LIABILITIES**
                    
                    
                    2,706,883
                    
                    
                    —**MINORITY
                        INTEREST**
                    
                    
                    252,992**COMMITMENTS
                        AND CONTINGENCIES****STOCKHOLDERS'
                        EQUITY**Convertible
                        preferred stock, $1 par value, cumulative 7% dividend:1,000,000
                        shares authorized; 10,950 issued and outstandingat
                        December 31, 2005 and December 31, 2004(Liquidation
                        preference $1,170,700)
                    
                    
                    10,950
                    
                    
                    10,950Common
                        stock, $0.33 par value: 25,000,000 shares authorized;6,995,276
                        shares issued and 5,672,445 shares outstanding as of December
                        31, 2005;
                        6,128,067shares
                        issued and 4,670,703 shares outstanding at December 31,
                        2004
                    
                    
                    2,308,441
                    
                    
                    2,022,262Paid-in
                        capital
                    
                    
                    22,600,165
                    
                    
                    13,950,774Other
                        comprehensive income
                    
                    
                    2,374,858Accumulated
                        deficit
                    
                    
                    (15,784,108
                    )
                    
                    (9,800,885
                    )11,510,306
                    
                    
                    6,183,101Less:
                        1,322,831 and 1,457,364 shares of treasury stock,at
                        cost, at December 31, 2005 and December 31, 2004,
                        respectively
                    
                    
                    (2,389,356
                    )
                    
                    (2,616,832
                    )**TOTAL
                        STOCKHOLDERS' EQUITY**
                    
                    
                    9,120,950
                    
                    
                    3,566,269**TOTAL
                        LIABILITIES AND STOCKHOLDERS' EQUITY**
                    
                    $
                    16,033,865
                    
                    $
                    6,934,243
  *
                        Restated to include the impact of share-based compensation
                        expense
  The
                accompanying notes are an integral part of these consolidated financial
                statements.
 65
 
 **PATIENT
                        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                        Statements of Operations and Comprehensive Loss**
  **For
                        The Years Ended December 31,****2005**
                    
                    
                    **2004***
                    
                    
                    **2003****REVENUES
                        FROM RELATED PARTIES**
                    
                    $
                    562,374
                    
                    $
                    —
                    
                    $
                    180,000**EXPENSES**Salaries
                        and employee benefits
                    
                    
                    4,264,665
                    
                    
                    982,261
                    
                    
                    548,269Professional
                        fees
                    
                    
                    2,523,035
                    
                    
                    1,484,143
                    
                    
                    231,164Rent
                    
                    
                    88,368
                    
                    
                    76,276
                    
                    
                    71,942Insurance
                    
                    
                    118,095
                    
                    
                    64,083
                    
                    
                    67,728Taxes
                        other than income taxes
                    
                    
                    110,369
                    
                    
                    50,697
                    
                    
                    29,708Amortization
                        of patents
                    
                    
                    270,785General
                        and administrative
                    
                    
                    1,118,176
                    
                    
                    266,523
                    
                    
                    287,812**Operating
                        expenses**
                    
                    
                    8,493,493
                    
                    
                    2,923,983
                    
                    
                    1,236,623**Operating
                        loss**
                    
                    
                    (7,931,119
                    )
                    
                    (2,923,983
                    )
                    
                    (1,056,623
                    )Interest,
                        dividend income and other
                    
                    
                    42,476
                    
                    
                    11,056
                    
                    
                    3,159Equity
                        in losses of investee
                    
                    
                    (74,660
                    )Realized
                        gains on investments, net
                    
                    
                    2,014,369
                    
                    
                    1,591,156
                    
                    
                    430,883Interest
                        expense
                    
                    
                    (135,414
                    )
                    
                    (32,284
                    )
                    
                    (42,903
                    )Unrealized
                        gains (losses) on marketable securities, net
                    
                    
                    32,335
                    
                    
                    (1,054,702
                    )
                    
                    (475,605
                    )**Loss
                        before minority interest and deferred income tax
                        benefit**
                    
                    
                    (6,052,013
                    )
                    
                    (2,408,757
                    )
                    
                    (1,141,089
                    )**Minority
                        interest**
                    
                    
                    47,008**Net
                        loss before deferred income tax benefit**
                    
                    
                    (6,005,005
                    )
                    
                    (2,408,757
                    )
                    
                    (1,141,089
                    )**Deferred
                        income tax benefit**
                    
                    
                    97,482**Net
                        loss**
                    
                    
                    (5,907,523
                    )
                    
                    (2,408,757
                    )
                    
                    (1,141,089
                    )**Preferred
                        dividends**
                    
                    
                    (75,700
                    )
                    
                    (76,650
                    )
                    
                    (76,652
                    )**Net
                        loss attributable to common shareholders**
                    
                    $
                    (5,983,223
                    )
                    $
                    (2,485,407
                    )
                    $
                    (1,217,741
                    )**Basic
                        and diluted net loss per common share**
                    
                    $
                    (1.11
                    )
                    $
                    (0.75
                    )
                    $
                    (0.39
                    )**Weighted
                        average common shares outstanding**
                    
                    
                    5,373,318
                    
                    
                    3,300,973
                    
                    
                    3,112,329**Comprehensive
                        income (loss):****Net
                        loss**
                    
                    $
                    (5,907,523
                    )
                    $
                    (2,408,757
                    )
                    $
                    (1,141,089
                    )**Other
                        comprehensive income, unrealized gain on available-for-sale
                        investments**
                    
                    
                    2,374,858
                    
                    
                    —
                    
                    
                    —**Comprehensive
                        loss**
                    
                    $
                    (3,532,665
                    )
                    $
                    (2,408,757
                    )
                    $
                    (1,141,089
                    )
  *
                        Restated to include the impact of share-based compensation
                        expenseThe
                        accompanying notes are an integral part of these consolidated
                        financial
                        statements.
  66
 **PATIENT
                        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                        Statements of Cash Flows******
                    
                    ****
  **For
                        The Years Ended December 31,****2005**
                    
                    **2004***
                    
                    **2003**Cash
                        flows from operating activities:Net
                        loss
                    
                    $
                    (5,907,523
                    )
                    $
                    (2,408,757
                    )
                    $
                    (1,141,089
                    )Adjustments
                        to reconcile net loss to net cash used in operating
                        activities:Depreciation
                    
                    
                    14,943
                    
                    
                    863
                    
                    
                    16,972Amortization
                        of patents
                    
                    
                    270,785Realized
                        gains on investments, net
                    
                    
                    (2,014,369
                    )
                    
                    (1,591,156
                    )
                    
                    (430,883
                    )Unrealized
                        (gain) loss on marketable securities
                    
                    
                    (32,335
                    )
                    
                    1,054,702
                    
                    
                    475,605Stock-based
                        compensation to employees and directors
                    
                    
                    3,116,674
                    
                    
                    5,094Stock-based
                        compensation to consultants
                    
                    
                    1,387,612Stock
                        received for services
                    
                    
                    (666,249
                    )Deferred
                        income tax benefit
                    
                    
                    (97,482
                    )Equity
                        in income (loss) on investee
                    
                    
                    74,660Minority
                        interest
                    
                    
                    (47,008
                    )Changes
                        in operating assets and liabilities:Restricted
                        certificate of deposit
                    
                    
                    (87,500
                    )Receivables
                        from investments
                    
                    
                    (934,031
                    )Marketable
                        securities, net
                    
                    
                    2,439,665
                    
                    
                    (232,379
                    )
                    
                    (8,242
                    )Inventories
                    
                    
                    (77,481
                    )Prepaid
                        expenses
                    
                    
                    (112,734
                    )Other
                        current assets
                    
                    
                    117,116
                    
                    
                    (201,392
                    )
                    
                    (18,013
                    )Accounts
                        payable and accrued liabilities
                    
                    
                    494,918
                    
                    
                    456,188
                    
                    
                    (94,840
                    )Due
                        to broker
                    
                    
                    341,087
                    
                    
                    460,776Net
                        cash used in operating activities
                    
                    
                    (1,719,252
                    )
                    
                    (2,456,061
                    )
                    
                    (1,200,490
                    )Cash
                        flows from investing activities:Purchase
                        of property and equipment
                    
                    
                    (829,537
                    )Purchase
                        of Surgicount
                    
                    
                    (432,398
                    )Purchase
                        of ASG
                    
                    
                    (300,000
                    )Proceeds
                        from sale of long-term investments
                    
                    
                    1,371,522
                    
                    
                    
                    
                    
                    1,000,900Purchases
                        of long-term investments
                    
                    
                    (603,173
                    )
                    
                    (788,518
                    )Net
                        cash used in investing activities
                    
                    
                    (793,586
                    )
                    
                    (788,518
                    )
                    
                    1,000,900Cash
                        flows from financing activities:Proceeds
                        from issuance of common stock and warrants
                    
                    
                    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
                    )
                    
                    
                    
                    
                    (25,661
                    )Payments
                        of preferred dividends
                    
                    
                    (19,163
                    )
                    
                    (76,650
                    )
                    
                    (76,652
                    )Proceeds
                        from notes payable
                    
                    
                    1,621,627Payments
                        and decrease in notes
                    
                    
                    (95,976
                    )
                    
                    (23,224
                    )
                    
                    (36,063
                    )Net
                        cash provided by (used in) financing activities
                    
                    
                    1,745,807
                    
                    
                    3,866,758
                    
                    
                    (138,376
                    )Net
                        increase (decrease) in cash and cash equivalents
                    
                    
                    (767,031
                    )
                    
                    622,179
                    
                    
                    (337,966
                    )Cash
                        and cash equivalents at beginning of period
                    
                    
                    846,404
                    
                    
                    224,225
                    
                    
                    562,191Cash
                        and cash equivalents at end of period
                    
                    $
                    79,373
                    
                    $
                    846,404
                    
                    $
                    224,225
  *
                        Restated to include the impact of share-based compensation
                        expenseThe
                        accompanying notes are an integral part of these consolidated
                        financial
                        statements.
  67
  **PATIENT
                        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                        Statements of Cash Flows (continued)**
  **For
                        The Years Ended December 31,****2005**
                    
                    **2004***
                    
                    **2003**Supplemental
                        disclosures of cash flow information:Cash
                        paid during the period for interest
                    
                    $
                    61,593
                    
                    $
                    2,452
                    
                    $
                    —Supplemental
                        disclosures of non cash investing and financing
                        activities:Issuance
                        of common stock in connection with land acquisition
                    
                    $
                    85,619
                    
                    $
                    —
                    
                    $
                    —Issuance
                        of common stock in connection with purchase of marketable
                        securities
                    
                    $
                    101,640
                    
                    $
                    55,812
                    
                    $
                    —Accrued
                        purchase price of investment
                    
                    $
                    (165,240
                    )
                    $
                    165,240
                    
                    $
                    —Assumption
                        of accrued liabilities
                    
                    $
                    15,000Dividends
                        accrued
                    
                    $
                    75,700
                    
                    $
                    19,163
                    
                    $
                    —Capitalized
                        interest
                    
                    $
                    28,840
                    
                    $
                    —
                    
                    $
                    —Reclassification
                        of other current asset to purchase of Surgicount
                    
                    $
                    20,000
                    
                    $
                    —
                    
                    $
                    —
 
 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
                    
                    
                    495,211The
                        accompanying notes are an integral part of these consolidated
                        financial
                        statements.
 
 68
  **PATIENT
                        SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES****Consolidated
                        Statements of Stockholders' Equity****For
                        the Three Years Ended December 31, 2005**
  **Other**
                      
                      
                      
                      
                      
                      
                      
                      **Total****Preferred
                          Stock**
                      
                      **Common
                          Stock**
                      
                      **Paid-In**
                      
                      **Comprehensive**
                      
                      **Accumulated**
                      
                      **Treasury
                          Stock**
                      
                      **Shareholders’****Shares**
                      
                      **Amount**
                      
                      **Shares**
                      
                      **Amount**
                      
                      **Capital**
                      
                      **Income**
                      
                      **Deficit**
                      
                      **Shares**
                      
                      **Amount**
                      
                      **Equity**BALANCES,
                          January 1, 2003
                      
                      
                      10,950
                      
                      $
                      10,950
                      
                      
                      4,517,664
                      
                      $
                      1,490,829
                      
                      $
                      10,454,669
                      
                      $
                      —
                      
                      $
                      (6,097,737
                      )
                      
                      (1,368,864
                      )
                      $
                      (2,591,171
                      )
                      $
                      3,267,540Net
                          loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,141,089
                      )
                      
                      
                      
                      
                      
                      
                      
                      (1,141,089
                      )Preferred
                          Dividends
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (76,652
                      )
                      
                      
                      
                      
                      
                      
                      
                      (76,652
                      )Repurchases
                          of common stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (88,500
                      )
                      
                      (25,661
                      )
                      
                      (25,661
                      )BALANCES,
                          December 31, 2003
                      
                      
                      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 stock for: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 stock for:Cash
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      129,904
                      
                      
                      
                      
                      
                      
                      
                      
                      65,319
                      
                      
                      120,096
                      
                      
                      250,000Purchase
                          of investments/Surgicount acquisition
                      
                      
                      
                      
                      
                      
                      
                      
                      600,000
                      
                      
                      198,000
                      
                      
                      3,579,916
                      
                      
                      
                      
                      
                      
                      
                      
                      58,444
                      
                      
                      104,943
                      
                      
                      3,882,859Exercise
                          of stock options
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      16,150
                      
                      
                      
                      
                      
                      
                      
                      
                      5,625
                      
                      
                      10,100
                      
                      
                      26,250Services
                      
                      
                      
                      
                      
                      
                      
                      
                      96,961
                      
                      
                      31,998
                      
                      
                      408,220
                      
                      
                      
                      
                      
                      
                      
                      
                      15,756
                      
                      
                      29,268
                      
                      
                      469,486Compensation
                          expense due to warrant issuances
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      918,132
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      918,132Compensation
                          expense due to restricted stock issuances
                      
                      
                      
                      
                      
                      
                      
                      
                      170,248
                      
                      
                      56,181
                      
                      
                      1,463,666
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,519,847Compensation
                          expense due to stock option issuances
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,596,825
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,596,825Warrants
                          issued in purchase of Surgicount
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      536,578
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      536,578Repurchases
                          of common stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (10,611
                      )
                      
                      (36,931
                      )
                      
                      (36,931
                      )BALANCES,
                          December 31, 2005
                      
                      
                      10,950
                      
                      $
                      10,950
                      
                      
                      6,995,276
                      
                      $
                      2,308,441
                      
                      $
                      22,600,165
                      
                      $
                      2,374,858
                      
                      $
                      (15,784,108
                      )
                      
                      (1,322,831
                      )
                      $
                      (2,389,356
                      )
                      $
                      9,120,950
 *
                Restated
                to include the impact of share-based compensation expense
 
 The
                accompanying notes are an integral part of these consolidated financial
                statements.
 69
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements**
 **December
                31, 2005**
 
 **1.
                DESCRIPTION OF BUSINESS AND GOING CONCERN CONSIDERATION**
 
 Until
                March 31, 2005, Patient Safety Technologies, Inc. ( ***"PST"*** ,
                or the ***"Company"*** )
                (formerly known as Franklin Capital Corporation) was a Delaware corporation
                that
                elected to be 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”*** ).
                Through its operating subsidiaries, the Company is currently involved
                in
                providing capital and managerial assistance to development stage
                companies in
                the medical products and health care solutions industries.
 
 Currently,
                the Company has four wholly-owned operating subsidiaries: (1) SurgiCount
                Medical, Inc., a California corporation; (2) Patient Safety Consulting
                Group,
                LLC, a Delaware Limited Liability Company; (3) Ault
                Glazer Bodnar Capital Properties, LLC ,
                a
                Delaware Limited Liability Company; and (4) Ault Glazer Bodnar Merchant
                Capital,
                Inc., a Delaware corporation.
 
 The
                Company, including its operating subsidiaries, 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 Medical, Inc.,
                a provider of
                patient safety devices and Patient Safety Consulting Group, LLC,
                a healthcare
                consulting services company, focus on the Company’s primary target industries,
                the health care and medical products field. Ault Glazer Bodnar Merchant
                Capital,
                Inc. ( ***“AGB
                Merchant Capital”*** )
                was
                formed on June 27, 2005, to hold the Company’s non-patient safety related
                assets, such as Ault
                Glazer Bodnar Capital Properties, LLC ( ***“AGB
                Properties”*** ),
                a real
                estate development and management company, in order to assist the
                Company in
                divesting of its investments in the financial services and real estate
                industries. The Company plans to change the name of AGB Merchant
                Capital to
                Automotive Services Group, Inc. to reflect the subsidiary's primary
                holding, a 50% owned subsidiary, Automotive Services Group, LLC
                ( ***“ASG”*** ).
                As
                discussed in Note 20, the Company purchased the remaining equity
                interest in ASG
                subsequent to year end.
 
 **Going
                Concern**
 
 The
                accompanying consolidated financial statements have been prepared
                assuming that
                the Company will continue as a going concern. At December 31, 2005,
                the Company
                has an accumulated deficit of approximately $15.8 million and a working
                capital
                deficit of approximately $1.7 million. For the year ended December
                31, 2005, the
                Company incurred a loss of approximately $5.9 million and has utilized
                approximately $1.7 million in cash in its operations. Further, as
                of December
                31, 2005 and through the date hereof, the Company has yet to generate
                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, 2005, the Company has
                relied on
                liquidating investments and certain financing to fund its operations.
                Management
                is currently seeking additional financing and believes, however no
                assurances
                can be made, that these avenues will continue to be available to
                the Company to
                fund its operations for the 12 months subsequent to December 31,
                2005, or until
                the fruition of adequate cash flow from its medical products and
                healthcare
                solutions segments. 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 and FIN 46 Consideration**
 
 The
                accompanying consolidated financial statements for 20 05
                include the accounts of the
                Company and its subsidiaries. All significant intercompany balances
                and
                transactions have been eliminated in consolidation.
 
 70
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  The
                Company complies Financial
                Accounting Standards Board ( ***“FASB”*** ) In terpretation
                No. 46R, *“Consolidation
                of Variable Interest Entities”* ( ***“FIN
                46R”*** ).
                Variable interest entities ( ***“VIEs”*** )
                are
                generally entities that lack sufficient equity to finance their activities
                without additional financial support from other parties or whose
                equity holders
                lack adequate decision-making ability. All VIEs with which the Company
                is
                involved must be evaluated to determine primary beneficiary of the
                risks and
                rewards of the VIE. The primary beneficiary is required to consolidate
                the VIE
                for financial reporting purposes. The Company has determined that
                ASG is a VIE
                and that during the 4 th quarter
                of 2005, the Company was deemed to be the primary beneficiary.
  **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 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.
 
 In
                the
                normal course of business, all of the Company’s marketable securities
                transactions, money balances and security positions are transacted
                with a
                broker.  The Company is subject to credit risk to the extent any broker
                with whom it conducts business is unable to fulfill contractual obligations
                on
                its behalf.  Management monitors the financial condition of such brokers
                and does not anticipate any losses from these counterparties.
 
 **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 SFAS
                No. 115, *Accounting
                for Certain Investments in Debt and Equity Securities* .
                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.
 
 71
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  *Trading
                Securities.* The
                Company’s investment in marketable securities that are bought and held
                principally for the purpose of selling them in the near-term are
                classified as
                trading securities. Trading securities are recorded at fair value
                on the balance
                sheet in current assets, with the change in fair value during the
                period
                included in earnings in the statement of operations.
 
 *Available-for-Sale
                Investments.* Investments
                designated as available-for-sale include both marketable equity and
                debt
                (including redeemable preferred stock) securities. Investments that
                are
                designated as available-for-sale are reported at fair value, with
                unrealized
                gains and losses recorded in stockholders’ equity. Realized gains and losses on
                the sale or exchange of equity securities and declines in value judged
                to be
                other than temporary are recorded in realized gains (losses) on investments,
                net.
 
 **Investments
                - Equity Method**
 
 The
                Company complies with APB 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 Board of Directors of the Company (the “Board of
                Directors”) 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 as determined in good faith by the Board of Directors.
                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 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.
 
 72
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  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
                year ended December 31, 2005, included in realized gains on investments,
                net, is
                a $50,000 impairment charge from the Company’s investment in China Nurse, LLC.
                No impairment charges were recognized during the years ended December
                31, 2004
                and 2003.
  **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
                without regard
                to unrealized gains (losses) reported in the prior periods. 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 Statement of Financial Accounting Standards (“SFAS”) No. 107,
“Disclosures About Fair Value of Financial Instruments,” approximate the
                carrying amounts presented in the accompanying Consolidated Balance
                Sheets.
 
 **Goodwill
                and Patents**
 
 The
                Company complies with SFAS No. 142, *“Goodwill
                and Other Intangible Assets”* ,
                which
                provides accounting and reporting standards for acquired intangible
                assets.
                Under SFAS No. 142, goodwill and other intangible assets with
                indefinite useful lives are no longer amortized but tested for impairment
                at
                least annually. The Company performs an impairment test on goodwill
                at least
                annually, unless events and circumstances indicate that goodwill
                might be
                impaired. Patents are amortized using the straight-line method over
                its
                remaining legal life, approximately 14 years.
 
 **Off-balance
                Sheet Risks**
 
 The
                Company is subject to certain inherent risks arising from its investing
                activities of selling securities short.  The ultimate cost to the Company
                to acquire these securities may exceed the liability reflected in
                these
                consolidated financial statements. Additionally, in August 2005, the
                Company entered into an agreement with a financial institution to
                borrow against
                securities. 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. To the extent the agreement
                was
                terminated early, the Company 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, the Company
                pledge a total
                of 25% of the value of the securities in cash. The pledged cash is
                reduced daily
                by the amount of the earned premium and protects 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 the Company to fund additional monies, such that
                25% of the
                initial borrowing, as adjusted by the earned premium, was covered.
                If the
                Company failed to fund additional monies the financial institution
                had the right
                to liquidate the pledged securities. In the event the proceeds from
                liquidation
                are insufficient to cover the amount of the borrowings, the financial
                institution’s sole recourse was against the pledged cash. At December 31, 2005,
                the Company had terminated its agreement with the financial institution.
                During
                January 2006, the Company entered into a new agreement with the financial
                institution to borrow against securities (see Subsequent Events,
                Note 20).
 
 73
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  **Revenue
                Recognition**
  The
                Company complies with SEC Staff Accounting Bulletin (SAB) 101, Revenue
                Recognition, amended by SAB 104. Consulting service contract revenue
                (approximately $562,000 in 2005) and management fee revenue (approximately
                $180,000 in 2003) are 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.
 
 **Stock-Based
                Compensation** ******
 
 Prior
                to
                January 1, 2005, the Company accounted for stock-based compensation in
                accordance with APB Opinion No. 25, *Accounting
                for Stock Issued to Employees* ,
                and
                related interpretations, as permitted by SFAS No. 123, *Accounting
                for Stock-Based Compensation* .
                In
                December 2004, SFAS No. 123(R), “ *Share-Based
                Payment* ,”
which
                addresses the accounting for employee stock options, was issued.
                SFAS 123(R)
                revises the disclosure provisions of SFAS 123 and supercedes APB
                Opinion No. 25.
                SFAS 123(R) requires that the cost of all employee stock options,
                as well as
                other equity-based compensation arrangements, be reflected in the
                financial
                statements over the vesting period based on the estimated fair value
                of the
                awards. This statement is effective for the Company as of the beginning
                of the
                first interim or annual reporting period that begins after January
                1, 2006. The
                Company elected to adopt SFAS 123(R) 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 year ended
                December 31, 2005, the Company had stock-based compensation expense,
                from
                issuances to the Company’s employee and directors, included in reported net
                loss, of $3,116,674. This included restricted stock grants valued
                at $1,519,849
                and stock options valued at $1,596,825. All
                options that the Company granted in 2005 and 2004 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,****2005**
                      
                      **2004**Weighted
                          average risk free interest rate
                      
                      3.75
                      %
                      
                      3.00
                      %Weighted
                          average life (in years)
                      
                      3.0
                      
                      
                      0.1Volatility
                      
                      83
                      %
                      
                      102
                      %Expected
                          dividend yield
                      
                      0
                      %
                      
                      0
                      %Weighted
                          average grant-date fair value per share of options granted
                      $
                      5.03
                      
                      $
                      0.50
 
 
 74
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  **Property
                and Equipment**
 
 Property
                and equipment are stated at cost and are depreciated on the straight-line
                method
                over the estimated useful lives of the assets as follows:
 
 **Estimated****Useful
                          Lives**Furniture
                          and fixtures
                      5-7
                          YearsComputer
                          software and equipment
                      3-5
                          Years
 
 Maintenance
                and repairs are charged to operations, while betterments and improvements
                are
                capitalized.
  **Impairment
                of Long-Lived Assets**
  The
                Company complies with SFAS No. 144, *“Accounting
                for the Impairment or Disposal of Long-Lived Assets,”* which
                requires impairment losses to be recorded on long-lived assets used
                in
                operations when indicators of impairment are present and undiscounted
                cash flows
                estimated to be generated by those assets are less than the assets’ carrying
                amount. The Company continually evaluates whether events and circumstances
                have
                occurred that indicates the remaining estimated useful life of long-lives
                assets, such as property and equipment may warrant revision, or the
                remaining
                balance may not be recoverable.
  **Income
                Taxes**
 
 The
                Company accounts for income taxes in accordance with the provisions
                of SFAS No.
                109, " *Accounting
                for Income Taxes* ".
                The
                significant components of deferred tax assets and liabilities are
                principally
                related to the Company's net operating loss carryforward and its
                unrealized
                appreciation of investments.
 
 Deferred
                income taxes are provided in amounts sufficient to give effect to
                temporary
                differences between financial and tax reporting, principally related
                to net
                operating loss carryforwards. Valuation allowances are provided to
                the extent
                realization of recorded tax assets is not considered likely.
 
 **Loss
                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 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 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.
 
 Options
                and warrants outstanding as of December 31, 2005 to purchase 1,044,044
                and
                1,278,562 shares of common stock, respectively, and 246,375 shares
                issuable upon
                conversion of outstanding convertible preferred stock were not included
                in the
                computation of diluted net loss per common share for the years ended
                December
                31, 2005, as their inclusion would have been anti-dilutive.
 
 Options
                and warrants outstanding as of December 31, 2004 to purchase 5,625
                and 758,841
                shares of common stock, respectively, and 246,375 shares issuable
                upon
                conversion of outstanding convertible preferred stock were not included
                in the
                computation of diluted net loss per common share for the year ended
                December 31,
                2004, as their inclusion would have been anti-dilutive.
 
 75
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  Options
                outstanding as of December 31, 2003 to purchase 61,875 shares of
                common stock
                and 246,375 shares issuable upon conversion of outstanding convertible
                preferred
                stock were not included in the computation of diluted net loss per
                common share
                for the year ended December 31, 2003, as their inclusion would have
                been
                anti-dilutive.
 
 **Convertible
                Preferred Stock**
 
 The
                Company complies with the reporting and disclosure requirements of
                SFAS No. 129, *“Disclosure
                Information about Capital Structure”* ,
                for its
                convertible preferred stock.
 
 **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, 2005 and 2004 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”*** **)** .
 
 **Recent
                Accounting Pronouncements**
 
 In
                May
                2005, the FASB issued SFAS No. 154, *“Accounting
                Changes and Error Corrections, a replacement of APB Opinion No. 20
                and FASB
                Statement No. 3”* .
                Previously, APB No. 20, *“Accounting
                Changes”* and SFAS
                No. 3, *“Reporting
                Accounting Changes in Interim Financial Statements”* required the
                inclusion of the cumulative effect of changes in accounting principle
                in net
                income of the period of the change. SFAS No. 154 requires companies
                to recognize
                a change in accounting principle, including a change required by
                a new
                accounting pronouncement when the pronouncement does not include
                specific
                transition provisions, retrospectively to prior periods’ financial statements.
                The Company will assess the impact of a retrospective application
                of a change in
                accounting principle
 
 In
                March 2005, the FASB issued FIN No. 47, *“Accounting
                for Conditional Asset Retirement Obligations.”* FIN
                No. 47 clarifies the conditions under which an entity would have sufficient
                information to apply an expected value technique to, and recognize
                a liability
                for, a conditional asset retirement obligation. This interpretation
                was
                effective for the Company at December 31, 2005. The Company’s adoption of
                FIN No. 47 did not have a material impact on the Company’s consolidated
                financial statements.
 
 In
                November 2004, the FASB issued SFAS No. 151, *“Inventory
                Costs - an amendment of ARB No. 43 Chapter 4.”* SFAS
                No. 151 more clearly defines when excessive idle facility expense, freight,
                handling costs, and spoilage are to be current-period charges. In
                addition, SFAS
                No. 151 requires the allocation of fixed production overhead to the cost
                of
                conversion to be based on the normal capacity of the production facilities.
                SFAS
                No. 151 is effective for inventory costs incurred during fiscal years
                beginning after June 15, 2005. The Company expects that SFAS No. 151
                will not have a material impact on the Company’s 2006 consolidated financial
                statements.
 
 76
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  In
                December 2004, the FASB issued SFAS No. 153, *“Exchanges
                of Nonmonetary Assets - an amendment of APB Opinion
                No. 29.”* SFAS
                No. 153 amends APB No. 29 to require that assets exchanged in a
                nonmonetary transaction are to be measured at fair value except for
                those
                exchanges of nonmonetary assets that lack commercial substance. SFAS
                No. 153 is effective for nonmonetary asset exchanges occurring in fiscal
                years beginning after June 15, 2005. The Company expects that SFAS
                No. 153 will not have a material impact on the Company’s consolidated
                financial statements.
 
 **3.
                MARKETABLE SECURITIES**
 
 Marketable
                securities at December 31, 2005 and 2004 are comprised of the
                following:
 
 **December
                          31,**
                      
                      **December
                          31,****2005**
                      
                      **2004**U.S.
                          Treasuries
                      $
                      —
                      
                      $
                      2,016,406IPEX,
                          Inc.
                      
                      113,050Tuxis
                          Corporation
                      
                      746,580Other
                      
                      64,170
                      
                      
                      1,471,313$
                      923,800
                      
                      $
                      3,487,719
 
 *IPEX,
                Inc.*
 
 At
                December 31, 2005, the Company held 1,045,000 shares of common stock
                and
                warrants to purchase 225,000 shares of common stock at $1.50 per
                share and
                warrants to purchase 225,000 shares of common stock at $2.00 per
                share of IPEX,
                formerly Administration for International Credit & Investments, Inc. 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
                directly from the majority shareholder of IPEX, former President,
                former Chief
                Executive Officer and former director of IPEX and, until such time
                as the sale
                of the securities is either registered with the SEC or the securities
                are
                eligible to be sold without restriction pursuant to Rule 144(k) promulgated
                pursuant to the Securities Exchange Act of 1934, the Company is restricted
                from
                publicly selling these securities except in accordance with Rule
                144. The
                remaining 95,000 shares of common stock are valued at $113,050 and
                included in
                marketable securities. IPEX's common stock is traded on the OTC Bulletin
                Board,
                which reported a closing price, at December 31, 2005, of $2.38. The
                Company has
                valued its holdings in IPEX at a 50% discount to the $2.38 closing
                price, or
                $1.19 per share, due to the limited average number of shares traded
                on the OTC
                Bulletin Board as well as other trading restrictions on the Company’s
                unregistered holdings in IPEX. The warrants are exercisable for a
                period of five
                years and are callable by IPEX in certain instances. IPEX operates
                an electronic
                market for collecting, detecting, converting, enhancing and routing
                telecommunication traffic and digital content. Members of the exchange
                anonymously exchange information based on route quality and price
                through a
                centralized, web accessible database and then route traffic. IPEX’s
                fully-automatic, highly scalable Voice over Internet Protocol routing
                platform
                updates routes based on availability, quality and price and executes
                the
                capacity request of the orders using proprietary software and delivers
                them
                through IPEX’s system. IPEX invoices and processes payments for its members’
transactions and offsets credit risk through its credit management
                programs with
                third parties.
 
 *Tuxis
                Corporation*
 
 At
                December 31, 2005, the Company held 108,200 shares of common stock
                of Tuxis. The
                108,200 shares of common stock are valued at $746,580. Tuxis’ common stock is
                traded on the American Stock Exchange, which reported a closing price
                of $7.50
                at December 31, 2005. The Company has valued its holdings in Tuxis
                at an 8%
                discount to the $7.50 closing price, or $6.90 per share, due to the
                limited
                average number of shares traded on the American Stock Exchange.
 
 77
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  **4.
                RESTRICTED CERTIFICATE OF DEPOSIT**
 
 At
                December 31, 2005, 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 new corporate offices that it began occupying,
                subsequent to year end, with Ault Glazer & Company Investment Management LLC
                ( ***"Ault
                Glazer"*** ),
                a
                related party. The Company is in the process of finalizing a sublease
                agreement
                with Ault Glazer. 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 17)
 
 **5.
                PROPERTY AND EQUIPMENT**
 
 Property
                and equipment at December 31, 2005 and 2004 are comprised of the
                following:
 
 **December
                          31,**
                      
                      **December
                          31,****2005**
                      
                      **2004**Land
                      $
                      509,051
                      
                      $
                      —Construction-in-progress
                      
                      598,836Computer
                          software and equipment
                      
                      199,323
                      
                      
                      4,314Furniture
                          and equipment
                      
                      36,665Other
                      
                      20,206
                      
                      
                      20,206Property
                          and equipment, gross
                      
                      1,364,081
                      
                      
                      24,519Less:
                          accumulated depreciation
                      
                      (15,806)
                      
                      
                      (863)Property
                          and equipment, net
                      $
                      1,348,275
                      
                      $
                      23,657
 
 Depreciation
                expense for the years ended December 31, 2005, 2004 and 2003 was
                $14,943, $863
                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. Of
                the
                approximate $1,000,000 budgeted for construction of this site, $598,836
                was
                expended as of December 31, 2005 all of which is in
                construction-in-progress.
  **6.
                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.
 
 78
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  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.
 
 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 amortization of patents and goodwill are not deductible
                for tax
                purposes.
 
 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**
                      **2003**Revenue
                      
                      562,374
                      
                      
                      
                      —
                      
                      
                      180,000Net
                          loss
                      $
                      (6,013,000
                      )
                      
                      $
                      (2,786,000
                      )
                      $
                      (1,518,000
                      )Basic
                          and diluted net loss per common share
                      $
                      (1.12
                      )
                      
                      $
                      (0.84
                      )
                      $
                      (0.49
                      )
 
 
 79
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  *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. Its first
                location, in
                Birmingham, Alabama opened in March 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 in 2006 (See Note 20), the Company determined
                that it
                became the primary beneficiary of ASG, a VIE as determined by FIN
                46R.
 
 Upon
                initial measurement, components of the purchase price are 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
 
 **7.
                GOODWILL AND PATENTS**
 
 The
                Company’s goodwill relates primarily to the Financial Services and
                Real Estate and Medical Products reporting segment. The changes in the
                amount of goodwill for the year ended December 31, 2005, is as follows:
 
 **Goodwill**Balance
                          as of January 1, 2005
                      
                      $
                      —Goodwill
                          for purchase of ASG
                      
                      
                      614,028Goodwill
                          for purchase of Surgicount Medical
                      
                      
                      1,687,527Balance
                          as of December 31, 2005
                      
                      $
                      2,301,555
 
 Identifiable
                intangible assets, net, as of December 31, 2005 are composed of patents:
 
 Patents
                      
                      $
                      4,684,576Accumulated amortization
                      
                      
                      (270,785
                      )$
                      4,413,791
 
 
 80
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  The patents
                are subject to amortization over their estimated useful life of 14.4
                years. The following table presents estimated amortization expense
                for each of
                the succeeding five calendar years and thereafter.
 
 2006
                      $
                      325,0002007
                      
                      325,0002008
                      
                      325,0002009
                      
                      325,0002010
                      
                      325,000Thereafter
                      
                      2,788,791$
                      4,413,791
 
 **8.
                LONG-TERM INVESTMENTS**
 
 Long-term
                investments at December 31, 2005 and 2004 are comprised of the
                following:
 
 **December
                          31,**
                      
                      **December
                          31,****2005**
                      
                      **2004**Alacra
                          Corporation
                      $
                      1,000,000
                      
                      $
                      1,000,000Digicorp
                      
                      3,025,398
                      
                      
                      532,435IPEX,
                          Inc.
                      
                      1,130,500Real
                          Estate
                      
                      481,033
                      
                      
                      738,518China
                          Nurse
                      
                      
                      
                      
                      50,000$
                      5,636,931
                      
                      $
                      2,320,953
 
 *Alacra
                Corporation*
 
 At
                December 31, 2005, 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 have the Series F convertible preferred stock redeemed
                by
                Alacra for face value plus accrued dividends on December 31, 2006.
                Alacra, 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 mission-critical
                business
                information. Alacra's customers include more than 750 financial institutions,
                management consulting, law and accounting firms and other corporations
                throughout the world.
 
 *Digicorp*
 
 At
                December 31, 2005, the Company held 2,750,361 shares, or approximately
                7.5%, of
                the common stock of Digicorp. 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%. The 2,750,361 shares of common stock are valued
                at
                $3,025,398. Digicorp's common stock is traded on the OTC Bulletin
                Board, which
                reported a closing price, at December 31, 2005, of $1.90. The Company
                has valued
                its holdings in Digicorp at an approximate 42% discount to the $1.90
                closing
                price, or $1.10 per share, due to the limited average number of shares
                traded on
                the OTC Bulletin Board.
 
 81
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  *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.
 
 *Investments
                in Real Estate*
 
 At
                December 31, 2005, the Company had several real estate investments,
                recorded at
                its cost of $481,033. 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, 0.61 acres of undeveloped land in Springfield,
                Tennessee, and various loans secured by real estate in Heber Springs,
                Arkansas.
                AGB Properties is in the process of liquidating its real estate holdings.
 
 **9.
                NOTES PAYABLE**
 
 The
                Company initially purchased Excelsior on August 28, 2001. 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% but in accordance with the agreement has a right
                of offset
                against certain representations and warranties made by Winstar and
                we believe
                the amount of the offsets exceed the amount of the note payable.
                However, since
                Winstar does not agree with this belief, the only offsets against
                the principal
                balance of the note reflected in the accompanying consolidated financial
                statements relate to legal fees attributed to our defense of the
                lawsuits filed
                against us. The due date of the note is extended until the lawsuit
                discussed in
                Note 17 is settled. At December 31, 2005, the Company had incurred
                a total of
                approximately $203,446 in legal expenses, of which $95,976 was incurred
                during
                the year ended December 31, 2005. These amounts have been offset
                against the
                amount due.
 
 On
                April
                7, 2005, the Company issued a $1,000,000 principal amount promissory
                note (the ***"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 Note and interest at the rate of 6% per annum
                is payable
                on May 31, 2006. The obligations under the Note are collateralized
                by all real
                property owned by the Company. During the year ended December 31,
                2005, the
                Company had incurred interest expense of $44,055 on the Note, all
                of which is
                accrued at December 31, 2005.
 
 As
                of
                December 31, 2005, Ault Glazer Bodnar Acquisition Fund, LLC ( ***"AGB
                Acquisition Fund*** ")
                had
                loaned an aggregate of approximately $1,117,000 to ASG. The loans
                were advanced
                to ASG pursuant to the terms of a Real Estate Note dated July 27,
                2005, as
                amended (the ***"ASG
                Note"*** ).
                The
                ASG Note bears interest at the rate of 3% above the Prime Rate as
                published in
                the Wall Street Journal (7.25% at December 31, 2005). All unpaid
                principal,
                interest and charges under the ASG Note are due in full on July 31,
                2010. The
                ASG 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 year ended December 31, 2005, the Company
                had
                capitalized interest of $28,240 on the ASG Note, all of which is
                accrued at
                December 31, 2005.
 
 
 82
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  **10.
                ACCRUED LIABILITIES**
 
 Accrued
                liabilities at December 31, 2005 and 2004 are comprised of the
                following:
 
 **December
                          31,**
                      
                      **December
                          31,****2005**
                      
                      **2004**Accrued
                          purchase price on investment
                      $
                      —
                      
                      $
                      165,240Accrued
                          officer's severance
                      
                      22,716
                      
                      
                      160,142Accrued
                          interest
                      
                      215,093
                      
                      
                      112,432Accrued
                          professional fees
                      
                      160,000
                      
                      
                      10,000Deferred
                          revenue
                      
                      103,875Accrued
                          salaries
                      
                      45,833Other
                      
                      21,599
                      
                      
                      91,029$
                      569,116
                      
                      $
                      538,843
 
 **11.
                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.
 
 On
                November 3, 2004, the Company entered into a Subscription Agreement
                with several
                accredited investors (the "Investors"), relating to the issuance
                and sale by the
                Company of shares of its common stock (the "Shares") and five-year
                warrants (the
                "Warrants") to purchase additional shares of its common stock (the
                "Warrant
                Shares") in one or more closings of a private placement (the "Private
                Placement"). Pursuant to the Subscription Agreement, the Company
                may issue and
                sell to Investors an aggregate of up to 1,875,000 Shares at a price per
                Share of $2.67. Each Investor that purchases Shares pursuant to the
                Subscription
                Agreement will also receive a Warrant to purchase that number of
                Warrant Shares
                equal to 50% of the number of Shares purchased by that investor at
                an exercise
                price per Warrant Share equal to 110% of the closing price of the
                Company's
                common stock on the date of the issuance and sale of the Shares to
                such
                Investor. Each Warrant further specifies that the Company may require
                the holder
                thereof to exercise the Warrant in accordance with its terms in the
                event that
                the average closing price of the Company's common stock during any
                period of
                five consecutive trading days exceeds 200% of the Warrant's exercise
                price per
                share. Pursuant to the Subscription Agreement, the Company has agreed
                to
                register for resale all of the Shares and Warrant Shares issuable
                upon exercise
                of the Warrants issued and sold to Investors in connection with the
                Private
                Placement. Securities issued under the terms of the Subscription
                Agreement were
                made in reliance upon the exemption provided in Section 4(2) of the
                Securities
                Act of 1933 (the “Securities Act”) and the safe harbor provisions of Rule 506
                under Regulation D promulgated under the Securities Act, as
                amended.
 
 83
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  During
                the period November 3, 2004, through December 21, 2004, the Company
                held a
                series of four closings of the Private Placement. In conjunction
                with the
                closings the Company issued and sold to the Investors an aggregate
                of 1,517,700
                Shares and Warrants to purchase an aggregate of up to 758,851 Warrant
                Shares
                pursuant to the terms of the Subscription Agreement. These issuances
                resulted in
                aggregate net proceeds to the Company of $3,924,786. The
                Company filed
                a
                registration statement with the SEC on May 3, 2005, registering the
                resale of
                the shares of its common stock (including the shares of common stock
                issuable
                upon exercise of the warrants) on a continuous or delayed basis under
                the
                Securities Act.
 
 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) if Health West helps the
                Company
                develop a regional distribution network to integrate the Safety-SpongeTM System
                into the existing acute care supply chain, then we will issue Health
                West the
                remaining 15,756 shares. 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 12. In the event of the death of Bill
                Adams, who is
                Health West's Chief Executive Officer, the agreement will automatically
                terminate. The Company may terminate the agreement at any time upon
                delivery to
                Health West of notice of a good faith determination by the Company's
                Board of
                Directors that the agreement should be terminated for cause or as
                a result of
                disability of Mr. Adams. Health West may voluntarily terminate the
                agreement
                only after expiration of the initial two-year term upon providing
                30 days prior
                written notice to the Company.
 
 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.
 
 84
 
 **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.
 
 **12.
                WARRANTS**
 
 On
                November 3, 2004, the Company entered into a Subscription Agreement
                with several
                accredited investors (the ***"Investors"*** ),
                relating to the issuance and sale by the Company of shares of its
                common stock
                (the ***"Shares"*** )
                and
                five-year warrants (the ***"Warrants"*** )
                to
                purchase additional shares of its common stock (the ***"Warrant
                Shares"*** )
                in one
                or more closings of a private placement (the ***"Private
                Placement"*** ).
 
 During
                the period November 3, 2004 through December 21, 2004, the Company
                held a series
                of four closings of the Private Placement. In conjunction with the
                closings the
                Company issued and sold to the Investors an aggregate of 1,517,700
                Shares and
                Warrants to purchase an aggregate of up to 758,841 Warrant Shares
                pursuant to
                the terms of the Subscription Agreement. On April 22, 2005, the Company
                entered
                into a Subscription Agreement with an Investor whereby the Company
                sold an
                additional 20,000 Shares and Warrants to purchase an additional 20,000
                Warrant
                Shares. At December 31, 2005, the Warrants, including those granted
                on April 22,
                2005, weighted average exercise price was $3.91 with a remaining
                contractual
                life of 3.9 years.
 
 In
                March
                2005, the Company issued 177,000 warrants (including 150,000 capitalized
                as part
                of the acquisition of SurgiCount) to purchase shares of common stock
                at $5.27
                per share to various consultants. The warrants are immediately exercisable
                and
                have a five-year life. The warrants were valued at $633,163 and,
                depending on
                the nature of the consulting services received by the Company, were
                either
                capitalized or expensed.
 
 In
                April
                2005, the Company entered into a consulting agreement with Health
                West Marketing
                Incorporated and as incentive for entering into the agreement, the
                Company
                agreed to issue Health West a callable warrant to purchase 150,000
                (post 3:1
                forward stock split) shares of the Company's common stock at an exercise
                price
                of $5.95, exercisable for 5 years. In addition, the Company agreed
                to issue a
                callable warrant to purchase 25,000 (post 3:1 forward stock split)
                shares of the
                Company's common stock at an exercise price of $5.95, exercisable
                upon meeting
                specified milestones. The warrants were valued at $615,951 of which
                $527,958 was
                expensed during the period and the remaining amount will be expensed
                when and if
                the milestones are met.
 
 In
                April
                2005, the Company issued 100,000 warrants to purchase shares of common
                stock at
                $5.85 per share to a consultant. The warrants vest over a 12 month
                period and
                have a five-year life. The warrants were valued at $397,340 of which
                $264,893
                has been expensed.
 
 In
                September 2005, the Company issued 12,500 warrants to purchase shares
                of common
                stock at $3.55 per share to a consultant. The warrants vest over
                a 12 month
                period and have a three-year life. The warrants were valued at $24,600
                of which
                $17,402 has been expensed.
 
 In
                October 2005, the Company issued 25,000 warrants to purchase shares
                of common
                stock at $3.26 per share to a consultant. The warrants vest over
                a 12 month
                period and have a three-year life. The warrants were valued at $45,180
                of which
                $11,295 has been expensed.
 
 Warrants
                granted during the year ended December 31, 2005, were valued using
                the
                Black-Scholes valuation model assuming expected dividend yield, risk-free
                interest rate, expected life and volatility of 0%, 3.75%, three to
                five years
                and 83%, respectively. As of December 31, 2005, all warrants issued
                to the
                consultants remain outstanding.
 
 85
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  **13.
                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. During the year ended December 31, 2005, the Company repurchased
                10,611 shares of common stock for $36,931. During the year ended
                December 31, 2004 the Company did not repurchase any shares of common stock
                and during the year ended December 31 2003, the Company repurchased
                88,500
                shares of common stock for $25,661. 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.
 
 **14.
                STOCK OPTION PLANS**
 
 On
                September 9, 1997, the Company’s stockholders approved two Stock Option Plans: a
                Stock Incentive Plan ( ***“SIP”*** )
                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 ( ***“SOP”*** )
                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, 2005,
                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. As of December 31, 2005, the Company has granted a
                total 469,558
                shares of restricted stock of which 279,254 are vested. Of the total
                amount of
                restricted stock granted, 438,046 shares were granted from our 2005
                SOP, of
                which 263,498 are vested. For the year ended December 31, 2005, the
                Company
                recorded compensation expense of $1,978,078 related to these shares
                of
                restricted stock.
 
 
 86
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  The
                following is a summary of the activity of the Stock Option Plans:
  **Outstanding
                          Options****Shares**
                        **Available
                          for**
                        **Grant**
                      
                      
                      **Number
                          of**
                        **Shares**
                      
                      
                      **Per
                          Share**
                        **Option
                          Price**
                      
                      
                      **Weighted**
                        **Average**
                        **Exercise**
                        **Price****December
                          31, 2002**
                      
                      
                      **78,750**
                      
                      
                      **61,875**
                      
                      **$**
                      **3.22
                          - 4.67**
                      
                      **$**
                      **3.80****December
                          31, 2003**
                      
                      
                      **78,750**
                      
                      
                      **61,875**
                      
                      **$**
                      **3.22
                          - 4.67**
                      
                      **$**
                      **3.80**Grants
                      
                      
                      (78,750
                      )
                      
                      78,750
                      
                      $
                      0.50
                      
                      $
                      0.50Exercises
                      
                      
                      
                      
                      
                      (78,750
                      )
                      $
                      0.50
                      
                      $
                      0.50Cancellations
                      
                      
                      56,250
                      
                      
                      (56,250
                      )
                      $
                      3.22
                          - 3.83
                      
                      $
                      3.71**December
                          31, 2004**
                      
                      
                      **56,250**
                      
                      
                      **5,625**
                      
                      **$**
                      **4.67**
                      ****
                      **$**
                      **4.67**Adoption
                          of Amended 2005 SOP
                      
                      
                      2,500,000Exercises
                      
                      
                      
                      
                      
                      (5,625
                      )
                      $
                      4.67
                      
                      $
                      4.67Restricted
                          Stock Awards
                      
                      
                      (438,046
                      )Grants
                      
                      
                      (1,044,000
                      )
                      
                      1,044,000
                      
                      $
                      3.75
                          - 5.27
                      
                      $
                      5.02**December
                          31, 2005**
                      
                      
                      **1,074,204**
                      
                      
                      **1,044,000**
                      
                      **$**
                      **3.75
                          - 5.27**
                      ****
                      **$**
                      **5.02**
 
 Options
                          exercisable at:December
                          31, 2003
                      
                      
                      
                      
                      
                      61,875
                      
                      $
                      3.22
                          - 4.67
                      
                      $
                      3.80December
                          31, 2004
                      
                      
                      
                      
                      
                      5,625
                      
                      $
                      4.67
                      
                      $
                      4.67December
                          31, 2005
                      
                      
                      
                      
                      
                      220,125
                      
                      $
                      5.27
                      
                      $
                      5.27
 
 The
                outstanding options, all of which are issued under the 2005 SOP,
                have a
                remaining contractual life of approximately 9.39 years.
 
 **15.
                RELATED PARTY TRANSACTIONS**
 
 During
                the three months ended December 31, 2004 the Company’s corporate offices were
                initially provided at no cost by Ault Glazer & Company Investment Management
                LLC ( ***"Ault
                Glazer"*** ).
                During
                the year ended December 31, 2005, the Company paid approximately
                75% of the base
                rent on the corporate offices and Ault Glazer, based upon their usage
                of the
                facilities, paid the remaining base rent. Ault Glazer is a private
                investment
                management firm that manages an estimated $20 million in individual
                client
                accounts and private investment funds. Ault Glazer has been given
                discretionary
                authority to buy, sell, and vote securities on behalf of each of
                those client
                accounts and funds. Together, Milton “Todd” Ault III (“Ault”), the Chairman and
                Chief Executive Officer of the Company at December 31, 2005, and
                Louis Glazer,
                Chief Health and Science Officer and Class I Director of the Company,
                and
                Melanie Glazer, Manager of AGB Propeties, (together, the “Glazers”) own
                approximately 69% of the outstanding membership interests in Ault
                Glazer. As of
                December 31, 2005, Ault Glazer, Ault and the Glazers indirectly beneficially
                own
                or control approximately 25% of the outstanding common stock of the
                Company and
                beneficially own approximately 98.2% of the outstanding preferred
                stock of the
                Company.
 
 At
                December 31, 2005 and 2004, the Company had an amount due from Strome
                Securities
                of  $8,636 and $65,735, 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.
 
 87
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  The
                Company entered into a services agreement with Excelsior, which terminated
                at
                December 31, 2003, whereby the Company provided Excelsior with certain
                services.
                The Company received a management fee of not less than $15,000 per
                month as
                determined by Excelsior's board of directors. Additionally, the Company’s chief
                financial officer served in that capacity for Excelsior and his salary
                and
                benefits were allocated between Excelsior and the Company on an 80/20
                basis.
                During the years ended December 31, 2005, 2004, and 2003, the Company
                earned $0,
                $0 and $180,000, respectively, in management fees and was reimbursed
                $0, $0 and
                $144,000, respectively, for salary and benefits for the Company's
                chief
                financial officer, which was recorded as a reduction of expenses
                by the
                Company.
 
 *AGB
                Properties*
 
 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 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 valued
                at approximately $85,619.
 
 *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 Wolfgang Grabher,
                the majority
                shareholder of IPEX, former President, former Chief Executive Officer
                and former
                director of IPEX, to serve as a business consultant to IPEX. At June
                30, 2005,
                Mr. Grabher owned 18,855,900 shares of IPEX's 28,195,566 outstanding
                shares of
                common stock and granted Mr. Ault, the Company’s Chairman and Chief Executive
                Officer at that time, an irrevocable voting proxy for his shares.
                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 has
                provided
                and/or will provide if reasonably necessary within the next 12 months,
                the
                following services to IPEX: (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 from time to time; and (c) assisting IPEX in installing
                a new
                management team.
 
 The
                Company has performed a significant amount 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. The Company initially valued the amount of
                the consulting
                services at $1,331,250, 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, we have 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 now expects to ultimately
                recognize $656,250 in revenue as a result of this agreement, of which
                approximately $552,375 has been recognized and approximately $103,875
                has been
                deferred. Management expects that it will recognize the deferred
                revenue during
                the six months ended June 30, 2006.
  The
                Company's former Chairman and Chief Executive
                Officer and significant beneficial owner of the Company, Milton "Todd"
                Ault III,
                is currently 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.
 
 
 88
 
 **Patient
                Safety Technologies, Inc. and Subsidiaries**
 **Notes
                to Consolidated Financial Statements (continued)**
  *Digicorp*
 
 At
                December 31, 2005, the Company had an investment in Digicorp recorded
                in
                long-term investments. The Company’s Chief Financial Officer, William B. Horne,
                is also Chief Financial Officer of Digicorp and a director of the
                Company. Alice
                M. Campbell is also a director of Digicorp. Further, certain Company
                officers
                and directors, both past and present, served in various management
                and director
                roles at Digicorp.
 
 *Loans*
 
 Both
                during and subsequent to the year ended December 31, 2005, the Company
                received
                loans from AGB Acquisition Fund. Ault Glazer Bodnar & Company Investment
                Management, LLC ( ***“AGB
                & Company IM”*** )
                is the
                managing member of AGB Acquisition Fund. The managing member of AGB
&
Company IM is Ault Glazer Bodnar & Company, Inc. ( ***“AGB
                & Company”*** ).
                The
                Company’s former Chairman and Chief Executive Officer, Milton “Todd” Ault, III,
                is Chairman, Chief Executive Officer and President of AGB & Company. The
                Company’s Chief Financial Officer, William B. Horne, is also Chief Financial
                Officer of AGB & Company. Melanie Glazer, Manager of the Company’s
                subsidiary AGB Properties is also a director of AGB & Company.
  *Due
                from Related Paties*
  At
                December 31, 2005, the Company had an amount due
                from related parties of approximately $85,000 recorded in other current
                assets.
                This amount relates to an allocation of expenses from the Company
                to the related
                parties.
 
 **16.
              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, 2005 and 2004 are as
              follows:
  **2005**
                    
                    **2004**Deferred
                        tax assets:Federal
                        net operating loss carryforward
                    
                    $
                    4,000,000
                    
                    $
                    2,910,000State
                        net operating loss carryforward
                    
                    
                    279,000
                    
                    
                    171,000Stock
                        based compensation
                    
                    
                    1,077,000Other
                    
                    
                    26,000
                    
                    
                    18,000Total
                        deferred tax asset
                    
                    
                    5,382,000
                    
                    
                    3,099,000Deferred
                        tax liability:Book
                        and tax bases difference arising from purchased patents
                    
                    
                    (1,590,045
                    )Total
                        net deferred tax asset
                    
                    
                    3,791,955
                    
                    
                    3,099,000Less
                        valuation allowance
                    
                    
                    (5,382,000
                    )
                    
                    (3,099,000
                    )Net
                        deferred tax liability
                    
                    $
                    (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,
              2005, the Company has provided a valuation allowance in the amount
              of
              $5,382,000, an increase of $2,283,000. 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 $11,765,000 and $8,559,000
              at
              December 31, 2005 and 2004, 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.
 
 89
 
 **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Consolidated Financial Statements (continued)**
  For
              the
              years ended December 31, 2005, 2004 and 2003, a reconciliation of the
              federal statutory tax rate to the Company's effective tax rate is as
              follows:
  **2005**
                    
                    **2004**
                    
                    **2003**Federal
                        statutory tax rate
                    
                    (34.00)
                    %
                    (34.00)
                    %
                    (34.00)
                    %State
                        and local income taxes, net of federal tax Benefit
                    
                    0.01
                    
                    (2.00)
                    
                    (1.97)Non
                        deductible items
                    
                    1.76
                    
                    (0.25)
                    
                    0.48Valuation
                        allowance
                    
                    30.61
                    
                    36.25
                    
                    35.49Total
                        effective tax rate
                    
                    (1.62
                    )%
                    —
                    %
                    —
                    %
 
 **17.
              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. The lease terms of this sublease agreement
              are
              reflected in the lease commitment schedule. Future minimum annual rent
              payments
              under these leases are as follows:
 
 **December
                        31,****2006**
                    
                    **2007**
                    
                    **2008**
                    
                    **2009**
                    
                    **2010**
                    
                    **Thereafter**
                    
                    **Total**$
                    131,258
                    
                    $
                    138,776
                    
                    $
                    102,698
                    
                    $
                    105,779
                    
                    $
                    108,952
                    
                    $
                    18,159
                    
                    $
                    605,622
 
 Rent
              expense during the years ended December 31, 2005, 2004 and 2003 was
              $88,368,
              $76,276 and $71,942, 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.
 
 90
 
 **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Consolidated Financial Statements (continued)**
  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 financial statements
              do
              not include any adjustments for the possible outcome of this
              uncertainty.
 
 *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, 2005, approximate future annual base
              compensation under these agreements are as follows:
 
 **Years
                        ended December 31,****2006**
                    
                    **2007**
                    
                    **2008**
                    
                    **2009**
                    
                    **2010**
                    
                    **Total**$
                    600,000
                    
                    $
                    483,333
                    
                    $
                    275,000
                    
                    $
                    150,000
                    
                    $
                    150,000
                    
                    $
                    1,658,333
  *Clinical
                Trial Research Grant*
 
 In
                April
                2005, the Company entered into a Clinical Trial Agreement with Brigham
                and
                Women’s Hospital ( ***“BWH”*** ),
                an
                affiliate of Harvard Medical School, for BWH to conduct a clinical
                study of the
                Company’s Safety-Sponge TM System.
                Under terms of the agreement, BWH will collect data on how the
                Safety-Sponge TM System
                saves time, reduces costs and increases patient safety in the operating
                room.
                The study will also continue 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. BWH received a non-exclusive license to use
                the
                Safety-Sponge TM System,
                while the Company retains the right to all technical innovations
                and other
                intellectual properties derived from the study. Subject to termination,
                as
                provided for in the agreement, the Company has committed to fund
                a research
                grant in the aggregate amount of approximately $431,000 payable at
                defined
                stages of the study. At December 31, 2005 approximately $108,000
                was expensed
                and recorded in the consolidated financial statements under this
                agreement. The
                clinical trials are expected to be completed around September 2006 .
  **18.
              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, a provider of patient safety
              devices,
              health care solutions, which consists of Patient Safety Consulting
              Group, LLC,
              and financial services and real estate, which consists of AGB
              Properties, AGB Merchant Capital and ASG. 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”.
 
 
 91
 
 **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Consolidated Financial Statements (continued)**
  Segment
              information for the years ended December 31, 2005, 2004 and 2003 is
              as follows:
 
 **2005**
                    
                    **2004**
                    
                    **2003****Medical
                        Products**Revenue
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
                        loss
                    $
                    (2,387,519
                    )
                    
                    
                    —
                    
                    
                    
                    —Total
                        Assets
                    $
                    6,391,607
                    
                    
                    
                    —
                    
                    
                    
                    —**Health
                        Care Solutions**Revenue
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Net
                        loss
                    $
                    (396,912
                    )
                    
                    
                    —
                    
                    
                    
                    —Total
                        Assets
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —**Financial
                        Services and Real Estate**Revenue
                    $
                    562,374
                    
                    
                    
                    —
                    
                    
                    
                    —Net
                        income (loss)
                    $
                    1,681,261
                    
                    
                    $
                    536,454
                    
                    
                    $
                    (44,722
                    )Total
                        Assets
                    $
                    9,222,448
                    
                    
                    $
                    5,808,672
                    
                    
                    $
                    2,955,169**Corporate**Revenue
                    
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    180,000Net
                        loss
                    $
                    (4,804,353
                    )
                    
                    $
                    (2,945,211
                    )
                    
                    $
                    (1,096,367
                    )Total
                        Assets
                    $
                    419,810
                    
                    
                    $
                    1,125,571
                    
                    
                    $
                    302,863**Total**Revenue
                    $
                    562,374
                    
                    
                    
                    —
                    
                    
                    $
                    180,000Net
                        loss
                    $
                    (5,907,523
                    )
                    
                    $
                    (2,408,757
                    )
                    
                    $
                    (1,141,089
                    )Total
                        Assets
                    $
                    16,033,865
                    
                    
                    $
                    6,934,243
                    
                    
                    $
                    3,258,032
 
 **19.
              SELECTED QUARTERLY RESULTS (UNAUDITED)**
 
 **March 31**
                    
                    
                    **June 30**
                    
                    
                    **September 30**
                    
                    
                    **December 31****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
                    
                    $
                    (2,121,673
                    )
                    
                    $
                    (1,568,643
                    )
                    
                    $
                    (2,098,739
                    )
                    
                    $
                    (2,142,064
                    )Net
                        loss
                    
                    $
                    (1,784,212
                    )
                    
                    $
                    (1,770,433
                    )
                    
                    $
                    (2,155,314
                    )
                    
                    $
                    (197,564
                    )Basic
                        and diluted net loss per common share
                    
                    $
                    (0.37
                    )
                    
                    $
                    (0.33
                    )
                    
                    $
                    (0.39
                    )
                    
                    $
                    (0.04
                    )**2004
                        Quarter Ended**Total
                        assets
                    
                    $
                    3,156,465
                    
                    
                    $
                    3,092,669
                    
                    
                    $
                    2,748,527
                    
                    
                    $
                    6,934,243Revenues
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    —Operating
                        loss
                    
                    $
                    (292,848
                    )
                    
                    $
                    (393,789
                    )
                    
                    $
                    (1,287,315
                    )
                    
                    $
                    (950,031
                    )Net
                        income (loss)
                    
                    $
                    (140,446
                    )
                    
                    $
                    29,644
                    
                    
                    $
                    (1,315,172
                    )
                    
                    $
                    (982,783
                    )Basic
                        and diluted net income (loss) per common share
                    
                    $
                    (0.05
                    )
                    
                    $
                    0.00
                    
                    
                    $
                    (0.42
                    )
                    
                    $
                    (0.25
                    )
 
 **20.
              SUBSEQUENT EVENTS**
 
 On
              January 12, 2006, Steven J. Caspi (“Caspi”) loaned $1,000,000 to Automotive
              Services Group, LLC (“ASG”), an Alabama limited liability company which is 50%
              owned by the Company’s wholly owned subsidiary AGB Merchant Capital. 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, the Company entered into an agreement guaranteeing
              ASG’s obligations pursuant to the Caspi Note and 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 allocated approximately $92,000 as the
              estimated
              value of the warrants. The Caspi Note accrues interest at the rate
              of 10% per
              annum, which together with principal, is due to be repaid on July 13,
              2006.
 
 92
 
 **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Consolidated Financial Statements (continued)**
  From
              January 11, 2006 through March 6, 2006 AGB Acquisition Fund, a related
              party,
              loaned the Company a total $442,750, of which $340,750 was repaid on
              February 8,
              2006. As consideration for the outstanding balance of $102,000, the
              Company
              issued AGB Acquisition Fund secured promissory notes in the principal
              amount of
              $102,000 (the “Notes”), and entered into a security agreement granting AGB
              Acquisition 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 Notes. The Notes accrue interest at the rate
              of 7% per
              annum, which together with principal are due to be repaid sixty days
              from the
              dates the notes were issued and will begin to expire on April 24, 2006.
              At the
              option of the Company, payments of principal and interest may be paid
              by
              exchange of any securities owned by the Company valued on the day before
              the
              maturity date of the Note.
 
 During
              the three months ended March 31, 2005, the Company borrowed against
              255,000
              shares of Digicorp common stock and 95,000 shares of IPEX common stock
              and has
              therefore pledged these shares to a financial institution as discussed
              in Note
              2.
 
 On
              February 8, 2006, AGB Acquisition Fund loaned $686,945 to ASG. As consideration
              for the loan, ASG issued AGB Acquisition Fund a secured promissory
              note in the
              principal amount of $686,945 (the “Note”) and granted a real estate mortgage in
              favor of AGB Acquisition Fund relating to certain real property located
              in
              Jefferson County, Alabama (the “Property”). The Note bears interest at the rate
              of 10% per annum and is due on April 10, 2006, or within 30 days thereafter.
              AGB
              Acquisition 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 allocated approximately
              $44,000 as the estimated value of the warrants. As security for the
              performance
              of ASG’s obligations pursuant to the Note, ASG granted AGB Acquisition Fund
              a
              security interest in all personal property and fixtures located at
              the
              Property.
 
 On
              March
              7, 2006 the Company entered into a Revolving Line of Credit Agreement
              (the
“Revolving Line of Credit”) with AGB Acquisition Fund. The Revolving Line of
              Credit allows the Company to request advances of up to $500,000 from
              AGB
              Acquisition 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 AGB Acquisition Fund at a price of $3.10 per share.
              The
              obligations of the Company pursuant to such secured promissory notes
              will be
              secured by the Company’s assets, personal property and fixtures, inventory,
              products and proceeds therefrom.
 
 On
              March
              15, 2006 the Company, AGB Merchant Capital, Automotive Services Group,
              LLC
              (“ASG”) and Darell W. Grimsley, Jr. entered into a Unit Purchase Agreement
              (the
“Agreement”) for AGB Merchant Capital to purchase a 50% equity interest (the
“Membership Interest”) in ASG from Mr. Grimsley. After completing the
              transaction, AGB Merchant Capital now owns 100% of the outstanding
              equity
              interests in ASG. 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. As consideration
              for the Membership Interest, the Company issued Mr. Grimsley 200,000
              shares of
              the Company’s common stock. The Company plans to change the name of AGB Merchant
              Capital to Automotive Services Group, Inc. to reflect the subsidiaries
              primary
              holding, Automotive Services Group, LLC ( ***“ASG”*** ).
 
 
 93
 **Patient
              Safety Technologies, Inc. and Subsidiaries**
 **Notes
              to Consolidated Financial Statements (continued)**
  On
              February 3, 2006, Winstar Global Media, Inc. ( ***“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 9.
              The Company
              believes the lawsuit is without merit and intends to vigorously defend
              itself.


94


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





On
      July 6, 2004, Ernst & Young, LLP ( ***“E&Y”*** )
      indicated to the Company that, due to economic reasons, E&Y would not stand
      for re-election as the Company’s independent accountants for the year ended
      December 31, 2004 and that the client auditor relationship between the
      Company and E&Y will cease upon the filing of the Company’s quarterly report
      on Form 10-Q for the quarterly period ended June 30, 2004, which Form
      10-Q was filed August 16, 2004. As such, there was a change in accountants.
      However, the decision to change accountants was not presented to, recommended
      or
      approved by the Audit Committee or the Board. During the Company’s fiscal years
      ended December 31, 2002 and 2003, and through August 16, 2004, there were
      no disagreements with E&Y on any matter of accounting principles or
      practices, financial statement disclosure, or auditing scope or procedure,
      which
      disagreements, if not resolved to the satisfaction of E&Y, would have caused
      E&Y to make reference to the subject matter of the disagreements in
      connection with its reports on the Company’s financial statements. During the
      Company’s fiscal years ended December 31, 2002 and 2003, and through August 16,
      2004, there were no “reportable events” as set forth in Item 304(a)(1)(v) of
      Regulation S-K.





As
      a
      result of the resignation of E&Y, the Company, upon the approval and
      recommendation of the Audit Committee (which consisted solely of directors
      who
      are not “interested persons” of the Company), engaged Rothstein, Kass &
Company, P.C. ( ***“Rothstein
      Kass”*** )
      on
      October 28, 2004 to succeed E&Y as the Company’s independent accountants.
      Prior to this engagement, Rothstein Kass had not performed any services on
      behalf of the Company or been consulted in respect of the Company during the
      Company’s two most recent fiscal years or any subsequent interim period until
      October 28, 2004. Rothstein Kass has advised the Company that neither the firm
      nor any present member or associate of it has any material financial interest,
      direct or indirect, in the Company or its subsidiaries.





**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 and Executive Officers of the Registrant.**





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 five. The holders of the Series A Preferred
        Stock, voting separately as one class, shall have the right to elect two
        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.





95


The
      current directors of the company are as follows: Brigadier General (Ret.) Lytle
      Brown III (Class I Director (Served since 2004) - nominated for re-election
      to
      the Board for a three-year term expiring in 2007); Alice Campbell (Class II
      Director (Served since 2004) - term expiring in 2005); Herbert Langsam (Class
      II
      Director - (Served since 2004) - term expiring in 2005); Arnold Spangler (Class
      III Director (Served since January 7, 2006) - term expiring in 2006); and Louis
      Glazer, M.D., Ph.G (Class III Director (Served since 2004) - term expiring
      in
      2006).





All
      of
      the Company’s directors are independent with the exception of Louis Glazer,
      M.D., Ph.G.





**Common
      Stock Directors**





***Arnold
      Spangler,*** age 57,
      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 resignation of
      Milton “Todd” Ault, III effective January 9, 2006. From 1993 through 2005 Mr.
      Spangler was Managing Director of Macuso & 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.





***Alice
      M. Campbell*** (1),
      (2) ,
      age 56,
      has served as a Class II Director of the Company since October 22, 2004. Ms.
      Campbell also currently serves as an investigator and consultant, specializing
      in research and litigation services, financial investigations and computer
      forensics, for major companies and law firms throughout the United States.
      Ms.
      Campbell is a certified fraud specialist, as well as a certified instructor
      for
      the Regional Training Center of the United States Internal Revenue Service
      (the ***“IRS”*** )
      and for
      the National Business Institute. Previously, Ms. Campbell served as a special
      agent for the United States Treasury Department where she conducted criminal
      investigations and worked closely with the United States Attorney’s Office and
      with several federal agencies, including the IRS, Federal Bureau of
      Investigation, Secret Service, Customs Service, State Department, Drug
      Enforcement Agency, Bureau of Alcohol, Tobacco and Firearms and U.S. Postal
      Service. Ms. Campbell currently serves as a director of Digicorp (OTCBB: DGCO).
      Ms. Campbell served as a director of IPEX, Inc. (OTCBB: IPEX) and Chairman
      of
      its Audit Committee from June 23, 2005 until January 30, 2006. Ms. Campbell
      received her B.A. from the University of North Carolina, Chapel Hill and has
      attended various specialized schools dealing with financial matters.





***Brigadier
      General (Ret.) Lytle Brown III*** (1),
      (2) ,
      age 73,
      has served as a Class I Director of the Company since October 22, 2004. Mr.
      Brown also currently serves as a senior tax professional with H&R Block
      Inc., in Nashville, Tennessee. In addition, Mr. Brown owns and manages Marmatic
      Enterprises, a private company in Nashville, Tennessee that manages and invests
      in residential real estate principally in Tennessee and Florida. Mr. Brown
      is a
      former partner and executive vice president of Hart Freeland Roberts, Inc.,
      one
      of the largest architectural engineering firms in Tennessee. Mr. Brown
      previously served as the head of the United States Army Corps of Engineers
      from
      1984 to 1988, during which time he acted as commander of all engineering in
      Tennessee, as well as engineering units in Louisiana and Mississippi. Mr. Brown
      received his B.S. in engineering from Vanderbilt University and his J.D. from
      the Nashville School of Law.





**Series
        A Preferred Stock Directors**





***Louis
      Glazer, M.D., Ph.G.*** ,
      age 74,
      is the Company’s Chairman and Chief Executive Officer, is Chief Health and
      Science Officer of the Company’s wholly owned subsidiary Patient Safety
      Consulting Group, LLC (f/k/a Franklin Medical Products, LLC) and 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.





96


***Herbert
      Langsam*** (1),
      (2) ,
      age 74,
      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





**Executive
      Officers**





The
      executive officers of the Company as of March 26, 2006 are as follows:




***Name
                and Age***
            ***Title***
            ***Served
                as an***
              ***Officer
                Since***Louis
                Glazer, M.D., Ph.G.******(74)
            Chief
                Executive Officer and Chief Health and Science Officer of Patient
                Safety
                Consulting Group, LLC (f/k/a Franklin Medical Products, LLC)
            2005William
                B. Horne (37)
            Chief
                Financial Officer and Principal Accounting Officer
            2005Lynne
                Silverstein (35)
            President
                and Secretary
            2004Richard
                Bertran (44)
            President
                of Surgicount Medical, Inc.
            2005James
                Schafer (59)
            Chief
                Operating Officer 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
      President and Secretary of the Company, is the step-daughter of Louis Glazer.
      Louis Glazer is the Company’s Chairman and Chief Executive Officer, a Class III
      Director of the Company and Chief Health and Science Officer of the Company’s
      wholly owned subsidiary Patient Safety Consulting Group, LLC (f/k/a Franklin
      Medical Products, LLC). In addition, Louis Glazer and Melanie Glazer are husband
      and wife. Melanie Glazer is the Manager of our wholly owned subsidiary Ault
      Glazer Bodnar Capital Properties, LLC (f/k/a Franklin Capital Properties,
      LLC).





**Executive
      Officers**





***Louis
      Glazer, M.D., Ph.G.*** ,
      age 74,
      Chief Executive Officer and Chief Health and Science Officer of Patient Safety
      Consulting Group, LLC. For additional information about Dr. Glazer, please
      see
      the Directors’ biographical information section above.





***William
      B. Horne,*** **** age
      37,
      Chief Financial Officer and Principal Accounting Officer. Since July 5, 2005,
      Mr. Horne has been the Chief Financial Officer and a director of Ault Glazer
      Bodnar & Company, Inc., which is the managing member of AGB & Company
      IM. Mr. Horne has been Chief Financial Officer of Digicorp (OTCBB: DGCO) and
      a
      director of Digicorp since July 20, 2005. 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.





***Lynne
      Silverstein*** ,
      age 35,
      President and Secretary. Ms. Silverstein has been Chief Executive Officer of
      Ault Glazer Bodnar & Company, Inc. since October 2003. 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.





97


***Richard
      Bertran,*** ** age
      44,
      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.





***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**





***Melanie
      Glazer*** ,
      age 64,
      Manager of Ault Glazer Bodnar Capital Properties, LLC. Mrs. Glazer co-founded
      Ault Glazer Bodnar & Company, Inc. in 1998 and serves as a Banking/Special
      Situations Analyst. Mrs. Glazer began her career in banking in 1976 as Officer
      of United American Bank, responsible for business development, government
      relations and public relations. From 1978 to 1985 she was Vice President of
      Investors Savings & Loan Association in Nashville, Tennessee, where she
      managed a branch office and was responsible for business development,
      advertising for all offices, public relations, and was in charge of the savings
      incentive program. Mrs. Glazer joined Dobson & Johnson, Inc. in 1986, where
      she was a Real Estate Broker. In 1989, Mrs. Glazer established her own realty
      company, Morris Glazer Realty, which she ran successfully until 2003. Ms. Glazer
      received her B.A. in History in 1964 from George Peabody College, part of
      Vanderbilt University.





***Darrell
      W. Grimsley, Jr.,*** age 39,
      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 three persons,
      including Messrs. Herbert Langsam and Lytle Brown III and Ms. Alice Campbell,
      each of whom are considered independent under the rules promulgated by AMEX
      and
      under Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and
      each
      of whom is financially literate as required by the rules of AMEX. Ms. Campbell
      serves as Chairman of the Audit Committee. The Board has determined that Ms.
      Campbell is an “audit committee financial expert” as defined under Item 401 of
      Regulation S-K, and “financially sophisticated” as defined by the rules of AMEX.





**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, 2005:





98






Name
                and Relationship
            Number
              of
                late reports
            Transactions
                not
              timely
                reported
            Known
                failures to
              file
                a required formLouis
                Glazer, M.D., Ph.G., Officer and Director
            2
            3
            0William
                B. Horne, Officer
            2
            1
            0Lynne
                Silverstein, Officer
            2
            3
            0Alice
                Campbell, Director
            4
            6
            0Herbert
                Langsam, Director
            5
            8
            0Lytle
                Brown, III, Director
            4
            7
            0Milton
                “Todd” Ault, III, Former Officer andFormer
                Director
            5
            7
            0Philip
                Gatch, Former Officer
            3
            2
            0





**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, 2005 who earned compensation exceeding $100,000 during 2005
      (the ***“named
      executive officers”*** ),
      for
      services as executive officers for the last three fiscal years.





**SUMMARY
      COMPENSATION TABLE**




**Name
                and**
              **Principal
                Position**
            **Year**
            
            **Long-Term**
              **Compensation****Annual
                Compensation**
            **Awards**
            **Payouts****Salary
                ($)**
            **Bonus
                ($)**
            **Other**
              **Annual**
              **Compen-**
              **sation
                ($) (3)**
            **Restricted
                Stock Award(s) ($)**
            **Securities
                Underlying Options/ SARs (#)**
            **LTIP**
              **Payouts
                ($)**
            **All**
              **Other**
              **Compen-**
              **sation
                ($)**Louis
                Glazer, M.D., Ph.G.,
            2005
            120,000
            750
            2,582
            92,640
                (4)
            90,000
            ---
            ---Chief
                Executive Officer
            2004
            ---
            ---
            ---
            ---
            ---
            ---
            ---(1)
            2003
            ---
            ---
            ---
            ---
            ---
            ---
            ---Milton
                “Todd” Ault III,
            2005
            150,000
            750
            748
            92,640
                (5)
            90,000
            ---
            ---Former
                Chief Executive
            2004
            ---
            ---
            ---
            ---
            ---
            ---
            $500
                (2)Officer
            2003
            ---
            ---
            ---
            ---
            ---
            ---
            ---Lynne
                Silverstein,
            2005
            120,000
            ---
            591
            46,320
                (6)
            45,000
            ---
            ---President
                and Secretary
            2004
            ---
            ---
            ---
            ---
            ---
            ---
            ---2003
            ---
            ---
            ---
            ---
            ---
            ---
            ---William
                B. Horne,
            2005
            75,000
            750
            368
            94,333
                (7)
            78,000
            ---
            ---Chief
                Financial Officer
            2004
            ---
            ---
            ---
            ---
            ---
            ---
            ---2003
            ---
            ---
            ---
            ---
            ---
            ---
            ---Richard
                Bertran,
            2005
            92,500
            750
            433
            36,000
                (8)
            200,000
            ---
            ---President
                of
            2004
            ---
            ---
            ---
            ---
            ---
            ---
            ---Surgicount
                Medical, Inc.
            2003
            ---
            ---
            ---
            ---
            ---
            ---
            ---James
                Schafer,
            2005
            39,807
            750
            361
            50,000
                (9)
            125,000
            ---
            ---Chief
                Operating Officer
            2004
            ---
            ---
            ---
            ---
            ---
            ---
            ---of
                Surgicount Medical,
            2003
            ---
            ---
            ---
            ---
            ---
            ---
            ---Inc.




99





(1)
            Dr.
                Glazer was appointed Chief Executive Officer on January 7,
                2006.


(2)
            Amount
                represents compensation for attendance at a meeting of the Board
                of
                Directors.


(3)
            Amount
                represents long term disability premiums and Life Insurance premiums
                paid
                by the Company.


(4)
            Amount
                represents 24,000 shares issued for services and valued at $3.86
                per
                share.


(5)
            Amount
                represents 24,000 shares issued for services and valued at $3.86
                per
                share.


(6)
            Amount
                represents 12,000 shares issued for services and valued at $3.86
                per
                share.


(7)
            Amount
                represents 26,284 shares issued for services and valued at $3.59
                per
                share.


(8)
            Amount
                represents 10,000 shares issued for services and valued at $3.60
                per
                share.


(9)
            Amount
                represents 15,244 shares issued for services and valued at $3.28
                per
                share.





**OPTIONS
      GRANT TABLE**





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, 2005. The Company did not have any outstanding stock appreciation
      rights ( ***“SARs”*** )
      as of
      December 31, 2005.





**Option/SAR
                Grants in Last Fiscal Year****Individual
                Grants**
            **Potential
                Realizable Value at Assumed Annual Rates of Stock Price Appreciation
                for
                Option Term**
            **Alternative
                to (f) and (g): Grant Date Value****(a)**
              **Name**
            **(b)**
              **Number
                of Securities Underlying Options/ SARs Granted
                (#)**
            **(c)**
              **%
                of Total Options/ SARs Granted to Employees in Fiscal
                Year**
            **(d)**
              **Exercise
                or Base Price ($/Sh)**
            **(e)**
              **Expiration
                Date**
            **(f)**
              **5%
                ($)**
            **(g)**
              **10%
                ($)**
            **(h)**
              **Grant
                Date**
              **Present**
              **Value**
              **($)
                (1)**Louis
                Glazer, M.C., Ph.G.
            90,000
            100%
            $5.267
            3/30/2015
            ---
            ---
            $262,768Milton
                “Todd” Ault, III
            90,000
            100%
            $5.267
            3/30/2015
            ---
            ---
            $262,768Lynne
                Silverstein
            45,000
            100%
            $5.267
            3/30/2015
            ---
            ---
            $131,384William
                B. Horne
            78,000
            100%
            $5.267
            3/30/2015
            ---
            ---
            $227,732Richard
                Bertran
            200,000
            100%
            $5.000
            7/18/2015
            ---
            ---
            $343,195James
                Schafer
            125,000
            100%
            $5.000
            8/08/2015
            ---
            ---
            $186,324





(1)
            The
                value shown was calculated utilizing the Black-Scholes option pricing
                model and are presented solely for the purpose of comparative disclosure
                in accordance with certain regulations of the Securities and Exchange
                Commission. This model is a mathematical formula used to value traded
                stock price volatility. The actual value that an executive officer
                may
                realize, if any, is dependent on the amount by which the stock price
                at
                the time of exercise exceeds the exercise price. There is no assurance
                that the value realized by an executive officer will be at or near
                the
                value estimated by the Black-Scholes model. In calculating the grant
                date
                present values, the Company used the following assumptions: (a) expected
                volatility of approximately 155%; (b) risk-free rate of return of
                approximately 3.75%; (c) no dividends payable during the relevant
                period;
                and (d) exercise at the end of a 3 year period from the date of
                grant.





100


**Aggregate
      Option Exercises and Fiscal Year-End Option Values**





The
      following table sets forth information with respect to the named executive
      officers concerning the year-end value of in-the-money options and the value
      of
      unexercised options as of December 31, 2005. No options were exercised by the
      named executive officers during the fiscal year ended December 31,
      2005.





**Name**
              **(a)**
            **Shares
                acquired**
              **on
                exercise (#)**
              **(b)**
            **Value
                realized ($)**
              **(c)**
            **Number
                of**
              **securities**
              **underlying
                unexercised options/SARs**
              **at
                FY-end (#)**
              **Exercisable/**
              **Unexercisable**
              **(d)**
            **Value
                of**
              **unexercised**
              **in-the-money
                options/SARs**
              **at
                FY-end ($) Exercisable/**
              **Unexercisable**
              **(e)**Louis
                Glazer, M.D., Ph.G.
            ---
            ---
            36,000
                / 54,000
            ---
                / ---Milton
                “Todd” Ault, III
            ---
            ---
            36,000
                / 54,000
            ---
                / ---Lynne
                Silverstein
            ---
            ---
            18,000
                / 27,000
            ---
                / ---William
                B. Horne
            ---
            ---
            19,500
                / 58,500
            ---
                / ---Richard
                Bertran
            ---
            ---
            ---
                / 200,000
            ---
                / ---James
                Schafer
            ---
            ---
            ---
                / 125,000
            ---
                / ---





**Compensation
      of Directors**





As
      of
      December 31, 2005, 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.





**Compensation
      Committee Interlocks and Insider Participation**





The
      Compensation Committee members currently are Messrs. Herbert Langsam and Lytle
      Brown III and Ms. Alice Campbell, each of whom is independent under the rules
      promulgated by AMEX. 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.





101


**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. 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 is $150,000 per year. Upon entering into the agreement, Mr. Horne
      was
      granted 26,316 shares of restricted stock which vest quarterly during each
      year
      of the agreement. The number of shares to be issued to Mr. Horne for the first
      year of the agreement will be reduced by the value of any unvested restricted
      stock that he would be entitled to under his prior consulting agreement with
      the
      Company, which is described below. 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.





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 Marketing Incorporated, a consultant to the Company. 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.





102


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.





**Consulting
      Agreements**





On
      December 10, 2004, the Company entered into a consulting agreement with
      William B. Horne for financial and accounting related consulting services.
      The
      consulting agreement terminated upon effectiveness of Mr. Horne’s employment
      agreement described above. The term of the agreement was on a month-to-month
      basis. Pursuant to the terms of the consulting agreement, Mr. Horne was
      entitled to receive a monthly consulting fee of approximately $4,200, which
      the
      Board could increase at its discretion from time to time. Mr. Horne also was
      eligible to be awarded stock options under the consulting agreement as
      determined by the Board.





**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). 337,500 shares (post 3:1
      forward split effective April 5, 2005) of the Company’s common stock have been
      reserved for issuance under these plans, of which 202,500 shares have been
      reserved for the Stock Incentive Plan and 135,000 shares have been reserved
      for
      the Stock Option Plan.





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.





103


On
      December 31, 2005, there were 174,548 shares of common stock and 1,044,000
      options to purchase shares of common stock outstanding under the Amended and
      Restated Stock Option and Restricted Stock Plan, with 1,017,954 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 each of Stock Incentive Plan, the Stock Option
      Plan and the Amended and Restated Stock Option and Restricted Stock Plan.





***Stock
      Incentive Plan***





*Purpose*





The
      purpose of the Stock Incentive Plan is to give the Company and its affiliates
      a
      competitive advantage in attracting, retaining and motivating officers,
      employees and consultants of the Company and to provide the Company with a
      stock
      plan that provides incentives linked to the financial results of the Company
      and
      increase in stockholder value.





*Type
      of Awards*





The
      Stock
      Incentive Plan permits, at the discretion of the Compensation Committee, the
      grant of options to purchase common stock (including incentive stock options
      within the meaning of Section 422 of the Internal Revenue Code ( ***“ISOs”*** )
      or
“non-statutory stock options” ( ***“non-ISOs”*** ),
      SARs,
      restricted stock and tax offset bonuses. SARs entitle an optionee to an amount
      equal to the excess of the fair market value of one share of common stock over
      the per share exercise price multiplied by the number of shares in respect
      of
      which the SAR is exercised. SARs may only be granted in conjunction with all
      or
      part of an option grant.





Restricted
      stock may be awarded to any participant, for no cash consideration and may
      be
      subject to such conditions, including vesting, forfeiture and restrictions
      on
      transfer, as the Compensation Committee shall determine. Such terms and
      conditions will be specified in an agreement evidencing the award.





Finally,
      the Stock Incentive Plan permits the grant rights to receive a cash payment
      at
      such time or times as an award under the Stock Incentive Plan results in
      compensation income to the participant for the purpose of assisting the
      participant in paying the resulting taxes.





Upon
      exercise of an ISO or non-ISO, the Compensation Committee may elect to cash
      out
      all or any portion of the shares of common stock for which an option is being
      exercised by paying the optionee the excess of the fair market value of a share
      of common stock over the per share exercise price for each such option share
      being cashed out. All options granted under the Stock Incentive Plan become
      automatically exercisable upon a “change of control” and remain exercisable
      until expiration of their respective terms. A “change in control” is defined in
      the Stock Incentive Plan as the acquisition by any person or group (other than
      Stephen L. Brown and his Affiliates) of more than 25% of the voting securities
      of the Company or a sale or other disposition of all or substantially all of
      the
      assets of the Company to any person.





*Administration*





The
      Stock
      Incentive Plan is administered by a committee of the Board of Directors
      (currently the Compensation Committee) composed of not fewer than two outside
      directors each of whom will qualify as a “non-employee director” within the
      meaning of Rule 16b-3 of the 1934 Act and an “outside Director” within the
      meaning of Section 162(m) of the Internal Revenue Code. The Compensation
      Committee has the authority, among other rights, to select the participants
      to
      whom awards may be granted, determine whether to grant ISOs, non-ISOs, SARs
      or
      restricted stock, or any combination thereof and determine the vesting terms
      and
      other conditions of an award to a Stock Incentive Plan participant.





104


*Participants*





Stock
      Incentive Plan participants include the officers, employees (including such
      officers and employees who are also directors) or consultants of the Company
      and
      its affiliates who are responsible for or contribute to the management, growth
      and profitability of the business of the Company and its affiliates. Each grant
      of an award under the Stock Incentive Plan is evidenced by an agreement between
      the participant and the Company, which includes such terms and provisions as
      the
      Compensation Committee may determine from time to time.





*Transition
      of Awards*





Under
      the
      Stock Incentive Plan, generally, upon a participant’s death or when a
      participant’s employment is terminated for any reason, all unvested stock
      options are forfeited. Upon the termination of employment of an optionee other
      than as a result of the optionee’s death, unless otherwise provided in such
      optionee’s option agreement, an optionee’s right to exercise a vested option
      will expire three months after termination of employment. If an optionee’s
      employment is terminated by reason of death, the period of exercise for options
      vested at the optionee’s death is 12 months. Options are not transferable except
      on the death of the optionee, by will or the laws of decent and distribution.
      SARs may be exercised and transferred to the same extent that the options to
      which they relate may be exercised or transferred.





The
      Board
      of Directors may terminate, suspend, amend or revise the Stock Incentive Plan
      at
      any time subject to limitations in the plan. The Board may not, without the
      consent of the optionee, alter or impair rights under any award previously
      granted except in order to comply with applicable law.





***Stock
      Option Plan***





*Purpose*





The
      purpose of the Stock Option Plan is to further the interests of the Company,
      its
      stockholders and its employees by providing the “outside” directors of the
      Company ( *i.e.* ,
      those
      who are not also officers and employees of the Company) the opportunity to
      purchase common stock as an appropriate reward for the dedication and loyalty
      of
      the “outside” directors.





*Type
      of Awards*





Only
      non-ISOs can be granted under the Stock Option Plan.





*Administration*





The
      Stock
      Option Plan is administered by the Board of Directors (currently by the
      Compensation Committee). Options granted under the Stock Option Plan are
      intended to comply with the exemption afforded by Rule 16b-3 of the Exchange
      Act. The Board, in its discretion, can impose any vesting or other restrictions
      on options granted under the Stock Option Plan.





*Participants*





Stock
      Option Plan participants are outside directors of the Company.





*Termination
      of Awards*





Under
      the
      Stock Option Plan, options expire 30 days after the date of a participant’s
      appointment with the Company is terminated except if such termination is by
      reason of death or disability. In the event of termination by reason of
      disability, options expire 12 months after such termination. In the event of
      the
      participant’s death while serving as director or within the 30-day period
      following termination of the participant’s appointment, options expire 12 months
      following the date of death.





105


***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.





*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.





106


**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, 2005.





**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)
            1,482,046
            $5.02
            579,908**Equity
                compensation plans not approved by security
                holders**
            -0-
            -0-
            -0-**Total**
            1,482,046
            $5.02
            579,908





(1) Includes
      options to purchase shares of Company common stock under the following
      stockholder approved plans: Stock Incentive Plan approved on September 9, 1997,
      Non-Statutory Stock Option Plan approved on September 9, 1997, and 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 March 26, 2006, 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., 1800
      Century Park East, Ste. 200, Los Angeles, California 90067.


107





**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 & Company Investment Management LLC
              1800
                Century Park East, Ste. 200
              Los
                Angeles, California 90067
            1,430,700
                (3)
            23.6%
            10,750
                (3)
            98.2%Steven
                Bodnar & Bodnar Capital Management LLC
              680
                Old Academy Road
              Fairfield,
                CT 06824
            843,750
                (4)
            13.8%
            ---
            ---Brian
                Stewart
              222
                Seventh Street, No. 105
              Santa
                Monica, California 90402
            300,000
            5.2%
            ---
            ---Dr.
                William Stewart
              222
                Seventh Street, No. 105
              Santa
                Monica, California 90402
            300,000
            5.2%
            ---
            ---**Directors
                and Named Executive Officers****:**Louis
                Glazer, M.D., Ph.G
            238,581
                (5)
            4.0%
            ---
            ---Lynne
                Silverstein
            80,030
                (6)
            1.4%
            ---
            ---William
                B. Horne
            70,034
                (7)
            1.2%
            ---
            ---Richard
                Bertran
            10,000
            *
            ---
            ---James
                Schafer
            25,294
            *
            ---
            ---Arnold
                Spangler
            76,250
                (8)
            1.3%
            ---
            ---Alice
                M. Campbell
            68,654
                (9)
            1.2%
            ---
            ---Brigadier
                General (Ret.) Lytle Brown III
            53,500
                (10)
            *
            ---
            ---Herbert
                Langsam
            96,653
                (11)
            1.7%
            ---
            ---All
                directors and named executive
              officers
                as a group (6 persons)
            718,996
            12.4%
            ---
            ---





*
      Represents less than 1%


(1)
            Applicable
                percentage ownership is based on 5,820,401 shares of common stock
                outstanding as of March 26, 2006, together with securities exercisable
                or
                convertible into shares of common stock within 60 days of March 26,
                2006
                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 March 26,
                2006
                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.




108




(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 Bodnar & Company Investment Management LLC (***“AGB
                & Company IM”***)
                is a registered Investment Adviser. The securities beneficially owned
                by
                AGB & Company IM represents securities held by certain private
                investment funds and individual accounts managed by AGB & Company IM.
                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 AGB & Company IM
                is Ault Glazer Bodnar & Company, Inc. (***“AGB
                & Company Inc”***).
                Milton “Todd” Ault, III, William B. Horne and Melanie Glazer may be deemed
                to beneficially own the securities held by AGB & Company IM due to
                their relationships with AGB & Company Inc: the Company’s former
                Chairman and Chief Executive Officer, Milton “Todd” Ault, III, is
                Chairman, Chief Executive Officer and President of AGB & Company Inc;
                the Company’s Chief Financial Officer, William B. Horne, is Chief
                Financial Officer of AGB & Company Inc; and Melanie Glazer, Manager of
                the Company’s subsidiary Ault Glazer Bodnar Capital Properties, LLC, is a
                director of AGB & Company Inc.


(4)
            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.


(5)
            Consists
                of: (a) 66,600 shares of common stock owned directly by Dr. Glazer;
                (b)
                74,481 shares of common stock owned indirectly by virtue of ownership
                interests in various private investment funds and entities; (c) 7,500
                shares of common stock issuable upon exercise of stock options with
                an
                exercise price of $4.30 per share that expire on January 1, 2016;
                and (d)
                90,000 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.


(6)
            Consists
                of: (a) 35,030 shares of common stock; and (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.


(7)
            Consists
                of: (a) 31,034 shares of common stock; and (b) 39,000 shares of common
                stock issuable upon exercise of stock options with an exercise price
                of
                $5.27 per shares that expire March 30,
                2015.


(8)
            Consists
                of: (a) 42,500 shares of common stock; and (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
                to
                purchase 18,750 shares of common
                stock.


(9)
            Consists
                of: (a) 30,854 shares of common stock that Ms. Campbell owns directly;
                (b)
                3,300 shares that Ms. Campbell beneficially owns indirectly by
                virtue of her minority ownership interest in Zealous Partners, L.L.C.,
                a
                private investment fund managed by AGB & Company IM; (c) 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 (d)
                19,500
                options with an exercise price of $5.27 per share that expire on
                March 30,
                2015.


(10)
            Consists
                of: (a) 19,000 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) 19,500 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.


(11)
            Consists
                of: (a) 62,153 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) 19,500 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.





**Item
      13. Certain Relationships and Related Transactions.**





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.





109


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





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, directors, owners and/or
      managers of AGB & Company IM and its parent company AGB & Company Inc.
      Accordingly, certain conflicts of interest between the Company and AGB &
Company IM and AGB & Company Inc may occur from time to time. The Company
      will attempt to resolve any such conflicts of interest in its 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 Chief Executive Officer, Milton
“Todd” Ault, III, is Chairman, Chief Executive Officer and President of AGB
& Company Inc, the Company’s Chief Financial Officer, William B. Horne, is
      Chief Financial Officer of AGB & Company Inc, and Melanie Glazer, Manager of
      the Company’s subsidiary Ault Glazer Bodnar Capital Properties, LLC, is a
      director of AGB & Company Inc.





The
      Board
      does not believe that the Company has any conflicts of interest with the
      business of AGB & Company IM or AGB & Company Inc other than the
      responsibilities of Mr. Horne and Mrs. Glazer to devote time providing certain
      management and administrative services to AGB & Company IM and AGB &
Company Inc and AGB & Company IM’s clients from time-to-time. However,
      subject to applicable law, the Company may engage in transactions with AGB
&
Company IM and AGB & Company Inc 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 AGB & Company IM at
      1800 Century Park East, Ste. 200, Los Angeles, California 90067. The Company
      is
      responsible for paying approximately 25% of the lease expense associated with
      such office space, goods and services, which amounts to approximately $8,100
      per
      month.




During
      the fiscal year ended December 31, 2005 Ault Glazer Bodnar Acquisition Fund,
      LLC
      ( ***“AGB
      Acquisition Fund”*** ),
      a
      subsidiary company of AGB & Company Inc, loaned an aggregate of $1,114,748
      to Automotive Services Group, LLC ( ***“ASG”*** ),
      an
      Alabama limited liability company which is wholly owned by the Company’s wholly
      owned subsidiary Ault Glazer Bodnar Merchant Capital, Inc. ( ***“AGB
      Merchant Capital”*** ).
      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 AGB Acquisition Fund. As of
      December 31, 2005 $1,114,748 was outstanding under the Real Estate Note.
      Management believes the loans from AGB Acquisition Fund to ASG are on terms
      at
      least as favorable as could be obtained from an unrelated third
      party.





110


On
      March
      7, 2006 the Company entered into a Revolving Line of Credit Agreement (the ***“Revolving
      Line of Credit”*** )
      with
      AGB Acquisition Fund. The Revolving Line of Credit allows the Company to request
      advances of up to a total amount of $500,000 from AGB Acquisition 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 AGB
      Acquisition Fund at a price of $3.10 per share. The obligations of the Company
      pursuant to such secured promissory notes will be secured by the Company’s
      assets, personal property and fixtures, inventory, products and proceeds
      therefrom.





Since
      Milton “Todd” Ault, III resigned as the Company’s Chairman and Chief Executive
      Officer on January 9, 2006, the Company has been negotiating to document the
      retention of Ault Glazer Bodnar Securities, LLC ( ***“AGB
      Securities”*** )
      as a
      consultant to the Company. AGB Securities is a registered broker-dealer that
      is
      wholly owned by AGB & Company Inc. Mr. Ault, as a principal of AGB
      Securities, 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, the
      Company expects to enter into an agreement in the near future with AGB
      Securities to formally retain AGB Securities as a strategic financial advisor.
      If AGB Securities assists the Company with completing a capital raising
      transaction or other type of strategic acquisition, business combination or
      reorganization transaction, the Company expects to pay AGB Securities a fee
      in
      cash and/or securities of the Company based on the value of any such
      transaction.





**Strome
      Securities, L.P.**





Strome
      Securities, L.P. (“ ***Strome”*** )
      a
      broker dealer registered with the National Association of Securities Dealers,
      Inc. provides the Company with brokerage and execution services. Strome provides
      such services to the Company on market terms which have been approved by the
      Board of Directors. Until December 31, 2004 Milton “Todd” Ault, our former
      Chairman and 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 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. 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
      Automotive Services Group, LLC, a subsidiary which is wholly owned by Ault
      Glazer Bodnar Merchant Capital, Inc., 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 member of our Board of Directors and our audit and compensation
      committees, 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 Financial
      Officer, is currently Chief Financial Officer and 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. 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.





111


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.





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 has performed a
      significant amount 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.





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.





**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 are each beneficial
      owners of 5.2% of the Company’s outstanding shares of common stock as of March
      26, 2006.





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 is paid $40,000 per year and Dr. William
      Stewart is paid $5,000 per month.





112


**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 AGB Merchant Capital purchased
      50% of the outstanding equity interests of Automotive Services Group, LLC,
      an
      Alabama limited liability company ( ***“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 AGB Merchant Capital 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 AGB Merchant Capital 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 AGB Merchant Capital purchased the remaining 50% interest on
      March 15, 2006. AGB Merchant Capital 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.





**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 3
      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.





**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 is payable
      on
      May 31, 2006, the maturity date of the Bodnar Note. The obligations under the
      Bodnar Note are 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 will become immediately due and payable. The following constitute
      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. As
      of
      December 31, 2005 $1,000,000 was outstanding under the Bodnar Note. 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




113


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





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





*Audit
      Fees* *.* The
      aggregate fees billed for professional services rendered by Ernst & Young
      LLP and Rothstein, Kass & Company, P.C 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 $183,650 and $101,550
      for
      the fiscal years ended December 31, 2005 and 2004, respectively. The amounts
      paid or attributable to Ernst & Young LLP were approximately $21,150 and
      $28,600 for the fiscal years ended December 31, 2005 and 2004, respectively,
      and
      the amounts paid or attributable to Rothstein, Kass & Company, P.C were
      approximately $162,500 and $72,950 for the fiscal years ended December 31,
      2005
      and 2004, respectively.





*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 $10,000 and $17,000 for
      the
      fiscal years ended December 31, 2005 and 2004, 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 $25,000 and $10,000 for the
      fiscal years ended December 31, 2005 and 2004, 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, 2005 and 2004.





**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.





114


**PART
      IV**





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





**Financial
      Statements.** The
      following financial statements are set forth under Item 8:





Report
      of
      Rothstein, Kass & Company, P.C


Report
      of
      Ernst & Young LLP


Balance
      Sheets as of December 31, 2005 and 2004


Statements
      of Operations for the years ended December 31, 2005, 2004 and 2003


Statements
      of Cash Flows for the years ended December 31, 2005, 2004 and 2003


Statements
      of Changes in Net Assets for the years ended December 31, 2005, 2004 and
      2003


Financial
      Highlights for the years ended December 31, 2005, 2004, 2003, 2002 and
      2001


Portfolio
      of Investments as of December 31, 2005


Portfolio
      of Investments as of December 31, 2004


Notes
      to
      Financial Statements





**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)




115






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)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 $130,000 issued January 5, 2006 to
                Glazer
                Family Partnership LP (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                January 10, 2006)4.15
            
            Secured
                Promissory Note in the principal amount of $150,000 issued January
                11,
                2006 to Ault Glazer Bodnar Acquisition Fund (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on January 18, 2006)4.16
            
            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)4.17
            
            Secured
                Promissory Note in the principal amount of $85,000 issued January
                19, 2006
                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 January 24, 2006)4.18
            
            Secured
                Promissory Note in the principal amount of $25,000 issued January
                26 2006
                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 1, 2006)4.19
            
            Secured
                Promissory Note in the principal amount of $35,000 issued January
                27, 2006
                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 1, 2006)4.20
            
            Secured
                Promissory Note in the principal amount of $45,750 issued February
                1, 2006
                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)4.21
            
            Secured
                Promissory Note in the principal amount of $65,000 issued February
                2, 2006
                to Ault Glazer Bodnar & Company, Inc. (Incorporated by reference to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 6, 2006)4.22
            
            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)




116




4.23
            
            Secured
                Promissory Note in the principal amount of $12,000 issued February
                23,
                2006 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 March 1, 2006)4.24
            
            Secured
                Promissory Note in the principal amount of $60,000 issued February
                28,
                2006 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 March 1, 2006)4.25
            
            Secured
                Promissory Note in the principal amount of $30,000 issued March 6,
                2006 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 March 8, 2006)4.26
            
            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)10.1
            
            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)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
            
            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)10.9
            
            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)10.10
            
            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)10.11
            
            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)




117




10.12
            
            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)10.13
            
            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)10.14
            
            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)10.15
            
            Supply
                Agreement entered into August 17, 2005 by and 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 August 23, 2005)10.16
            
            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)10.17
            
            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)10.18
            
            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)10.19
            
            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)10.20
            
            Security
                Agreement by and between Glazer Family Partnership LP 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 10, 2006)10.21
            
            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)10.22
            
            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)10.23
            
            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)10.24
            
            Security
                Agreement 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 January 24, 2006)10.25
            
            Security
                Agreement dated January 26, 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 February 1, 2006)10.26
            
            Security
                Agreement dated January 27, 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 February 1, 2006)10.27
            
            Security
                Agreement dated February 1, 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 February 6,
                2006)




118




10.28
            
            Security
                Agreement dated February 2, 2006 by and between Ault Glazer Bodnar
&
                Company, 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 February 6, 2006)10.29
            
            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)10.30
            
            Security
                Agreement dated February 23, 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 1, 2006)10.31
            
            Security
                Agreement dated February 28, 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 1, 2006)10.32
            
            Security
                Agreement dated March 6, 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)


10.33
              
              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 for
                  the fiscal year ended December 31, 2005, filed with the Securities
                  and
                  Exchange Commission on April 17,
                  2006)


14.1
            
            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 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 Company (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)


23.1*
            
            Consent
                of Rothstein, Kass & Company, P.C.23.2*
            
            Consent
                of Ernst & Young LLP31.1*
            
            Certification
                of Chief Executive Officer required by Rule 13a-14(a) or Rule
                15d-14(a)31.2*
            
            Certification
                of Chief Financial Officer required by Rule 13a-14(a) or Rule
                15d-14(a)32.1*
            
            Certification
                of Chief Executive 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
                Code32.2*
            
            Certification
                of Chief Executive 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.


119


**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:
                    June 1, 2007
                By:
                    /s/ William B.
                    HorneWilliam B. HorneChief Executive and Chief Financial Officer andPrincipal 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.Arnold
                  Spangler.
              Chairman
                  of the Board
              June
                  1, 2007/s/
                    William B.
                    Horne
                William
                  B. Horne
              Chief
                  Executive, Chief Financial Officer and Principal Accounting Officer
                  and
                  Director
              June
                  1, 2007/s/
                    David
                    Augustine
                David
                  Augustine
              Director
              June
                  1, 2007_________________________________
                Herbert
                  Langsam
              Director/s/
                    Louis Glazer, M.D.,
                    Ph.G
                Louis
                  Glazer, M.D., Ph.G
              Director
              June
                  1, 2007_________________________________
                Wayne
                  Lin
              Director




120