**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**





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




FOR
      THE
      FISCAL YEAR ENDED DECEMBER 31, 2007




**OR**





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




FOR
      THE
      TRANSITION PERIOD FROM ___________ TO ____________




COMMISSION
      FILE NUMBER: 001-09727





**PATIENT
      SAFETY TECHNOLOGIES, INC.**


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





**Delaware**
            
            **13-3419202****(State
                of Incorporation)**
            
            **(I.R.S.
                Employer Identification Number)****43460
                Ridge Park Drive, Suite 140, Temecula, CA
                92591****(Address
                of principal executive offices) (Zip
                Code)**





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




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





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





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





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





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





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




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




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




Large accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filerx





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




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









**PATIENT
      SAFETY TECHNOLOGIES, INC.**





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


**ENDED
      DECEMBER 31, 2007**





**TABLE
      OF CONTENTS**





**Page****PART
                I**Item
                1.
            
            Business
            
            1Item
                1A.
            
            Risk
                Factors
            
            10Item
                1B.
            
            Unresolved
                Staff Comments
            
            19Item
                2.
            
            Properties
            
            19Item
                3.
            
            Legal
                Proceedings
            
            19Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            20**PART
                II**Item
                5.
            
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            
            20Item
                6.
            
            Selected
                Financial Data
            
            24Item
                7.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            25Item
                7A.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            41Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            42Item
                9.
            
            Changes
                In and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            75Item
                9A.
            
            Controls
                and Procedures
            
            75Item
                9B.
            
            Other
                Information
            
            76**PART
                III**Item
                10.
            
            Directors
                and Executive Officers of the Registrant
            
            76Item
                11.
            
            Executive
                Compensation
            
            79Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            
            90Item
                13.
            
            Certain
                Relationship and Related Transactions
            
            93Item
                14.
            
            Principal
                Accounting Fees and Services
            
            95**PART
                IV**Item
                15.
            
            Exhibits,
                Financial Statement Schedules
            
            95**SIGNATURES**
            
            99









**"SAFE
      HARBOR" STATEMENT UNDER**


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





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





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





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









**PART
      I**




**Item
      1. Business.**





**Organizational
      History**





Patient
      Safety Technologies, Inc. (referred to in this report as the ***“Company,”***  ***“we,”
      “us,”*** and ***“our”*** )
      (formerly known as Franklin Capital Corporation) is a Delaware corporation.
      Currently we conduct out operations through a single wholly-owned operating
      subsidiary: SurgiCount Medical, Inc. ( ***“*** *SurgiCount* ***”*** ),
      a
      California corporation. Beginning in July 2005 through August 2007, the
      Company’s wholly-owned subsidiary, Automotive Services Group, Inc. (formerly
      known as Ault Glazer Bodnar Merchant Capital, Inc.), a Delaware corporation,
      held the Company’s investment in Automotive Services Group, LLC ( *“ASG”* ),
      its
      wholly-owned express car wash subsidiary. During the period from June 29, 2007
      to August 13, 2007, Automotive Services Group sold all the assets held by
      ASG.





The
      Company, including SurgiCount, is engaged in the acquisition of controlling
      interests in companies and research and development of products and services
      focused primarily in the health care and medical products field, particularly
      the patient safety markets. SurgiCount is a developer and manufacturer of
      patient safety products and services. In addition, the Company holds various
      other unrelated investments which it is in the process of liquidating. The
      unrelated investments are recorded on the Company’s balance sheet in “long-term
      investments”.





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





On
      March
      30, 2005, stockholder approval was obtained to withdraw our election to be
      treated as a BDC and on March 31, 2005 we filed an election to withdraw our
      election with the Securities and Exchange Commission. At December 31, 2007,
      8.1%
      of our assets, consisting of our investment in Alacra Corporation, on a
      consolidated basis were comprised of investment securities within the meaning
      of
      the 1940 Act ( *“Investment
      Securities”* ).
      We
      continue to evaluate ways in which we can dispose of these Investment
      Securities.





Our
      operations currently focus on the research and development of products and
      services in the health care and medical products field, particularly the patient
      safety markets, and the acquisition of controlling interests in companies in
      the
      medical products field. In the past we also focused on the financial services
      and real estate industries. On October 2005 our Board of Directors authorized
      us
      to evaluate alternative strategies for the divesture of our non-healthcare
      assets. As an extension on our prior focus on real estate, in March 2006 we
      acquired the remaining 50% equity interest in ASG and upon doing so we entered
      the business of developing properties for the operation of automated express
      car
      wash sites. However, on March 29, 2006, our Board of Directors determined to
      focus our business exclusively on the patient safety medical products field.
      The
      Board of Directors established a special committee in January 2007 to evaluate
      potential divestiture transactions for ASG and our other real estate assets.
      The
      divestiture of ASG was completed on August 13, 2007.




SurgiCount,
      developer of the Safety-SpongeTM System, a wholly-owned operating subsidiary, was
      acquired to enhance our ability to focus our efforts in the health care and
      medical products field, particularly the patient safety markets. Currently,
      we
      are evaluating ways in which to monetize our few remaining non-patient safety
      related assets (the “ *non-core
      assets* ”).




1





**SurgiCount**





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





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





We
      are
      targeting 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.




2





***Customers
      and Distribution***




On
      April
      5, 2005, we entered into a consulting agreement with Health West Marketing
      Incorporated, a California corporation ( ***“Health
      West”*** ),
      pursuant to which Health West agreed to help us establish a comprehensive
      manufacturing and distribution strategy for the Safety-SpongeTM System worldwide.
      The initial term of the agreement was for a period of two years; however, the
      agreement was terminated with the appointment of Bill Adams, Health West’s Chief
      Executive Officer, to the position of Chief Executive Officer of SurgiCount
      effective April 21, 2006. In consideration for Health West's services, we agreed
      to issue Health West 42,017 shares of our common stock. We issued 26,261 shares,
      valued at $156,000, primarily for Health West’s assistance in structuring a
      comprehensive manufacturing agreement with A Plus International Inc.
      ( ***“A
      Plus”*** ),
      which
      was entered into on August 17, 2005. We issued the remaining 15,756 shares,
      valued at $94,000, for Health West’s services in assisting with the development
      of a regional distribution network to integrate the Safety-SpongeTM System into
      the existing acute care supply chain. As an additional incentive, in 2005 we
      granted Health West warrants to purchase a total of 175,000 shares of our common
      stock with an exercise price of $5.95 per share.





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





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





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





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




***Geographic
      Areas***





We
      currently market and sell our patient safety products and services in the United
      States. Eventually we also intend to market and sell our products 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  System
      allows for faster and more accurate counting of surgical sponges compared to
      traditional methods. The Safety-Sponge  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  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  System
      is
      the ability to uniquely identify an individual dressing.




3





SurgiCount
      began developing the Safety-Sponge  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  line
      of
      sponges, a new product listing was not warranted and the
      Safety-Sponge  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  line
      of
      sponges . 
      The Safety-Sponge  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  System is
      the
      first computer-assisted program of counting sponges ever cleared by the
      FDA. The
      Safety-Sponge  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  line
      of
      products. The CDRH specifically guided SurgiCount to three required
      biocompatibility tests for the Safety-Sponge  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.





At
      the
      time that we acquired SurgiCount we believed that sales of the
      Safety-Sponge  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  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  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  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  System.
      We have seen several successful in-service sessions and began receiving orders
      for the Safety-Sponge  System,
      in greater quantities, during the year ended December 31, 2007.




4





The
      Safety-Sponge  System
      is
      presently in the optimization and commercialization phase. Development of the
      Safety-Sponge  System
      has been completed and the system is currently being 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 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 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  System.
      Examples where recommendations were utilized include: the ideal location for
      labels, label coarseness and thickness, improved operating room procedures,
      label structure and scanner functionality.





In
      2005
      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 was the result of an on-going collaboration between Harvard
      and SurgiCount to refine the Safety-Sponge System in a clinical optimization
      study. Under terms of the agreement, Brigham and Women's Hospital collected
      data
      on how the Safety-Sponge System saves time, reduces costs and increases patient
      safety in the operating room. The study also assisted to refine the system's
      technical processes in the operating room to provide clear guidance and
      instruction to hospitals, easily integrating the Safety-Sponge  System
      into operating rooms. Brigham and Women's Hospital received a non-exclusive
      license to use the Safety-Sponge  System,
      while we will own all technical innovations and other intellectual properties
      derived from the study. We provided a research grant to Brigham and Women’s
      Hospital over the course of the clinical trial in the aggregate amount of
      $431,000. The final amount due under the terms of the clinical trial agreement,
      of $68,000, was paid in February 2008. The clinical trials were completed around
      September 2006 and the results from the clinical trial were published in the
      April issue of the *Annals
      of Surgery* .





Researchers
      at Brigham and Women’s Hospital have found that using bar-code technology to
      augment the counting of surgical sponges during an operative procedure increases
      the detection rate of miscounted and/or misplaced sponges. Previous studies
      have
      shown that counts are falsely reported as correct in the majority of cases
      of
      retained sponges and instruments, resulting in the surgical team believing
      that
      all the sponges are accounted for. In this study, researchers compared the
      traditional counting protocol with or without augmentation by the bar-code
      technology in 300 general surgery operations. The researchers found that the
      bar-code system detected more counting errors than traditional counting methods
      both in cases where sponges were misplaced and counted incorrectly.





***Manufacturing***





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




5





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




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





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





***Research
      and Development***  **





Research
      and development activities are important to our business. However, at this
      time
      we do not have a research facility but rather focus our efforts on acquisitions
      of companies operating within our target industries that have demonstrated
      product viability through their own research and development activities. We
      intend to outsource much of the research and development activities related
      to
      improving our existing products or expanding our intellectual property to
      similar products or products that have similar characteristics in our target
      industries. We did not incur any costs during the fiscal years ended December
      31, 2007 or 2006 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
      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 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 recently underwent a reexamination proceeding in the U.S. Patent
      Office.  During 2007, the U. S. Patent Office granted a reexamination
      certificate affirming the validity of the reexamined patent with certain
      amendments to the claims.  Our counsel has reviewed the amended claims and
      believes that they will cover the Safety-Sponge System as well as a broad range
      of commercially equivalent systems.  In addition to the reexamined patent
      and the European patent, we have filed one additional U. S. Patent application
      and one international patent application **** covering
      improved methods and systems for the automated counting and tracking of surgical
      articles, that would provide the Company’s Safety-Sponge  System
      with an additional level of protection to prevent competitors from attempting
      to
      replicate and market a similar version of the Company’s
      Safety-Sponge  System.





Sales
      of
      the Safety-Sponge 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 only recently 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.




7




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





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 RF Surgical has actively begun to market and sell
      its
      product whereas ClearCount Medical is in the late development stage with its
      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 it has developed a contractual relationship with A Plus
      and
      Cardinal for the manufacturing and distribution of its product, we believe
      this
      provides an advantage over the above competing products.





**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.





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.





8





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.





**Investments**





Our
      investment portfolio, also known as our non-core assets, which is valued at
      $666,667, is reflected below. At December 31, 2007, our investment portfolio
      includes our investment in Alacra Corporation, our only significant investment
      security. At December 31, 2006, our investment portfolio also consisted of
      certain real property located in Arkansas and Tennessee. At December 31, 2007
      the real property met the “held for sale” criteria and was classified as such.
      The investment portfolio securities, which are described below, are classified
      on our balance sheet as long-term investments.




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





*Alacra
      Corporation*





At
      December 31, 2007, we had an investment in Alacra Corporation ( *“Alacra”* ),
      valued
      at $667,000, which represents 8.2% of our total assets. On April 20, 2000,
      we
      purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
      We
      have the right, subject to Alacra having the available cash, to have the
      preferred stock redeemed by Alacra over a period of three years for face value
      plus accrued dividends beginning on December 31, 2006. Pursuant to this right,
      in December 2006 we informed management of Alacra that we were exercising our
      right to put back one-third of our preferred stock. Alacra had a sufficient
      amount of cash to redeem our preferred stock and in December 2007 completed
      the
      initial redemption of one-third of our preferred stock. We received proceeds
      of
      $333,000 which accounted for the entire amount of the decrease in value of
      our
      Alacra investment. We continue to exercise our right to put back our remaining
      preferred stock to Alacra.




9




*Real
      Estate Investments*





At
      December 31, 2006, we had two real estate investments, valued in the aggregate
      at $431,000. During the quarter ended December 31 2007 these real estate
      investments were reclassified as assets held for sale. The real estate
      investments, consisting of approximately 8.5 acres of undeveloped land in Heber
      Springs, Arkansas and 0.61 acres of undeveloped land in Springfield, Tennessee,
      are currently being marketed for sale. In March 2008, we completed the sale
      of
      the undeveloped land in Heber Springs for net proceeds of $226,000, which
      resulted in a realized loss of $25,000. During the year ended December 31,
      2006,
      we received payment on loans that were secured by real estate of $50,000. During
      the year ended December 31, 2005, we liquidated properties with a cost basis
      of
      $113,000, which resulted in a gain of $28,000. We expect that any future gain
      or
      loss recognized on the liquidation of our final real estate holding would be
      insignificant primarily due to the value paid for the real estate combined
      with
      the absence of any significant changes in property values in the real estate
      market where the real estate is located.





**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, 43460 Ridge Park Drive, Suite 140, Temecula, CA 92590.
      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., 46430 Ridge Park Drive, Suite
      140,
      Temecula, CA 92590 or by calling (951) 587-6201. You may also obtain the
      documents filed by Patient Safety Technologies, Inc. with the SEC for free
      at
      the Internet website maintained by the SEC at www.sec.gov. The Company does
      not
      currently make these documents available on its website.





**Item
      1A. Risk Factors.**





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





**RISKS
      RELATING TO OUR BUSINESS AND STRUCTURE**




*WE
      HAVE JUST BEGUN TO GENERATE SALES FROM OUR SAFETY-SPONGE SYSTEM AND THE REVENUES
      HAVE JUST NOW BEGUN TO REPRESENT A SIGNIFICANT SOURCE OF
      CASH..*




We
      have
      just begun to generate a significant amount of revenue from our Safety-Sponge
      System. During the year ended December 31, 2007, sales from our Safety-Sponge
      System amounted to $1,089,000. Further, of our $245,000 of revenue during fiscal
      2006, only $141,000 was generated from our Safety-Sponge System. 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-Sponge 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.




10




*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 operated
      in the patient safety medical products field 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.




*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
      MAY NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE WHICH MAY RESULT IN DILUTION
      TO
      YOUR OWNERSHIP AND VOTING RIGHTS OR MAY RESULT IN THE INCURRENCE OF SUBSTANTIAL
      DEBT.*




We
      may
      decide to raise additional funds from investors. If we determine that we need
      to
      raise additional funds, additional financing may not be available on favorable
      terms, if at all. Furthermore, if we do sell any such securities it will result
      in dilution to your ownership and voting rights and/or possibly result in our
      incurring substantial debt. Any such equity financing would result in dilution
      to existing stockholders and may involve securities that have rights,
      preferences, or privileges that are senior to our common stock. Any such debt
      financing may be convertible into common stock which would result in dilution
      to
      our stockholders and would have rights that are senior to our common stock.
      Further, any debt financing must be repaid regardless of whether or not we
      generate profits or cash flows from our business activities, which could strain
      our capital resources.




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




At
      December 31, 2007, patents received in the acquisition of SurgiCount Medical,
      Inc., net of accumulated amortization, represented $3,764,000, or 46%, 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-Sponge System, fail to
      achieve our assumed revenue growth rates or assumed operating margin
      results.




11




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




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




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




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




In
      connection with our purchase of SurgiCount Medical, Inc., we acquired one
      registered U.S. patent and one registered international patent of the
      Safety-Sponge 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.




12




*THERE
      ARE POTENTIAL CONFLICTS OF INTEREST WITH OUR PRESIDENT AND OUR EXCLUSIVE
      MANUFACTURING PARTNER WHICH COULD ADVERSELY AFFECT OUR RESULTS FROM
      OPERATIONS.*




Mr.
      Adams, our President and Chief Executive Officer of SurgiCount has provided,
      and
      continues to provide, consulting services to A Plus, our exclusive manufacturing
      partner. Mr. Adams devotes approximately 85% of his time to our business, based
      on a 60-hour, 6-day workweek. Accordingly, certain conflicts of interest may
      arise from time to time with our President.




Because
      of this possible conflict of interest, such individual may direct potential
      business 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, other than
      Mr.
      Adams responsibility to devote his time to provide services to other entities
      from time-to-time. 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.




*WE
      HAVE EXPERIENCED TURNOVER IN OUR CHIEF EXECUTIVE OFFICER POSITION IN RECENT
      MONTHS AND IF WE ARE NOT ABLE TO RETAIN OUR CURRENT CHIEF EXECUTIVE OFFICER,
      WILLIAM HORNE, AND PRESIDENT, WILLIAM ADAMS, 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 2006, Dr. Glazer had indicated his intent
      to
      resign as Chairman and Chief Executive Officer at such time that we retain
      a
      suitable candidate for the position of Chief Executive Officer. Due to health
      concerns, Dr. Glazer resigned his position as Chief Executive Officer on July
      11, 2006 and Milton "Todd" Ault, III was re-appointed Chief Executive Officer
      and a Director of the Company. On January 5, 2007, Milton “Todd” Ault, III
      resigned as our Chief Executive Officer and on January 9, 2007, Milton “Todd”
Ault, III resigned as our Chairman. On January 9, 2007, our Board of Directors
      appointed William B. Horne as our Chief Executive Officer. On April , 2008,
      our
      Board of Directors appointed William Adams, the Chief Executive Officer of
      SurgiCount Medical, as our President. Our future success is dependent on our
      ability to retain both our Chief Executive Officer and our President. Although
      we do not believe we have experienced any losses or negative effects from Mr.
      Ault's and Dr. Glazer's resignations and we do not expect any adverse
      consequences in the future, if we are not able to retain our current Chief
      Executive Officer and our current President we may have difficulty implementing
      our business strategy.




13


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




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





On
      January 29, 2007, SurgiCount entered into an agreement for A Plus International
      Inc. to be the exclusive manufacturer and provider of SurgiCount's Safety-Sponge
      products and granted A Plus the exclusive, world-wide license to manufacture
      and
      import SurgiCount's products including the right to sublicense to the extent
      necessary to carry out the grant. A Plus was previously engaged in the
      manufacturing of SurgiCount's products under a Supply Agreement dated August
      17,
      2005, but was not previously granted the exclusive, world-wide license to
      manufacture and import the products. In the event A Plus International Inc.
      does
      not meet the requirements of the agreement, SurgiCount may seek additional
      providers of the Safety-Sponge products. While our relationship with A Plus
      International Inc. is currently on good terms, we cannot assure you that we
      will
      be able to maintain our relationship with A Plus International Inc. or secure
      additional suppliers and manufacturers on favorable terms as needed. Although
      we
      believe the raw materials used in the manufacture of the Safety-Sponge 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.




*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.




14




*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-Sponge System, must receive 510(k) clearance or PMA approval. The
      Safety-Sponge System has received 501(k) clearance to market and sell its
      patented Safety-Sponge System from the FDA. To obtain 510(k) marketing
      clearance, a company must show that a new product is "substantially equivalent"
      in terms of safety and effectiveness to a product already legally marketed
      and
      which does not require a PMA. Therefore, it is not always necessary to prove
      the
      actual safety and effectiveness of the new product in order to obtain 510(k)
      clearance for such product. To obtain a PMA, we must submit extensive data,
      including clinical trial data, to prove the safety, effectiveness and clinical
      utility of our products. The process of obtaining such clearances or approvals
      can be time-consuming and expensive, and there can be no assurance that all
      clearances or approvals sought by us will be granted or that FDA review will
      not
      involve delays adversely affecting the marketing and sale of our products.
      FDA's
      quality system regulations also require companies to adhere to certain good
      manufacturing practices requirements, which include testing, quality control,
      storage, and documentation procedures. Compliance with applicable regulatory
      requirements is monitored through periodic site inspections by the FDA. In
      addition, we are required to comply with FDA requirements for labeling and
      promotion. The Federal Trade Commission also regulates most device
      advertising.




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




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




*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.




15




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




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




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




**RISKS
      RELATED TO OUR INVESTMENTS**




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




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




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




We
      have
      invested in illiquid equity securities acquired directly from issuers in private
      transactions. At December 31, 2007, 8.2% of our assets on a consolidated basis
      with our subsidiary were comprised of investment securities, which are illiquid
      investments. Investments in illiquid, or non-marketable, securities are
      inherently risky and a number of the companies we invest in are expected to
      fail. We review all of our investments quarterly for indicators of impairment;
      however, for non-marketable equity securities, the impairment analysis requires
      significant judgment to identify events or circumstances that would likely
      have
      a material adverse effect on the fair value of the investment. The indicators
      we
      use to identify those events or circumstances include as relevant, the nature
      and value of any collateral, the portfolio company's ability to make payments
      and its earnings, the markets in which the portfolio company does business,
      comparison to valuations of publicly traded companies, comparisons to recent
      sales of comparable companies, the discounted cash flows of the portfolio
      company and other relevant factors. Because such valuations are inherently
      uncertain and may be based on estimates, our determinations of fair value may
      differ materially from the values that would be assessed if a ready market
      for
      these securities existed. Investments identified as having an indicator of
      impairment are subject to further analysis to determine if the investment is
      other than temporarily impaired, in which case we write the investment down
      to
      its impaired value. When a company in which we hold investments is not
      considered viable from a financial or technological point of view, we write
      down
      the entire investment since we consider the estimated fair market value to
      be
      nominal. We recognized impairment charges of nil and $1,445,000 for the fiscal
      years ended December 31, 2007 and 2006, respectively. Since a significant amount
      of our assets are comprised of non-marketable investment securities, any future
      impairment charges from the write down in value of these securities will most
      likely have a material adverse affect on our financial condition.




16




*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
      lesser extent, upon proceeds from sales of investments rather than revenue
      generated from operating activities to defray a significant portion of our
      operating expenses.




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




Our
      investment in Alacra was acquired directly from the issuer in private
      transactions. Accordingly, the securities that we received from out investment
      in Alacra is subject to restrictions on resale and/or otherwise is illiquid.
      These 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
      investment in Alacra 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 investment, the proceeds of such liquidation may
      be
      significantly less than the value at which we acquired those
      investments.




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




In
      the
      past, our investments have primarily been in equity securities of other
      companies. The equity interest in Alacra, our only remaining equity investment,
      may not appreciate in value and, in fact, may decline in value. Accordingly,
      we
      may not be able to realize gains from our equity interest, and any gains that
      we
      do realize on the disposition of our equity interest may not be sufficient
      to
      offset any other losses we experience.




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




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




17




**RISKS
      RELATED TO OUR REAL ESTATE HOLDINGS**




*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.*




Our
      remaining real real estate investment in Springfield, Tennessee is affected
      by
      the economic cycles and risks inherent to that region. Like other real estate
      markets, the real estate market in this area has experienced economic downturns
      in the past, and we cannot predict how the current economic conditions will
      impact this market in both the short and long term. Further declines in the
      economy or a decline in the real estate market in this area could hurt our
      financial performance and the value of our property. The factors affecting
      economic conditions in this region 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 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 $0.57 to $4.70. Any future market
      price for our shares may continue to be very volatile. This price volatility
      may
      make it more difficult for you to sell shares when you want at prices you find
      attractive. We do not know of any one particular factor that has caused
      volatility in our stock price. However, the stock market in general has
      experienced extreme price and volume fluctuations that often are unrelated
      or
      disproportionate to the operating performance of companies. Broad market factors
      and the investing public's negative perception of our business may reduce our
      stock price, regardless of our operating performance. Further, the market for
      our common stock is limited and we cannot assure you that a larger market will
      ever be developed or maintained. Our common stock is currently on the OTC
      Bulletin Board under the symbol PSTX. Prior thereto, the Company’s common stock
      was traded on the American Stock Exchange ("AMEX") under the symbol “PST.” As of
      April 11, 2008, the average daily trading volume of our common stock over the
      past three months was approximately 24,000 shares. The last reported sales
      price
      for our common stock on April 11, 2008, was $1.35 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.




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




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




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




18




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




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




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




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




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




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




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




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




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





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





The
      Company has no unresolved comments relating to its prior periodic
      reports.




**Item
      2. Properties.**





We
      do not
      own any real estate or other physical properties materially important to our
      operation. Our headquarters are located at 43460 Ridge Park Drive, Suite 140,
      Temecula, CA 92590. We are responsible for paying approximately $9,400 per
      month
      for the lease expense associated with our headquarters. Our office space is
      currently approximately 3,500 square feet.





In
      addition, we also have one real estate investment. The cost of this investment,
      as carried in our financial statements, is $180,000 and is comprised of 0.61
      acres of undeveloped land in Springfield, Tennessee. Management does not
      currently believe that the Company’s real estate holding represents a material
      risk to the Company.





**Item
      3. Legal Proceedings.**





On
      July
      28, 2005, Jeffrey A. Leve and Jeffrey Leve Family Partnership, L.P. filed a
      lawsuit in the Superior Court of the State of California for the county of
      Los
      Angeles, Central District against us and five other defendants affiliated with
      Winstar Communications, Inc. The plaintiffs are attempting to collect a default
      judgment of $5,014,000 entered against Winstar Global Media, Inc. ( ***“WGM”*** )
      by a
      federal court in New York, by attempting to enforce the judgment against us
      and
      the other defendants, none of whom are judgment debtors. Further, the plaintiffs
      are attempting to enforce their default judgment against us when their initial
      lawsuit in federal court against us was dismissed on the merits. The Court
      granted plaintiffs leave to amend the current Complaint after twice granting
      our
      motions to dismiss.   Plaintiffs made some changes to their Complaint
      and dropped two other defendants. On April 18, 2007, we filed our Answer setting
      forth our numerous defenses.  We are currently scheduled to begin the trial
      phase of our defense on April 28, 2008. We believe the lawsuit is without merit
      and intend to vigorously defend against the lawsuit.  However, an
      unfavorable outcome may have a material adverse effect on our business,
      financial condition and results of operations.




19





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





No
      matters were submitted to our shareholders during the quarter ended December
      31,
      2007.





**PART
      II**




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





**Stock
      Transfer Agent**





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





**Market
      Prices**





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





**Period**
            
            **Prices (Low)**
            
            **Prices (High)****2006**First
                Quarter
            
            $
            2.27
            
            $
            4.70Second
                Quarter
            
            $
            2.60
            
            $
            4.30Third
                Quarter
            
            $
            1.45
            
            $
            3.25Fourth
                Quarter
            
            $
            0.57
            
            $
            3.97**2007**First
                Quarter
            
            $
            1.01
            
            $
            2.50Second
                Quarter
            
            $
            1.35
            
            $
            1.85Third
                Quarter
            
            $
            0.85
            
            $
            1.52Fourth
                Quarter
            
            $
            0.90
            
            $
            1.75




Our
      common stock is subject to Rules 15g-1 through 15g-9 under the Securities
      Exchange Act of 1934, as amended, which impose certain sales practice
      requirements on broker-dealers who sell our common stock to persons other than
      established customers and “accredited investors” (generally, individuals with a
      net worth in excess of $1,000,000 or an annual income exceeding $200,000
      individually or $300,000 together with their spouses). For transactions covered
      by this rule, a broker-dealer must make a special suitability determination
      for
      the purchaser and have received the purchaser’s written consent to the
      transaction prior to the sale.




20





**Stock
      Performance Graph**





The
      following graph compares the performance of our common stock over the five
      preceding fiscal years to the weighted average performance over the same period
      of the stock of companies included in the NASDAQ Composite Index and the Dow
      Jones Health Care Titans 30 Index. The graph assumes $100 was invested at the
      close of trading on December 31, 2002 in our common stock and in each of the
      indices and that all dividends were reinvested. The stockholder return shown
      on
      the graph below should not be considered indicative of future stockholder
      returns, and we will not make or endorse any predictions of future stockholder
      returns.









1 $100
      invested on 12/31/02 in stock or index, including reinvestment of dividends.
      Fiscal year ending December 31.




**Dividends**





The
      Company paid $38,325, nil, and $19,163 in dividends to preferred stockholders
      during 2007, 2006 and 2005, respectively, and has not paid any dividends to
      common stockholders during the past three years. Dividends to preferred
      stockholders are cumulative and paid at the rate of 7% a year. We currently
      have
      no intention of paying dividends on our common stock.





**Stockholders**





As
      of
      April 11, 2008, there were approximately 622 holders of record of the Company’s
      common stock. The Company has 25,000,000 shares of common stock authorized,
      of
      which 12,079,602 were issued and outstanding at April 11, 2008. The Company
      has
      1,000,000 shares of convertible preferred stock authorized, of which 10,950
      were
      issued and outstanding at April 11, 2008.




21


**Equity
      Compensation Plans**





For
      a
      summary of equity compensation plans under which the Company's common stock
      is
      authorized for issuance as of the fiscal year ended December 31, 2007 refer
      to
      Part III, Item 12.





**Recent
      Sales of Unregistered Securities**





Between
      January 1, 2007 and April 6, 2007, the Company issued 79,138 shares of Common
      Stock to various employees, directors, consultants and creditors. The Common
      Stock was issued for services and payment of accrued interest. The Common Stock
      was valued at approximately $127,000. These shares were issued in reliance
      upon
      the exemption provided by Section 4(2) of the Securities Act.





On
      January 29, 2007, the Company entered into a subscription agreement and sold
      an
      aggregate of 800,000 shares of its Common Stock and warrants to purchase an
      aggregate of up to 300,000 shares of its Common Stock in a private placement
      transaction to A Plus, an accredited investor. The warrants are exercisable
      for
      a period of five years, have an exercise price equal to $2.00, and 50% of the
      warrants are callable upon the occurrence of any one of a number of specified
      events when, after any such specified occurrence, the average closing price
      of
      the Company’s common stock during any period of five consecutive trading days
      exceeds $4.00 per share. The Company received gross proceeds of $500,000 in
      cash
      and during the twelve (12) months ended January 31, 2008, will have received
      $500,000 in product. These securities were sold in reliance upon the exemption
      provided by Section 4(2) of the Securities Act and the safe harbor of Rule
      506
      under Regulation D promulgated under the Securities Act. No advertising or
      general solicitation was employed in offering the securities, the sales were
      made to a limited number of persons, all of whom represented to the Company
      that
      they are accredited investors, and transfer of the securities is restricted
      in
      accordance with the requirements of the Securities Act.





On
      January 29, 2007, the Company entered into a subscription agreement with several
      unaffiliated accredited investors in a private placement exempt from the
      registration requirements of the Securities Act. The Company issued and sold
      to
      these accredited investors an aggregate of 104,000 shares of its common stock
      and warrants to purchase an additional 52,000 shares of its common stock. The
      warrants are exercisable for a period of five years, have an exercise price
      equal to $2.00, and 50% of the warrants are callable upon the occurrence of
      any
      one of a number of specified events when, after any such specified occurrence,
      the average closing price of the Company’s common stock during any period of
      five consecutive trading days exceeds $4.00 per share. These issuances resulted
      in aggregate gross proceeds to the Company of $130,000. These securities were
      sold in reliance upon the exemption provided by Section 4(2) of the Securities
      Act and the safe harbor of Rule 506 under Regulation D promulgated under the
      Securities Act. No advertising or general solicitation was employed in offering
      the securities, the sales were made to a limited number of persons, all of
      whom
      represented to the Company that they are accredited investors, and transfer
      of
      the securities is restricted in accordance with the requirements of the
      Securities Act.





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




22





Between
      March 7, 2007 and April 5, 2007, the Company entered into a subscription
      agreement with several accredited investors in a private placement exempt from
      the registration requirements of the Securities Act. The Company issued and
      sold
      to these accredited investors an aggregate of 2,000,000 shares of its common
      stock and warrants to purchase an additional 1,000,000 shares of its common
      stock. The warrants are exercisable for a period of five years, have an exercise
      price equal to $2.00, and 50% of the warrants are callable upon the occurrence
      of any one of a number of specified events when, after any such specified
      occurrence, the average closing price of the Company’s common stock during any
      period of five consecutive trading days exceeds $4.00 per share. These issuances
      resulted in aggregate gross proceeds to the Company of $2,500,000. We were
      required to file a registration statement within 120 days after April 5, 2007
      (the “ ***Closing
      Date”*** ).
      The
      registration statement was not filed until November 16, 2007 and we therefore
      issued, as liquidated damages, to the purchasers of the 2,000,000 shares of
      our
      Common Stock and the warrants to purchase 1,000,000 shares of our Common Stock,
      warrants with a term of five years and an exercise price of $2.00 per share
      to
      purchase 200,000 shares of our Common Stock. We recognized $193,000 in expense
      as a result of these liquidated damaged. We used the net proceeds from this
      private placement transaction primarily for general corporate purposes and
      repayment of existing liabilities. These securities were sold in reliance upon
      the exemption provided by Section 4(2) of the Securities Act and the safe harbor
      of Rule 506 under Regulation D promulgated under the Securities Act. No
      advertising or general solicitation was employed in offering the securities,
      the
      sales were made to a limited number of persons, all of whom represented to
      the
      Company that they are accredited investors, and transfer of the securities
      is
      restricted in accordance with the requirements of the Securities
      Act.




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




On
      April
      26, 2007, upon the occurrence of default of Maroon Creek Capital, LP’s
      ( **“Maroon”** ),
      a
      California limited partnership, $81,000 promissory note, the Company issued
      10,000 warrants to purchase shares of common stock at $2.00 per share to Maroon.
      The warrants vested immediately and have a five-year life. The warrants were
      valued at $9,000 and were expensed at the time of issuance. These warrants
      were
      issued in reliance upon the exemption provided by Section 4(2) of the Securities
      Act.





Between
      May 9, 2007 and June 28, 2007, the Company issued 220,169 shares of Common
      Stock
      to various employees, directors, consultants and creditors. The Common Stock
      was
      issued for services and payment of accrued interest. The Common Stock was valued
      at approximately $392,000. These shares were issued in reliance upon the
      exemption provided by Section 4(2) of the Securities Act.





On
      June
      7, 2007, the Company entered into a subscription agreement with several
      accredited investors in a private placement exempt from the registration
      requirements of the Securities Act. The Company issued and sold to these
      accredited investors an aggregate of 48,000 shares of its common stock and
      warrants to purchase an additional 24,000 shares of its common stock. The
      warrants are exercisable for a period of five years, have an exercise price
      equal to $2.00, and 50% of the warrants are callable upon the occurrence of
      any
      one of a number of specified events when, after any such specified occurrence,
      the average closing price of the Company’s common stock during any period of
      five consecutive trading days exceeds $4.00 per share. These issuances resulted
      in aggregate gross proceeds to the Company of $60,000. We used the net proceeds
      from this private placement transaction primarily for general corporate
      purposes. 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.




Pursuant
      to the February 2005 Agreement and Plan of Merger and Reorganization (the
“Merger”) between the Company and SurgiCount, in the event that prior to the
      fifth anniversary of the closing of the Merger the cumulative gross revenues
      of
      SurgiCount exceed $500,000, the Company is obligated to issue an additional
      50,000 shares of the Company’s common stock to certain SurgiCount founders.
      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. During the year ended December 31, 2007, cumulative
      gross revenues of SurgiCount exceeded $1,000,000 and as such the Company issued
      100,000 shares to the SurgiCount founders. The Company recorded $145,000 of
      goodwill as a result of these issuances.




On
      June
      28, 2007, the Company issued 337,439 shares of its common stock to Ault Glazer
      Capital Partners, LLC (formerly AGB Acquisition Fund) (the ***“Fund”*** ).
      The
      shares were issued in satisfaction of the unpaid principal and accrued interest
      of $422,000 owed to the Fund pursuant to a Revolving Line of Credit Agreement
      (the ***“Revolving
      Line of Credit”*** )
      entered
      into with the Fund on March 7, 2006. The amount due under the Revolving Line
      of
      Credit, which
      was
      in default, was converted into shares of the Company’s common stock at a
      conversion price of $1.25 per share.




23





On
      July
      23, 2007, the Company issued 25,000 warrants to purchase shares of common stock
      at $1.75 per share to a consultant. The warrants vested immediately and have
      a
      five-year life. The warrants were valued at $27,000 and were expensed at the
      time of issuance. These warrants were issued in reliance upon the exemption
      provided by Section 4(2) of the Securities Act.





Between
      August 1, 2007 and October 12, 2007, the Company issued 102,024 shares of Common
      Stock to an employee, director, and creditors of the Company. The Common Stock
      was issued for services and payment of accrued interest. The Common Stock was
      valued at approximately $133,000. These shares were issued in reliance upon
      the
      exemption provided by Section 4(2) of the Securities Act.





On
      October 17, 2007, the Company entered into a securities purchase agreement
      with
      Francis Capital Management, LLC ( ***“Francis
      Capital”*** ),
      an
      accredited investor, in a private placement exempt from the registration
      requirements of the Securities Act. The Company issued and sold to Francis
      Capital an aggregate of 1,270,000 shares of its common stock and warrants to
      purchase an additional 763,000 shares of its common stock. Additionally,
      pursuant to the terms of the securities purchase agreement with Francis Capital,
      the Company issued warrants to purchase 400,000 shares of its common stock
      to
      two consultants that provided services in connection with the financing. The
      services provided included investor relations and an evaluation of and oversight
      responsibilities over completion of the transaction The warrants are exercisable
      for a period of five years at an exercise price equal to $1.40 per share. These
      issuances resulted in aggregate gross proceeds to the Company of $1,500,000
      in
      cash and the extinguishment of $90,000 in existing debt owed to Francis Capital
      by the Company. We were required to file a registration statement and to use
      our
      best efforts to cause the registration statement to become effective within
      120
      calendar day from November 16, 2007 (the ***“Filing
      Date”*** )
      or, in
      the event of a full review by the Securities and Exchange Commission, within
      150
      calendar days from the Filing Date (collectively the ***“Effectiveness
      Date”*** ).
      The
      registration statement was declared effective on December 21, 2008. We intend
      to
      use the net proceeds from this private placement transaction primarily for
      general corporate purposes and repayment of existing liabilities. These
      securities were sold in reliance upon the exemption provided by Section 4(2)
      of
      the Securities Act and the safe harbor of Rule 506 under Regulation D
      promulgated under the Securities Act. No advertising or general solicitation
      was
      employed in offering the securities, the sales were made to a limited number
      of
      persons, all of whom represented to the Company that they are accredited
      investors, and transfer of the securities is restricted in accordance with
      the
      requirements of the Securities Act.





On
      December 31, 2007, the Company issued 31,892 shares of Common Stock to a
      creditor of the Company. The Common Stock was issued for payment of accrued
      interest. The Common Stock was valued at approximately $45,000. These shares
      were issued in reliance upon the exemption provided by Section 4(2) of the
      Securities Act.





**Item
      6. Selected Financial Data.**





The
      following selected financial data for the fiscal years ended December 31, 2007,
      2006, 2005, 2004 and 2003 are derived from our financial statements which
      have been audited by Ernst & Young, LLP (December 31, 2003), Rothstein Kass
      (December 31, 2004 and 2005), and Squar, Milner, Peterson, Miranda &
Williamson, LLP (December 31, 2006 and 2007), 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.




24





**BALANCE
                SHEET DATA****as
                of December 31,**
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Total
                assets
            
            $
            8,174,174
            
            $
            11,181,446
            
            $
            16,033,865
            
            $
            6,934,243
            
            $
            3,258,032Liabilities
            
            $
            6,285,965
            
            $
            9,638,092
            
            $
            6,912,915
            
            $
            3,367,974
            
            $
            1,233,894Net
                assets
            
            $
            1,888,209
            
            $
            1,543,354
            
            $
            9,120,950
            
            $
            3,566,269
            
            $
            2,024,138Shares
                outstanding
            
            
            12,054,602
            
            
            6,561,195
            
            
            5,672,445
            
            
            4,670,703
            
            
            3,060,300




**OPERATING
                DATA****for
                the year ended December 31,**
            
            
            **2007**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**Revenues
                from Safety-Sponge product
            
            $
            1,089,001
            
            $
            140,654
            
            $
            -
            
            $
            -
            
            $
            -Revenues
                from related parties
            
            $
            -
            
            $
            103,875
            
            $
            562,374
            
            $
            -
            
            $
            180,000Interest,
                dividend income and other, net
            
            $
            4,287
            
            $
            2,251
            
            $
            42,476
            
            $
            11,056
            
            $
            3,159Operating
                expenses
            
            $
            5,527,284
            
            $
            7,691,188
            
            $
            8,384,525
            
            $
            2,923,983
            
            $
            1,236,623Realized
                (loss) gains on investments, net
            
            $
            22,394
            
            $
            (1,541,506
            )
            $
            2,014,369
            
            $
            1,591,156
            
            $
            430,883Unrealized
                gains (losses) on marketable securities, net
            
            $
            (24,578
            )
            $
            16,901
            
            $
            32,335
            
            $
            (1,054,702
            )
            $
            (475,605
            )Loss
                applicable to common shareholders
            
            $
            (7,082,628
            )
            $
            (13,699,802
            )
            $
            (5,983,223
            )
            $
            (2,485,407
            )
            $
            (1,217,741
            )Basic
                and diluted net loss per common share
            
            $
            (0.70
            )
            $
            (2.15
            )
            $
            (1.11
            )
            $
            (0.75
            )
            $
            (0.39
            )





**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.*




25


**Overview**





Patient
      Safety Technologies, Inc. currently conducts its operations through a single
      wholly-owned operating subsidiary: SurgiCount Medical, Inc., a California
      corporation. Beginning in July 2005 through August 2007, the Company’s
      wholly-owned subsidiary, Automotive Services Group, Inc. (formerly known as
      Ault
      Glazer Bodnar Merchant Capital, Inc.), a Delaware corporation, held the
      Company’s investment in Automotive Services Group, LLC ( ***“ASG”*** ),
      its
      wholly-owned express car wash subsidiary. During the period from June 29, 2007
      to August 13, 2007, Automotive Services Group sold all the assets held by
      ASG.





The
      Company, including SurgiCount Medical Inc. ( ***“SurgiCount”*** ),
      is
      engaged in the acquisition of controlling interests in companies and research
      and development of products and services focused primarily in the health care
      and medical products field, particularly the patient safety markets. SurgiCount
      is a developer and manufacturer of patient safety products and services. In
      addition, the Company holds various other unrelated investments which it is
      in
      the process of liquidating. The unrelated investments are recorded on the
      Company’s balance sheet in “long-term investments”.





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





On
      March
      30, 2005, stockholder approval was obtained to withdraw our election to be
      treated as a BDC and on March 31, 2005 we filed an election to withdraw our
      election with the SEC. At December 31, 2007, 8.2% of our assets, consisting
      of
      our investment in Alacra Corporation, on a consolidated basis with our
      subsidiary were comprised of investment securities within the meaning of the
      1940 Act ( ***“Investment
      Securities”*** ).
      If the
      value of our assets that consist of Investment Securities were to exceed 40%
      of
      our total assets (excluding government securities and cash items) on an
      unconsolidated basis we could be required to re-register as an investment
      company under the 1940 Act unless an exemption or exclusion applies. We continue
      to evaluate ways in which we can dispose of these Investment Securities and
      do
      not believe that the value of our Investment Securities will increase in an
      amount that would require us to re-register as a BDC. Registration as an
      investment company would subject us to restrictions that are inconsistent with
      our fundamental business strategy of equity growth through creating, building
      and operating companies in the patient safety medical products industry.
      Registration under the 1940 Act would also subject us to increased regulatory
      and compliance costs, and other restrictions on the way we operate and would
      change the method of accounting for our assets under GAAP.





Our
      operations currently focus on the acquisition of controlling interests in
      companies and research and development of products and services in the health
      care and medical products field, particularly the patient safety markets. In
      the
      past we also focused on the financial services and real estate industries.
      On
      October 2005 our Board of Directors authorized us to evaluate alternative
      strategies for the divesture of our non-healthcare assets. As an extension
      on
      our prior focus on real estate, in March 2006 we acquired the remaining 50%
      equity interest in ASG and upon doing so we entered the business of developing
      properties for the operation of automated express car wash sites. However,
      on
      March 29, 2006, our Board of Directors determined to focus our business
      exclusively on the patient safety medical products field. The Board of Directors
      established a special committee in January 2007 to evaluate potential
      divestiture transactions for ASG and our other real estate assets. Due to the
      potential conflicts of interest that could have arisen from the divestiture
      of
      our non-patient safety related assets, the Board of Directors established a
      special committee in January 2007 to evaluate any potential divestiture. The
      special committee evaluated several alternative divestiture transactions for
      ASG
      and determined that in some instances the most favorable transactions involved
      transactions with a related party. Specifically, ASG’s sale of its express car
      wash and a parcel of real property to Charles H. Dellaccio and Darrell Grimsley.
      The divestiture of ASG was completed on August 13, 2007.




26




SurgiCount
      Medical, Inc., developer of the Safety- Sponge System was acquired to enhance
      our ability to focus our efforts in the health care and medical products field,
      particularly the patient safety markets. Currently, we are evaluating ways
      in
      which to monetize our remaining non-patient safety related assets (the **“** ***non-core
      assets*** **”** ).





Our
      principal executive offices are located at 43460 Ridge Park Drive, Suite 140,
      Temecula, CA 92590. Our telephone number is (951) 587-6201. Our website is
      located at http://www.patientsafetytechnologies.com .





**Critical
      accounting policies and estimates**





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





**Valuation
      of Non-Marketable Equity Securities**





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





Investments
      in non-marketable securities are inherently risky and the one remaining
      privately held company that we have invested in may fail. Its success (or lack
      thereof) is dependent upon product development, market acceptance, operational
      efficiency and other key business success factors. In addition, depending on
      its
      future prospects, it may not be able to raise additional funds when needed
      or it
      may receive lower valuations with less favorable investment terms than in
      previous financings, thus 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 nil, $1,445,000 and $50,000,
      in
      impairments during the years ended December 31, 2007, 2006, and 2005,
      respectively.




27





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. We may determine, if appropriate, to
      discount the value where there is an impediment to the marketability of the
      securities held.





**Valuation
      of Intangible Assets**





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





**Stock-Based
      Compensation**





We
      have
      adopted the provisions of SFAS No. 123(R), *Share-Based
      Payment* ,
      effective January 1, 2005 using
      the
      modified retrospective application method as provided by SFAS 123(R) and
      accordingly, financial statement amounts for the prior periods in which the
      Company granted employee stock options have been restated to reflect the fair
      value method of expensing prescribed by SFAS 123(R). The
      fair
      value of each option grant, nonvested stock award and shares issued under the
      employee stock purchase plan were estimated on the date of grant using the
      Black-Scholes option pricing model and various inputs to the model. Expected
      volatilities were based on historical volatility of our stock. The expected
      term
      represents the period of time that grants and awards are expected to be
      outstanding. The risk-free interest rate approximates the U.S. treasury
      rate corresponding to the expected term of the option, and dividends were
      assumed to be zero. These inputs are based on our assumptions, which include
      complex and subjective variables. Other reasonable assumptions could result
      in
      different fair values for our stock-based awards.





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





**New
      Accounting Pronouncements**





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




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




28





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





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





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





**Financial
      Condition, Liquidity and Capital Resources**





Our
      cash
      balance was $405,000 at December 31, 2007, versus $4,000 at December 31, 2006.
      Total current liabilities were $2,402,000 at December 31, 2007, versus
      $5,637,000 at December 31, 2006. The minor amount of cash, combined with
      relatively insignificant amounts of other current assets, resulted in working
      capital deficit of approximately $1,801,000 at December 31, 2007. Since we
      continue to have recurring losses 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. From August 2006 through the date of this
      annual report we have sold to accredited investors in our private placements,
      as
      reflected below, $5,828,000 in equity securities.





*2006
      private placements*




Between
      August 17, 2006 and December 15, 2007, we entered into various subscription
      agreements with accredited investors in private placements exempt from the
      registration requirements of the Securities Act. We issued and sold to these
      accredited investors an aggregate of 438,000 shares of our common stock and
      warrants to purchase an additional 119,000 shares of our common stock. The
      warrants are exercisable for a period of three years with an exercise price
      equal to $2.00. These issuances resulted in gross cash proceeds to us of
      $548,000. We used the net proceeds from these private placement transactions
      primarily for general corporate purposes and repayment of existing
      liabilities.




29





*2007
      private placements*




Between
      January 29, 2007 and June 8, 2007, we entered into various subscription
      agreements with accredited investors in private placements exempt from the
      registration requirements of the Securities Act. We issued and sold to these
      accredited investors an aggregate of 2,952,000 shares of our common stock and
      warrants to purchase an additional 1,376,000 shares of our common stock. The
      warrants are exercisable for a period of three to five years with an exercise
      price equal to $2.00. These issuances resulted in aggregate gross proceeds
      to us
      of $3,690,000, of which $3,190,000 was in cash and $500,000 was in product
      which
      we will receive over the course of a twelve (12) month period. We used the
      net
      proceeds from these private placement transactions primarily for general
      corporate purposes and repayment of existing liabilities





On
      October 17, 2007, we entered into a securities purchase agreement with Francis
      Capital Management, LLC ( *“Francis
      Capital”* ),
      an
      accredited investor, in a private placement exempt from the registration
      requirements of the Securities Act. We issued and sold to Francis Capital an
      aggregate of 1,270,000 shares of our common stock and warrants to purchase
      an
      additional 763,000 shares of our common stock. The warrants are exercisable
      for
      a period of five years at an exercise price equal to $1.40 per share. These
      issuances resulted in aggregate gross proceeds to us of $1,500,000 in cash
      and
      the extinguishment of $90,000 in existing debt owed to Francis Capital by us.
      We
      used the net proceeds from this private placement transaction primarily for
      general corporate purposes and repayment of existing liabilities.





In
      addition to our private placements, we have also received a significant amount
      of funding from Ault Glazer Capital Partners, LLC (formerly AGB Acquisition
      Fund) (the ***“Fund”*** ).
      AG
      Management is the managing member of the Fund. The managing member of AG
      Management is The Ault Glazer Group, Inc. ( ***“The
      AG Group”*** )
      (f/k/a
      Ault Glazer Bodnar & Company, Inc.). The Company’s former Chairman and
      former Chief Executive Officer, Milton “Todd” Ault, III, is Chairman, Chief
      Executive Officer and President of The AG Group. At December 31, 2007 the
      outstanding principal balance of the loan that we entered into with the Fund
      was
      $2,531,000. At December 31, 2007 we also had outstanding promissory notes to
      four additional lenders, which were entered into during the year ended December
      31, 2006, in the principal amount of $1,172,000.





During
      the period from June 29, 2007 to August 13, 2007, Automotive Services Group
      sold
      all the assets held by ASG thereby completing the liquidation of Automotive
      Services Group. We received net proceeds, after expenses of the sales, of
      $3,178,000 which resulted in a gain of $10,000. The majority of the proceeds
      from the sales were used to repay existing debt. By selling these assets the
      Company has positioned itself to aggressively pursue the market for surgical
      sponges in the United States and Europe, which we believe represents a market
      opportunity equal to or in excess of $650 million in annual sales.





Management
      is currently seeking additional financing and believes that it will be
      successful. However, in the event management is not successful in obtaining
      additional financing, existing cash resources, together with proceeds from
      investments and anticipated revenues from operations, may not be adequate to
      fund our operations for the twelve months subsequent to December 31, 2007.
      However, ultimately long-term liquidity is dependent on our ability to attain
      future profitable operations. We intend to undertake additional debt or equity
      financings to better enable us to grow and meet future operating and capital
      requirements.





As
      of
      December 31, 2007, other than our office lease and employment agreements with
      key executive officers, we had no commitments not reflected in our consolidated
      financial statements.





Cash
      increased by $401,000 to $405,000 for the year ended December 31, 2007, compared
      to a decrease of $76,000 to $4,000 for the year ended December 31,
      2006.




Operating
      activities used $3,765,000 of cash for the year ended December 31, 2007,
      compared to using $2,794,000 for the year ended December 31, 2006.





Operating
      activities for the year ended December 31, 2007, exclusive of changes in
      operating assets and liabilities, used $4,026,000 of cash, as the Company's
      net
      cash used in operating activities of $3,765,000 included non-cash charges for
      depreciation and amortization of $531,000, debt discount of $1,083,000, realized
      gains of $33,000 and stock based compensation of $1,154,000. For the year ended
      December 31, 2006, operating activities, exclusive of changes in operating
      assets and liabilities, used $4,690,000 of cash, as the Company's net cash
      used
      in operating activities of $2,794,000 included non-cash charges for depreciation
      and amortization of $461,000, debt discount of $2,983,000, goodwill impairment
      of $971,000, gain on debt extinguishment of $191,000, realized losses of
      $1,542,000, unrealized gains of $17,000 and stock based compensation of
      $3,301,000.




30





Changes
      in operating assets and liabilities provided cash of $260,000 during the year
      ended December 31, 2007, principally due to an increase in accrued liabilities
      and a decrease in prepaid expenses and inventories which were partially offset
      by a decrease in the level of accounts payable. During the year ended December
      31, 2006, changes in operating assets and liabilities provided cash of
      $1,895,000 primarily due to net proceeds received from marketable securities,
      decreases in our receivables from investments and increases in the level of
      accounts payable and accrued liabilities which were partially offset by
      decreases in the amounts due to our broker. The amount due to our broker was
      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 three months ended March 31, 2006, we invested our cash
      balances in the public equity and debt markets in an attempt to maximize the
      short-term return on such assets. The amount due to our broker varied throughout
      the year depending upon the aggregate amount of marketable investment securities
      held by us and the level of borrowing against our available-for-sale securities.
      The actual amount of marketable investment securities held was influenced by
      several factors, including but not limited to, our expectations of potential
      returns available from what we considered to be mispriced securities as well
      as
      the cash needs of our operating activities. During times when we were heavily
      invested in marketable investment securities, our liquidity position was
      significantly reduced. We no longer make a practice of investing in marketable
      investment securities.





The
      principal factor in the $2,993,000 of cash provided by investing activities
      during the year ended December 31, 2007 was the sale
      of
      our express car wash and undeveloped land in Alabama for $3,178,000 and the
      proceeds from selling one-third of our investment in Alacra Series F Preferred
      stock for $333,000. This was
      partially offset by capitalized costs of $404,000 related to the ongoing
      development of purchased software related to our Safety-Sponge  System.
      The principal factor in the $2,016,000 of cash used in investing activities
      during the year ended December 31, 2006 was the purchase of land of $1,697,000,
      capitalized construction costs of $381,000 related to ASG, and capitalized
      costs
      of $148,000 related to the ongoing development of software related to our
      Safety-Sponge  System
      offset by proceeds from the sale of long-term investments of
      $289,000.





Cash
      provided by financing activities during the year ended December 31, 2007, of
      $1,174,000 resulted primarily from net proceeds from the issuance of common
      stock and warrants of $4,454,000 offset by the repayment of the Winstar Note
      in
      the amount of $450,000 and other notes in the amount of $2,922,000. Cash
      provided by financing activities during the year ended December 31, 2006, of
      $4,735,000 resulted from the net proceeds from notes payable of $4,207,000
      and
      the proceeds from the issuance of common stock and warrants for
      $528,000.





**Investments**





Until
      such time as we have completely liquidated our investment in Alacra Corporation,
      our financial condition remains partially dependent on its success. 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.
      Our investment in Alacra is subject to restrictions on resale under federal
      securities laws and otherwise is illiquid, which will make it difficult to
      dispose of this investment quickly. Since we may be forced to liquidate this
      investment on an accelerated timeline, the proceeds of such liquidation may
      be
      significantly less than the value at which we acquired the investment. The
      following is a discussion of our most significant investment at December 31,
      2007.





Our
      investment portfolio, also known as our non-core assets, which is valued at
      $666,667, is reflected below. At December 31, 2007, our investment portfolio
      includes our investment in Alacra Corporation, our only remaining investment
      security. At December 31, 2006, our investment portfolio also consisted of
      certain real property located in Arkansas and Tennessee. At December 31, 2007
      the real property met the “held for sale” criteria and was classified as such.
      The investment portfolio, which is reflected below, is classified as long-term
      investments.




31




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





*Alacra
      Corporation*





At
      December 31, 2007, we had an investment in Alacra Corporation ( *“Alacra”* ),
      valued
      at $667,000, which represents 8.2% of our total assets. On April 20, 2000,
      we
      purchased $1,000,000 worth of Alacra Series F Convertible Preferred Stock.
      We
      have the right, subject to Alacra having the available cash, to have the
      preferred stock redeemed by Alacra over a period of three years for face value
      plus accrued dividends beginning on December 31, 2006. Pursuant to this right,
      in December 2006 we informed management of Alacra that we were exercising our
      right to put back one-third of our preferred stock. Alacra had a sufficient
      amount of cash to redeem our preferred stock and in December 2007 completed
      the
      initial redemption of one-third of our preferred stock. We received proceeds
      of
      $333,000 which accounted for the entire amount of the decrease in value of
      our
      Alacra investment. We continue to exercise our right to put back our remaining
      preferred stock to Alacra.




*Real
      Estate Investments*





At
      December 31, 2006, we had two real estate investments, valued in the aggregate
      at $431,000. During the quarter ended December 31 2007 these real estate
      investments were reclassified as assets held for sale. The real estate
      investments, consisting of approximately 8.5 acres of undeveloped land in Heber
      Springs, Arkansas and 0.61 acres of undeveloped land in Springfield, Tennessee,
      are currently being marketed for sale. In March 2008, we completed the sale
      of
      the undeveloped land in Heber Springs for net proceeds of $226,000, which
      resulted in a realized loss of $25,000. During the year ended December 31,
      2006,
      we received payment on loans that were secured by real estate of $50,000. During
      the year ended December 31, 2005, we liquidated properties with a cost basis
      of
      $113,000, which resulted in a gain of $28,000. We expect that any future gain
      or
      loss recognized on the liquidation of our final real estate holding would be
      insignificant primarily due to the value paid for the real estate combined
      with
      the absence of any significant changes in property values in the real estate
      market where the real estate is located.




32




**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
      “Loss available 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;





·
            “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.





**Revenues**





*Year
      2007, 2006 and 2005*





We
      recognized revenues of $1,089,000, $245,000 and $562,000 for the years ended
      December 31, 2007, 2006 and 2005, respectively. All of the revenues generated
      during the year ended December 31, 2007 related to sales from the Safety-Sponge
      of $878,000 and sales from hardware and supplies of $211,000. Although hardware
      sales are not considered a recurring item, we expect that once an institution
      adopts our system, they will be committed to its use and therefore provide
      a
      recurring source of revenues for sales of the safety sponge.





We
      attribute a significant amount of the increase in sales generated by our
      Safety-Sponge  System
      to
      increased product awareness and demand. The Safety-Sponge  System
      is
      currently being evaluated by more than 10 medical institutions, the adoption
      by
      any one of which would have a material impact on our revenues. We expect that
      small medical institutions which adopt the Safety-Sponge System will represent
      approximately $100,000 in annual revenue whereas the larger institutions could
      represent annual recurring revenues of $600,000 or more. The adoption by the University
      of California San Francisco Medical Center in February 2007 of our Safety-Sponge  System
      reflects current demand which we expect will begin to accelerate.





Of
      the
      revenues that were generated during the years ended December 31, 2006 and 2005,
      only $141,000 related to sales of our Safety-Sponge  System.
      As expected, these initial revenues did not have a significant impact on our
      results of operations, however, we continue to experience greater demand for
      our
      Safety-Sponge System and expect revenues to significantly increase and become
      a
      continual source of funds to cover our operating costs.




Of
      the
      revenue earned during the years ended December 31, 2006 and 2005, 104,000 and
      $562,000, respectively, was the result of a consulting agreement, consented
      to
      by IPEX, whereby the majority shareholder of IPEX and former President, former
      Chief Executive Officer and former director of IPEX ( ***“Majority
      Shareholder”*** ),
      retained us to serve as a business consultant to IPEX. In consideration for
      the
      services, during December 2005, the Majority Shareholder personally transferred
      us 500,000 shares of common stock of IPEX as a non-refundable consulting fee.
      This consulting agreement reflected our prior focus in the financial services
      and real estate industries. Since we now only focus our efforts on the patient
      safety markets, we do not expect to recognize revenue from these types of
      consulting agreements in the future.




33





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





**Expenses**





*Year
      2007 compared to Year 2006*





Operating
      expenses were $5,527,000, $7,691,000, and 8,385,000 for the years ended December
      31, 2007, December 31, 2006 and December 31, 2005, respectively.





The
      decrease in operating expenses of $2,164,000, for year ended December 31, 2007
      when compared to December 31, 2006, was primarily the result of salaries and
      employee benefits, which decreased by $986,000. Our Compensation Committee,
      currently comprised of three independent directors, determines and recommends
      to
      our Board the cash and stock based compensation to be paid to our executive
      officers and also reviews the amount of salary and bonus for each of our other
      officers and employees. The most significant component of employee compensation
      is stock based compensation expense.





For
      the
      year ended December 31, 2007, we recorded $674,000 related to grants of
      nonqualified stock options and $297,000 related to restricted stock awards
      to
      our employees and $126,000 related to restricted stock awards to our
      non-employee directors. During the year ended December 31, 2006, we recorded
      $1,118,000 related to grants of nonqualified stock options, of which $114,000
      was attributed to grants of nonqualified stock options to Darrell W. Grimsley,
      the former Chief Executive Officer of our discontinued car wash segment. For
      comparison purposes, stock based compensation expense attributed to the
      discontinued car was segment is excluded in an analysis of stock based
      compensation annual variances since expenses attributed to the discontinued
      operations are included as a separate line in our Consolidated Statements of
      Operations and Comprehensive Loss - Loss from discontinued car was segment.
      During the year ended December 31, 2006, we also recorded $1,105,000 related
      to
      restricted stock awards to our employees and non-employee directors. The
      issuance of stock options and restricted stock awards to our employees and
      non-employee directors, adjusted for the $126,000 in restricted stock awards
      to
      our non-employee directors which is recorded in general and administrative
      expenses, resulted in a decrease in stock based compensation expense of
      $1,138,000 for the year ended December 31, 2007. Therefore, excluding stock
      based compensation, salaries and employee benefits increased by $152,000.





At
      December 31, 2007, three of our executives were covered under employment
      agreements. Our Chief Executive Officer, William B. Horne, was covered under
      a
      two year employment agreement with annual base compensation of $250,000; our
      Chief Executive Officer of SurgiCount Medical, Inc., Bill Adams, was covered
      under a three year employment agreement with annual base compensation of
      $300,000 and; our President of Sales and Marketing of SurgiCount Medical, Inc.,
      Richard Bertran, was covered under a three year employment agreement with annual
      base compensation of $250,000. 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.
      Currently, monthly gross salaries for all of our employees are $156,000 as
      opposed to $135,000 at December 31, 2006. We believe, as with all our operating
      expenses, that our existing cash resources, together with proceeds from
      investments, anticipated financings and expected revenues from our operations,
      should be adequate to fund our salary obligations.




34





The
      second largest component of our operating expenses is professional fees, which
      decreased by $1,318,000 during the year ended December 31, 2007 compared to
      the
      amount reported during the previous year. As in employee compensation, stock
      based compensation expense is the most significant component of professional
      fees. During the year ended December 31, 2007 and 2006, professional fees
      included stock based compensation related to the issuances of restricted stock
      and warrants of $57,000 and $898,000, respectively. The decrease in stock based
      compensation of $841,000 paid to our outside consultants is the primary
      component of our decrease in professional fees. This $841,000 decrease was
      primarily caused from warrant issuances during the year ended December 31,
      2006
      of $593,000. A significant amount of the warrants issued during the year ended
      December 31, 2006, relate to a consulting agreement that we entered into in
      February 2006 with Analog Ventures, LLC ( ***“Analog
      Ventures”*** )
      whereby
      Analog Ventures agreed to consult with us on matters relating primarily to
      the
      divestiture of our non-core assets and assist us in our efforts to focus our
      business exclusively on the patient safety medical products field. As an
      incentive for entering into the agreement, we agreed to issue Analog Ventures
      a
      warrant to purchase 175,000 shares of our common stock at an exercise price
      of
      $3.95, exercisable for 3 years. We recognized an expense of $405,000 related
      to
      these warrants. In addition to the stock based compensation from the Analog
      Ventures warrant, we issued 75,380 warrants to purchase shares of our common
      stock at prices ranging from $1.25 to $2.00 per share to our placement agent,
      Ault Glazer & Co., LLC, (the ***“Placement
      Agent”*** ).
      These
      warrants, which were valued at $79,000, were issued to the Placement Agent
      for
      their successful efforts in assisting us with raising debt and equity financing.





The
      remaining decrease in professional fees, of $477,000, is primarily attributed
      to
      a decrease in legal fees and the absence of any expenses associated with our
      clinical trial agreement with Brigham and Women's Hospital, the teaching
      affiliate of Harvard Medical School, offset by an overall increase in cash
      payments to our nurse consultants which are utilized to generate awareness
      and
      train health care professionals in the use of our Safety-Sponge  System.





The
      decrease in legal fees of $300,000 is a result of (i) the successful resolution
      of our patent reexamination that was initiated in order to strengthen the
      enforceability of our U.S. patent, (ii) the absence of any significant
      legal fees associated with debt financings and (iii) the overall simplified
      corporate structure that was created upon the successful restructuring that
      began in March 2006 when 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.





The
      clinical trial is the result of an on-going collaboration between Harvard and
      SurgiCount to refine the Safety-Sponge System in a clinical optimization study.
      Under terms of the agreement, Brigham and Women's Hospital collected data on
      how
      the Safety-Sponge System saves time, reduces costs and increases patient safety
      in the operating room. The study also assisted in refining the system's
      technical processes in the operating room to provide clear guidance and
      instruction to hospitals, easily integrating the Safety-Sponge  System
      into operating rooms. Brigham and Women's Hospital received a non-exclusive
      license to use the Safety-Sponge  System,
      while we will own all technical innovations and other intellectual properties
      derived from the study. We provided a research grant to Brigham and Women’s
      Hospital over the course of the clinical trial in the aggregate amount of
      $431,000, none of which was expensed during the year ended December 31, 2007
      and
      $280,000 was expensed during the year ended December 31, 2006. The final amount
      due under the terms of the clinical trial agreement, of $68,000, was paid in
      February 2008. The clinical trials were completed around September 2006 and
      the
      results from the clinical trial were released in March 2008.





All
      of
      our stock based compensation issued to employees, non-employee directors and
      consultants were expensed in accordance with SFAS 123(R). During the years
      ended
      December 31, 2007, 2006, and 2005, we valued the nonqualified stock options
      and
      warrants using the Black-Scholes valuation model assuming expected dividend
      yield, risk-free interest rate, expected life and volatility of 0%, 3.00% to
      4.50%, three to five years and 63% to 102%, respectively. The restricted stock
      awards were valued at the closing price on the date the restricted shares were
      granted.





Cost
      of
      sales experienced an increase of $557,000 during the year ended December 31,
      2007 over the prior year. The increase in cost of sales reflects the significant
      growth that we experienced from the sales of our Safety-Sponge System. With
      the
      assistance of our exclusive manufacturing partner, A Plus International, we
      are
      in the process of transitioning the majority of the production of our
      Safety-Sponges from California to China. Consequently, we anticipate a reduction
      in our cost of sales, as a percentage of our total revenues.




35





General
      and administrative expenses experienced an increase of $226,000 during the
      year
      ended December 31, 2007 over the prior year. During the year ended December
      31,
      2007, we recorded restricted stock awards to our non-employee
      directors of $126,000
      in general and administrative expenses and accrued an additional $100,000 for
      the services of our former Chairman, Arnold Spangler. After adjusting for these
      restricted stock awards and accrued compensation, general and administrative
      expenses reflected a decrease of $2,000. As
      discussed above, in Financial Condition, Liquidity and Capital Resources, we
      have a
      significant working capital deficit and have experienced continued losses.
      These
      financial constraints have required us to be selective in the expenses that
      we
      incur and where possible delay or forego an expense. This overall condition
      has
      resulted in a slight decrease in our cash based general and administrative
      expense. General and administrative expenses are comprised of a combination
      of a
      several types of expenses, none of which are significant
      individually.





*Year
      2006 compared to Year 2005*





The
      decrease in operating expenses of $535,000, for the year ended December 31,
      2006
      when compared to December 31, 2005, was primarily the result of salaries and
      employee benefits, which decreased by $460,000. The most significant component
      of employee compensation is stock based compensation expense.





For
      the
      year ended December 31, 2006, we recorded $1,118,000 related to grants of
      nonqualified stock options. As discussed above, in our analysis of *Year
      2007 compared to Year 2006* ,
      $114,000 of this amount was attributed to grants of nonqualified stock options
      to Mr. Grimsley and included in our loss from discontinued operations. During
      the year ended December 31, 2006, we also recorded $1,105,000 related to
      restricted stock awards to our employees and non-employee directors. During
      the
      year ended December 31, 2005, we recorded $1,597,000 relating to grants of
      nonqualified stock options and $1,520,000 related to restricted stock awards
      to
      our employees and non-employee directors. The issuance of stock options and
      restricted stock awards to our employees and non-employee directors, excluding
      the value of the grant to Mr. Grimsley, resulted in a decrease in stock based
      compensation expense of $1,008,000 for the year ended December 31, 2006.
      Therefore, excluding stock based compensation, salaries and employee benefits
      increased by $548,000.





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





At
      December 31, 2006, four of our executives were covered under employment
      agreements. Our Chief Executive Officer, William B. Horne, was covered under
      a
      two year employment agreement with annual base compensation of $150,000; our
      Chief Executive Officer of SurgiCount Medical, Inc., Bill Adams was covered
      under a three year employment agreement with annual base compensation of
      $300,000; our President of Sales and Marketing of SurgiCount Medical, Inc.,
      Richard Bertran, was 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, was covered under a two year employment agreement
      with annual base compensation of $100,000. As discussed above, the addition
      of
      these employment contracts effectively increased employee compensation during
      the year ended December 31, 2006 by $436,000. The remaining increase in employee
      compensation is attributed to an overall increase in benefits associated with
      the individuals that are covered under employment contracts.




36





The
      second largest component of our operating expenses is professional fees, which
      decreased by $362,000 during the year ended December 31, 2006 compared to the
      amount reported during the previous year. This decrease is primarily comprised
      of decreases in stock based compensation to outside consultants of $489,000
      offset by an overall increase in cash payments to consultants who are utilized
      to generate awareness and train health care professionals in the use of our
      Safety-Sponge  System.
      Stock based compensation expense is the most significant component of
      professional fees. During the year ended December 31, 2006 and 2005,
      professional fees included stock based compensation related to the issuances
      of
      restricted stock and warrants of $898,000 and $1,388,000, respectively. The
      decrease in stock based compensation of $490,000 paid to our outside consultants
      is the primary component of our decrease in professional fees. This $490,000
      decrease was primarily caused from warrant issuances during the year ended
      December 31, 2006 and 2005, of $593,000 and $918,000, respectively, a decrease
      of $325,000. A significant amount of the warrants issued during the year ended
      December 31, 2006, relate to a consulting agreement that we entered into in
      February 2006 with Analog Ventures, LLC ( ***“Analog
      Ventures”*** )
      with an
      associated expense of $405,000. In addition to the stock based compensation
      from
      the Analog Ventures warrant, we issued 75,380 warrants to purchase shares of
      our
      common stock to our placement agent, Ault Glazer & Co., LLC, (the ***“Placement
      Agent”*** ).
      These
      warrants, which were valued at $79,000, were issued to the Placement Agent
      for
      their successful efforts in assisting us with raising debt and equity financing.





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





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





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





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





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





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





We
      had
      interest income of $4,000, $2,000, $42,000 for the years ended December 31,
      2007, 2006, and 2005, respectively.




37





The
      increase in interest income for the year ended December 31, 2007 when compared
      to December 31, 2006 was primarily the result of an overall increase in cash
      during the year ended December 31, 2007.





The
      decrease in interest income for the year ended December 31, 2006 when compared
      to December 31, 2005 was primarily the result of a decreased amount of fixed
      income investments held throughout the period, primarily during the first
      quarter of 2005. At March 31, 2005, we held in marketable securities
      approximately $2.5 million in U.S. Treasuries as opposed to no investments
      in
      U.S. Treasuries during the year ended December 31, 2006.





**Interest
      expense**





We
      had
      interest expense of $1,468,000, $3,156,000, and $135,000 for the years ended
      December 31, 2007, 2006 and 2005, respectively.





The
      decrease in interest expense for the year ended December 31, 2007 when compared
      to December 31, 2006 is primarily attributable to the non-cash interest charges
      incurred as a result of the debt discount associated with our short-term debt
      financings. During the year ended December 31, 2007 and 2006, we recorded
      $1,084,000 and $2,983,000, respectively, in non-cash interest charges. The
      non-cash interest charges that were incurred during the year ended December
      31,
      2006 included $136,000 that were attributed to our car wash segment and recorded
      in loss from discontinued operations. Thus, non-cash interest charges recorded
      in interest expense decreased $1,763,000 and represented the primary cause
      of
      the decrease in interest expense from 2006 to 2007. These non-cash charges
      resulted from the issuance of debt that either had conversion prices on the
      date
      of issuance that were below the fair market value of the underlying common
      stock
      or required the issuance of warrants to purchase shares of our common stock,
      which required us to record an expense based on the estimated fair value of
      the
      warrants. The remaining fluctuation in interest expense is attributable to
      the
      overall decreased level of borrowings during the year ended December 31, 2007
      over the prior year.





The
      increase in interest expense for the year ended December 31, 2006 when compared
      to December 31, 2005 is primarily attributable to the non-cash interest charges
      of $2,983,000, after a reduction for the non-cash interest charges of $136,000
      related to loans at our discontinued car wash segment. Thus, non-cash interest
      charges, excluding those of our discontinued car wash segment, resulted in
      an
      increase of $2,847,000 and represented the primary cause of the increase in
      interest expense.





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





During
      the year ended December 31, 2007 we realized a net gain of $22,000. Realized
      gains (losses) during the year ended December 31, 2007 reflect the sale of
      certain non-operating assets.





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





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





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





During
      the year ended December 31, 2007, the Company recognized unrealized appreciation
      of $25,000 due to the write-down to fair value of approximately 8.5 acres of
      undeveloped land in Heber Springs, Arkansas. In March 2008, the Company
      completed the sale of this real property for net proceeds of $226,000, which
      resulted in a realized loss of $25,000.




38





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





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





**Loss
      from discontinued car was segment**





The
      loss
      from our discontinued car was segment decreased by $1,481,000 to $166,000 during
      the year ended December 31, 2007 from a loss of $1,647,000 during the year
      ended
      December 30, 2007. ASG’s
      first site, developed in Birmingham, Alabama, had its grand opening on March
      8,
      2006. Thus, the year ended December 31, 2006 reflected slightly less than ten
      full months of operations whereas, due to the sale of our express car wash
      on
      June 29, 2007, the year ended December 31, 2007 reflected approximately six
      full
      months of operations. Further, during the year ended December 31 ,
      2006, a
      goodwill impairment charge of $971,000 was recorded in the car wash services
      operating segment.  This goodwillimpairment related to goodwill that resulted from the Company’s acquisition of
      ASG in March 2006.During
      the year ended December 31, 2007, despite a significantly shorter operating
      period and as a result of a more established business presence from a more
      mature business, revenues reflected only a slight decrease of $34,000 and
      operating costs decreased by $1,505,000. However, excluding goodwill impairment
      of $971,000, operating costs decreased by $534,000. The remaining operating
      cost
      decrease of $534,000 is primarily attributed to a $257,000 decrease in interest
      expense, of which $136,000 is non-cash interest charges incurred as a result
      of
      debt discount, and the incurrence of only six months of operating expenses
      during the year ended December 31, 2007 as opposed to an entire year of
      operating expenses during the year ended December 31, 2006.




The
      loss
      from our discontinued car was segment increased by $1,585,000 during the year
      ended December 31, 2006 from a loss of $62,000 during the year ended December
      31, 2005, its first year of operations. In response to the financial constraints
      stemming from our unsuccessful efforts to raise the necessary capital to
      continue the planned build-out on the additional car wash facilities, coupled
      with our emphasis on the patient
      safety markets, we
      evaluated alternative methods to divest the car wash services segment.
      Recognizing that revenues and cash flows would be lower than expected from
      the
      car wash services segment, we determined that a triggering event had occurred
      and conducted an interim goodwill impairment analysis in the quarters ended
      June
      30, 2006 and September 30, 2006. As a result of our goodwill impairment
      analyses, we recorded
      goodwill impairment charges of $971,000 and nil during the year ended December
      31, 2006 and 2005, respectively. This
      goodwill impairment related to goodwill that resulted from the Company’s
      acquisition of ASG.  The fair value of our reporting units were estimated
      using the expected present value of future cash flows and the valuation employed
      a combination of present value techniques to measure fair value and considered
      market factors . The
      remaining increase in loss of $614,000 is primarily attributed to interest
      expense at the discontinued car wash segment of $458,000. The increase in
      interest expense was a combination of both non-cash interest charges of $136,000
      and interest expense of $322,000 attributable to the overall increase in
      borrowings that occurred during the year ended December 31, 2006.




**Accumulated
      other comprehensive income**





Unrealized
      gains (losses) on our investments designated as available-for-sale are recorded
      in accumulated other comprehensive income. At December 31, 2007 and 2006, our
      remaining investments were carried at cost and therefore we did not record
      any
      unrealized gains (losses) on these investments. At December 31, 2005, we
      classified our restricted holdings in Digicorp and IPEX as available-for-sale.
      During the year ended December 31, 2006, we had disposed of or written-off
      these
      investments. At December 31, 2005, the unrealized gains (losses) on our
      restricted holdings in IPEX and Digicorp amounted to ($328,000) and $2,703,000,
      respectively. The cumulative decrease in net unrealized gains amounts to
      $2,375,000.




39





**Taxes**





We
      are
      subject to federal and state income tax on a portion of our taxable income.
      At
      December 31, 2007, we had a net operating loss carryforward of approximately
      $25.0 million to offset future taxable income for federal income tax purposes.
      The utilization of the loss carryforward to reduce any future income taxes
      will
      depend on our ability to generate sufficient taxable income prior to the
      expiration of the net operating loss carryforwards. The carryforward expires
      beginning in 2011.





A
      change
      in the ownership of a majority of the fair market value of our common stock
      can
      delay or limit the utilization of existing net operating loss carryforwards
      pursuant to Internal Revenue Code Section 382. We believe that such a change
      occurred during the year ended December 31, 2007 and are currently performing
      an
      analysis to determine the amount of our net operating loss carryforward that
      is
      limited.




**Contractual
      Obligations**





The
      following table sets forth information relating to our contractual obligations
      as of December 31, 2007:





**Contractual
                obligations**
            
            **Payments
                Due by Period****Less
                than****Total**
            
            **1 year**
            
            **1-3 years**
            
            **3-5 years**Operating
                lease obligations
            
            $
            351,258
            
            $
            113,082
            
            $
            238,176
            
            $
            —Notes
                Payable to Ault Glazer Capital Partners, LLC
            
            
            2,530,558
            
            
            —
            
            
            —
            
            
            2,530,558Notes
                Payable to Herb Langsam
            
            
            600,000
            
            
            600,000
            
            
            —
            
            
            —Note
                Payable to Charles Kalina III
            
            
            400,000
            
            
            400,000
            
            
            —
            
            
            —Other
                Notes Payable
            
            
            172,380
            
            
            172,380
            
            
            —
            
            
            —Employment
                Agreements
            
            
            693,750
            
            
            581,250
            
            
            112,500
            
            
            —**Total**
            
            **$**
            **4,747,946**
            
            **$**
            **1,866,712**
            
            **$**
            **350,676**
            
            **$**
            **2,530,558**




40


**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 portion of our assets in a private, development stage, company.
      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 types of investments, there is significantly greater risk of loss than
      is
      the case with traditional investment securities. Our private investment may
      result in a complete loss or will be unprofitable despite appearing to be likely
      to become successful.





Because
      there is no public market for the equity interests in the small company 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."




41


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


**PATIENT
      SAFETY TECHNOLOGIES, INC.**


**INDEX
      TO FINANCIAL STATEMENTS**





Report
                of Squar, Milner, Peterson, Miranda & Williamson, LLP
            
            43Report
                of Rothstein, Kass & Company, P.C.
            
            44Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            
            45Consolidated
                Statements of Operations and Comprehensive loss for the years ended
                December 31, 2007, 2006 and 2005
            
            46Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005
            
            47
                - 48Consolidated
                Statements of Stockholders' Equity for the years ended December 31,
                2007,
                2006 and 2005
            
            49Notes
                to Financial Statements
            
            50
                - 74





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




42




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




To
      the
      Board of Directors and Stockholders of


Patient
      Safety Technologies, Inc.





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





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





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





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





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





San
      Diego, California


April
      15,
      2008




43




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Board of Directors and Stockholders of


Patient
      Safety Technologies, Inc. and Subsidiaries





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





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





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





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






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




Roseland,
      New Jersey


April
      10,
      2006




44




**PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Balance Sheets**
  **December
                  31,**
              
              **December
                  31,****2007**
              
              **2006****ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              405,413
              
              $
              3,775Accounts
                  receivable
              
              
              71,840
              
              
              65,933Inventories
              
              
              —
              
              
              42,825Prepaid
                  expenses
              
              
              104,723
              
              
              78,834Other
                  current assets
              
              
              19,174
              
              
              13,125**TOTAL
                  CURRENT ASSETS**
              
              
              601,150
              
              
              204,492Restricted
                  certificate of deposit
              
              
              87,500
              
              
              87,500Notes
                  receivable
              
              
              153,545
              
              
              153,668Property
                  and equipment, net
              
              
              663,391
              
              
              328,202Assets
                  held for sale, net
              
              
              405,986
              
              
              3,189,674Goodwill
              
              
              1,832,027
              
              
              1,687,527Patents,
                  net
              
              
              3,763,908
              
              
              4,088,850Long-term
                  investments
              
              
              666,667
              
              
              1,441,533**TOTAL
                  ASSETS**
              
              $
              8,174,174
              
              $
              11,181,446**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Notes
                  payable, current portion - net
              
              $
              1,172,380
              
              $
              3,517,149Accounts
                  payable
              
              
              708,593
              
              
              1,295,849Accrued
                  liabilities
              
              
              520,749
              
              
              824,466**TOTAL
                  CURRENT LIABILITIES**
              
              
              2,401,722
              
              
              5,637,464Notes
                  payable, less current portion - net
              
              
              2,530,558
              
              
              2,527,562Deferred
                  tax liabilities
              
              
              1,499,329
              
              
              1,473,066**COMMITMENTS
                  AND CONTINGENCIES (Note 18)****STOCKHOLDERS'
                  EQUITY**Convertible
                  preferred stock, $1.00 par value, cumulative 7% dividend:1,000,000
                  shares authorized; 10,950 issued and outstandingat
                  December 31, 2007 and December 31, 2006(Liquidation
                  preference of $1,229,138 at December 31, 2007 and $1,190,813
                  atDecember
                  31, 2006)
              
              
              10,950
              
              
              10,950Common
                  stock, $0.33 par value: 25,000,000 shares authorized;12,054,602
                  shares issued and outstanding as of December 31, 2007;
                  7,489,026shares
                  issued and 6,874,889 shares outstanding at December 31,
                  2006
              
              
              3,978,019
              
              
              2,471,379Additional
                  paid-in capital
              
              
              34,320,134
              
              
              29,654,341Accumulated
                  deficit
              
              
              (36,566,538
              )
              
              (29,483,910
              )1,742,565
              
              
              2,652,760Less:
                  614,137 shares of treasury stock, at cost, at December 31,
                  2006
              
              
              —
              
              
              (1,109,406
              )**TOTAL
                  STOCKHOLDERS' EQUITY**
              
              
              1,742,565
              
              
              1,543,354**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              8,174,174
              
              $
              11,181,446
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
 45
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
          Statements of Operations and Comprehensive Loss**
 **For
                    The Year Ended December 31,****2007**
                
                **2006**
                
                **2005****REVENUES**
                
                $
                1,089,001
                
                $
                244,529
                
                $
                562,374**COST
                    OF SALES**
                
                
                716,292
                
                
                158,902
                
                
                —**Gross
                    margin**
                
                
                372,709
                
                
                85,627
                
                
                562,374**OPERATING
                    EXPENSES**Salaries
                    and employee benefits
                
                
                2,737,235
                
                
                3,722,822
                
                
                4,182,466Professional
                    fees
                
                
                843,207
                
                
                2,161,044
                
                
                2,523,035Rent
                
                
                78,937
                
                
                131,129
                
                
                88,368Insurance
                
                
                88,327
                
                
                87,674
                
                
                113,921Taxes
                    other than income taxes
                
                
                66,309
                
                
                101,536
                
                
                104,238Amortization
                    of patents
                
                
                324,942
                
                
                324,942
                
                
                270,785General
                    and administrative
                
                
                1,388,327
                
                
                1,162,041
                
                
                1,101,712**Total
                    operating expenses**
                
                
                5,527,284
                
                
                7,691,188
                
                
                8,384,525**Operating
                    loss**
                
                
                (5,154,575
                )
                
                (7,605,561
                )
                
                (7,822,151
                )**OTHER
                    INCOME (EXPENSES)**Interest,
                    dividend income and other
                
                
                4,287
                
                
                2,251
                
                
                42,476Liquidated
                    damages
                
                
                (193,346
                )
                
                —
                
                
                —Equity
                    in loss of investee
                
                
                —
                
                
                —
                
                
                (74,660
                )Realized
                    gain (loss) on investments, net
                
                
                22,394
                
                
                (1,541,506
                )
                
                2,014,369Gain
                    on debt extinguishment
                
                
                —
                
                
                190,922
                
                
                —Interest
                    expense
                
                
                (1,468,045
                )
                
                (3,155,853
                )
                
                (135,414
                )Unrealized
                    (loss) gain on marketable securities, net
                
                
                (24,578
                )
                
                16,901
                
                
                32,335**Loss
                    from continuing operations before income taxes**
                
                
                (6,813,863
                )
                
                (12,092,846
                )
                
                (5,943,045
                )**Income
                    tax expense (benefit)**
                
                
                (26,264
                )
                
                116,979
                
                
                97,482**Loss
                    from continuing operations**
                
                
                (6,840,127
                )
                
                (11,975,867
                )
                
                (5,845,563
                )**Loss
                    from discontinued operations**
                
                
                (165,851
                )
                
                (1,647,285
                )
                
                (61,960
                )**Net
                    loss**
                
                
                (7,005,978
                )
                
                (13,623,152
                )
                
                (5,907,523
                )**Preferred
                    dividends**
                
                
                (76,650
                )
                
                (76,650
                )
                
                (75,700
                )**Loss
                    applicable to common shareholders**
                
                $
                (7,082,628
                )
                $
                (13,699,802
                )
                $
                (5,983,223
                )**Basic
                    and diluted net loss per common share****Continuing
                    operations**
                
                $
                (0.68
                )
                $
                (1.89
                )
                $
                (1.10
                )**Discontinued
                    operations**
                
                $
                (0.02
                )
                $
                (0.26
                )
                $
                (0.01
                )**Net
                    loss**
                
                $
                (0.70
                )
                $
                (2.15
                )
                $
                (1.11
                )**Weighted
                    average common shares outstanding - basic and
                    diluted**
                
                
                10,066,940
                
                
                6,362,195
                
                
                5,373,318**Comprehensive
                    loss:****Net
                    loss**
                
                $
                (7,005,978
                )
                $
                (13,623,152
                )
                $
                (5,907,523
                )**Other
                    comprehensive (loss) gain, unrealized gain (loss)
                    on****available-for-sale
                    investments**
                
                
                —
                
                
                (2,374,858
                )
                
                2,374,858.00**Total
                    comprehensive loss**
                
                $
                (7,005,978
                )
                $
                (15,998,010
                )
                $
                (3,532,665
                )
  The
            accompanying notes are an integral part of these consolidated financial
            statements.
 46
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
            Statements of Cash Flows**
 **For
                    The Year Ended December 31,****2007**
                
                **2006**
                
                **2005**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (7,005,978
                )
                $
                (13,623,152
                )
                $
                (5,907,523
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                
                
                205,673
                
                
                136,056
                
                
                14,943Amortization
                    of patents
                
                
                324,942
                
                
                324,942
                
                
                270,785Non-cash
                    interest
                
                
                1,083,813
                
                
                2,983,417
                
                
                —Goodwill
                    impairment
                
                
                —
                
                
                971,036
                
                
                —Realized
                    (gain) loss on investments, net
                
                
                (32,561
                )
                
                1,541,506
                
                
                (2,014,369
                )Gain
                    on debt extinguishment
                
                
                —
                
                
                (190,922
                )
                
                —Unrealized
                    gain on marketable securities
                
                
                24,578
                
                
                (16,901
                )
                
                (32,335
                )Stock-based
                    compensation to employees and directors
                
                
                1,097,123
                
                
                2,403,173
                
                
                3,116,674Stock-based
                    compensation to consultants
                
                
                57,249
                
                
                898,294
                
                
                1,387,612Stock-based
                    compensation for liquidated damages
                
                
                193,346
                
                
                —
                
                
                —Stock
                    received for services
                
                
                —
                
                
                —
                
                
                (666,249
                )Loss
                    on investee
                
                
                —
                
                
                —
                
                
                74,660Income
                    tax expense (benefit)
                
                
                26,264
                
                
                (116,979
                )
                
                (97,482
                )Minority
                    interest
                
                
                —
                
                
                —
                
                
                (47,008
                )Changes
                    in operating assets and liabilities:Restricted
                    cash
                
                
                —
                
                
                —
                
                
                (87,500
                )Accounts
                    receivable
                
                
                (5,907
                )
                
                (65,933
                )
                
                —Receivables
                    from investments
                
                
                —
                
                
                934,031
                
                
                (934,031
                )Marketable
                    securities, net
                
                
                —
                
                
                809,260
                
                
                2,439,665Inventories
                
                
                42,825
                
                
                34,656
                
                
                (77,481
                )Prepaid
                    expenses
                
                
                474,111
                
                
                33,900
                
                
                43,278Other
                    current assets
                
                
                (6,049
                )
                
                105,269
                
                
                (38,896
                )Notes
                    receivable
                
                
                123
                
                
                (32,603
                )
                
                —Assets
                    held for sale, net
                
                
                21,818
                
                
                —
                
                
                —Accounts
                    payable
                
                
                (587,256
                )
                
                878,372
                
                
                494,918Accrued
                    liabilities
                
                
                320,770Due
                    to broker
                
                
                —
                
                
                (801,863
                )
                
                341,087Net
                    cash used in operating activities
                
                
                (3,765,116
                )
                
                (2,794,441
                )
                
                (1,719,252
                )Cash
                    flows from investing activities:Purchase
                    of property and equipment
                
                
                (561,068
                )
                
                (2,305,657
                )
                
                (829,537
                )Purchase
                    of SurgiCount
                
                
                —
                
                
                —
                
                
                (432,398
                )Proceeds
                    from sale of property and equipment
                
                
                42,600
                
                
                —
                
                
                —Proceeds
                    from sale of assets held for sale, net
                
                
                3,178,023
                
                
                —
                
                
                —Proceeds
                    from sale of long-term investments
                
                
                333,333
                
                
                289,409
                
                
                1,371,522Purchases
                    of long-term investments
                
                
                —
                
                
                —
                
                
                (903,173
                )Net
                    cash provided by (used in) investing activities
                
                
                2,992,888
                
                
                (2,016,248
                )
                
                (793,586
                )Cash
                    flows from financing activities:Proceeds
                    from issuance of common stock and warrants
                
                
                4,484,406
                
                
                527,850
                
                
                250,000Proceeds
                    from exercise of stock options
                
                
                —
                
                
                —
                
                
                26,250Purchases
                    of treasury stock
                
                
                —
                
                
                —
                
                
                (36,931
                )Proceeds
                    from notes payable
                
                
                100,000
                
                
                7,549,683
                
                
                1,621,627Payments
                    and decrease on notes payable
                
                
                (3,372,215
                )
                
                (3,342,442
                )
                
                (95,976
                )Payments
                    of preferred dividends
                
                
                (38,325
                )
                
                —
                
                
                (19,163
                )Net
                    cash provided by financing activities
                
                
                1,173,866
                
                
                4,735,091
                
                
                1,745,807Net
                    increase (decrease) in cash
                
                
                401,638
                
                
                (75,598
                )
                
                (767,031
                )Cash
                    at beginning of period
                
                
                3,775
                
                
                79,373
                
                
                846,404Cash
                    at end of period
                
                $
                405,413
                
                $
                3,775
                
                $
                79,373
  The
            accompanying notes are an integral part of these consolidated financial
            statements.
 47
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
  **Consolidated
            Statements of Cash Flows (continued)**
 **For
                    The Year Ended December 31,****2007**
                
                **2006**
                
                **2005**Supplemental
                    disclosures of cash flow information:Cash
                    paid during the period for interest
                
                $
                255,245
                
                $
                216,779
                
                $
                61,593Supplemental
                    schedule of non cash investing and financing activities:Dividends
                    accrued
                
                $
                38,325
                
                $
                76,650
                
                $
                75,700Issuance
                    of common stock and warrants in connection with Surgicount
                    acquisition
                
                $
                144,500
                
                $
                —
                
                $
                4,232,178Issuance
                    of common stock in payment of notes payable and accrued
                    interest
                
                $
                695,732
                
                $
                —
                
                $
                —Issuance
                    of common stock for inventory
                
                $
                500,000
                
                $
                —
                
                $
                —Payment
                    of accrued liability with long-term investments
                
                $
                10,969
                
                $
                —
                
                $
                —Reclassification
                    of accrued interest to notes payable, less current portion -
                    net
                
                $
                348,614
                
                $
                —
                
                $
                —Reclassification
                    of long term investments to assets held for sale
                
                $
                430,564
                
                $
                —
                
                $
                —Issuance
                    of common stock in connection with asset purchase
                    agreement
                
                $
                —
                
                $
                —
                
                $
                66,895Issuance
                    of common stock in connection with land acquisition
                
                $
                —
                
                $
                —
                
                $
                85,619Issuance
                    of common stock in connection with purchase of marketable
                    securities
                
                $
                —
                
                $
                —
                
                $
                101,640Issuance
                    of common stock in connection with prepaid legal services
                
                $
                —
                
                $
                50,000
                
                $
                —Accrued
                    purchase price of investment
                
                $
                —
                
                $
                —
                
                $
                (165,240
                )Assumption
                    of accrued liabilities
                
                $
                —
                
                $
                —
                
                $
                15,000Capitalized
                    interest
                
                $
                —
                
                $
                —
                
                $
                28,840Reclassification
                    of other current asset to purchase of Surgicount
                
                $
                —
                
                $
                —
                
                $
                20,000Purchase
                    of the remaining 50% interest in ASG, through issuance of common
                    stock,
                    resulting in the following asset acquired and liabilities assumed
                    during
                    the quarter ended March 31, 2006 as follows:ASGGoodwill
                
                $
                357,008Common
                    stock issued
                
                $
                (610,000
                )Minority
                    interest
                
                $
                252,992In
                    connection with the Company's acquisitons of Surgicount and ASG,
                    equity
                    instruments were issued and liabilities assumed during 2005 as
                    follows:Surgicount
                
                
                
                
                
                ASGFair
                    value of assets acquired
                
                $
                6,372,103
                
                $
                1,095,211Cash
                    paid
                
                
                (452,398
                )
                
                (300,000
                )Equity
                    instruments issued
                
                
                (4,232,178
                )Minority
                    interest
                
                
                
                
                
                (300,000
                )Liabilities
                    assumed
                
                $
                1,687,527
                
                $
                495,211
  The
            accompanying notes are an integral part of these consolidated interim
            financial
            statements.
 48
  **PATIENT
          SAFETY TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Stockholders' Equity**
 **For
          the Three Years Ended December 31, 2007**
 **Total****Preferred
                    Stock**
                
                **Common
                    Stock Issued**
                
                **Paid-In**
                
                **Other**
                  **Comprehensive**
                
                **Accumulated**
                
                **Treasury
                    Stock**
                
                **Shareholders’****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Capital**
                
                **Income**
                
                **Deficit**
                
                **Shares**
                
                **Amount**
                
                **Equity**BALANCES,
                    December 31, 2004
                
                
                10,950
                
                $
                10,950
                
                
                6,128,067
                
                $
                2,022,262
                
                $
                13,950,774
                
                $
                —
                
                $
                (9,800,885
                )
                
                (1,457,364
                )
                $
                (2,616,832
                )
                $
                3,566,269Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (5,907,523
                )
                
                —
                
                
                —
                
                
                (5,907,523
                )Other
                    comprehensive income
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                2,374,858
                
                
                —
                
                
                —
                
                
                —
                
                
                2,374,858Preferred
                    Dividends
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (75,700
                )
                
                —
                
                
                —
                
                
                (75,700
                )Issuance
                    of common stock for:Cash
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                129,904
                
                
                —
                
                
                —
                
                
                65,319
                
                
                120,096
                
                
                250,000Purchase
                    of investments/Surgicount acquisition
                
                
                —
                
                
                —
                
                
                600,000
                
                
                198,000
                
                
                3,579,916
                
                
                —
                
                
                —
                
                
                58,444
                
                
                104,943
                
                
                3,882,859Exercise
                    of stock options
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                16,150
                
                
                —
                
                
                —
                
                
                5,625
                
                
                10,100
                
                
                26,250Services
                
                
                —
                
                
                —
                
                
                96,961
                
                
                31,998
                
                
                408,220
                
                
                —
                
                
                —
                
                
                15,756
                
                
                29,268
                
                
                469,486Compensation
                    expense due to warrant issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                918,132
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                918,132Compensation
                    expense due to restricted stock issuances
                
                
                —
                
                
                —
                
                
                170,248
                
                
                56,181
                
                
                1,463,666
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,519,847Compensation
                    expense due to stock option issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,596,825
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,596,825Warrants
                    issued in purchase of Surgicount
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                536,578
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                536,578Repurchases
                    of common stock
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (10,611
                )
                
                (36,931
                )
                
                (36,931
                )BALANCES,
                    December 31, 2005
                
                
                10,950
                
                $
                10,950
                
                
                6,995,276
                
                $
                2,308,441
                
                $
                22,600,165
                
                $
                2,374,858
                
                $
                (15,784,108
                )
                
                (1,322,831
                )
                $
                (2,389,356
                )
                $
                9,120,950Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (13,623,152
                )
                
                —
                
                
                —
                
                
                (13,623,152
                )Other
                    comprehensive income
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,374,858
                )
                
                —
                
                
                —
                
                
                —
                
                
                (2,374,858
                )Preferred
                    Dividends
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (76,650
                )
                
                —
                
                
                —
                
                
                (76,650
                )Issuance
                    of common stock for:Cash
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (263,178
                )
                
                —
                
                
                —
                
                
                438,000
                
                
                791,028
                
                
                527,850Purchase
                    of ASG
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                248,751
                
                
                —
                
                
                —
                
                
                200,000
                
                
                361,249
                
                
                610,000Services
                
                
                —
                
                
                —
                
                
                79,144
                
                
                26,118
                
                
                331,288
                
                
                —
                
                
                —
                
                
                70,694
                
                
                127,673
                
                
                485,079Compensation
                    expense due to warrant issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                593,215
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                593,215Compensation
                    expense due to restricted stock issuances
                
                
                —
                
                
                —
                
                
                414,606
                
                
                136,820
                
                
                968,565
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,105,385Compensation
                    expense due to stock option issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,117,788
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,117,788Warrants
                    issued in connection with debt financings
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                4,057,747
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                4,057,747BALANCES,
                    December 31, 2006
                
                
                10,950
                
                $
                10,950
                
                
                7,489,026
                
                $
                2,471,379
                
                $
                29,654,341
                
                $
                —
                
                $
                (29,483,910
                )
                
                (614,137
                )
                $
                (1,109,406
                )
                $
                1,543,354Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (7,005,978
                )
                
                —
                
                
                —
                
                
                (7,005,978
                )Preferred
                    Dividends
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (76,650
                )
                
                —
                
                
                —
                
                
                (76,650
                )Issuance
                    of common stock for:Cash
                
                
                —
                
                
                —
                
                
                3,639,863
                
                
                1,201,155
                
                
                2,828,026
                
                
                —
                
                
                —
                
                
                584,137
                
                
                1,055,226
                
                
                5,084,407Contingent
                    payment due to SurgiCount acquisition
                
                
                —
                
                
                —
                
                
                100,000
                
                
                33,000
                
                
                111,500
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                144,500Services
                
                
                —
                
                
                —
                
                
                33,000
                
                
                10,890
                
                
                38,610
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                49,500Payment
                    of debt
                
                
                
                
                
                
                
                
                551,197
                
                
                181,895
                
                
                513,836
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                695,731Compensation
                    expense due to warrant issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                210,578
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                210,578Compensation
                    expense due to restricted stock issuances
                
                
                —
                
                
                —
                
                
                241,516
                
                
                79,700
                
                
                289,054
                
                
                —
                
                
                —
                
                
                30,000
                
                
                54,180
                
                
                422,934Compensation
                    expense due to stock option issuances
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                674,189
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                674,18910,950
                
                $
                10,950
                
                
                12,054,602
                
                $
                3,978,019
                
                $
                34,320,134
                
                $
                —
                
                $
                (36,566,538
                )
                
                —
                
                $
                —
                
                
                1,742,565
  The
            accompanying notes are an integral part of these consolidated interim
            financial
            statements.
 49




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




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





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





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





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





**2.
      LIQUIDITY AND GOING CONCERN**





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





**3.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Principles
      of Consolidation**





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





**Use
      of Estimates**





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




50


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


**Cash
      and Cash Equivalents**





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





**Concentration
      of Credit Risk**





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





**Shipping
      and Handling Costs**





Shipping
      and handling costs are classified as cost of sales.





**Accounts
      Receivable**





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





**Inventories**





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





**Investments
      - Debt and Equity Securities**





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





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





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





**Investments**





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




51


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





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





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





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




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





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





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




52


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


**Fair
      Value of Financial Instruments**





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





**Revenue
      Recognition**




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





**Goodwill
      and Intangible Assets**





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





**Long-Lived
      Assets**


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





**Stock-Based
      Compensation**





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





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




53


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


**Property
      and Equipment**





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





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





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





**Beneficial
      Conversion Feature of Convertible Notes Payable**





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





**Income
      Taxes**





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





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





**Earnings
      per Common Share**





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





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




54


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


**Treasury
      Stock**





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





**Comprehensive
      Income (Loss)**





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





**Recent
      Accounting Pronouncements**





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





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





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





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




55


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


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





**4.
      DISCONTINUED OPERATIONS**





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




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




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





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




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





**5.
      RESTRICTED CERTIFICATE OF DEPOSIT**





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




56


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




**6.
      PROPERTY AND EQUIPMENT**





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




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





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





**7.
      ACQUISITIONS**





*Surgicount
      Medical, Inc.*





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





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





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




57


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




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





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




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





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









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





*Automotive
      Services Group, LLC*





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





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





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




58




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


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


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





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





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





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





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





**8.
      GOODWILL AND PATENTS**





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


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





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





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





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





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




59


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




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





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





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





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




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





*Alacra
      Corporation*





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





*Investments
      in Real Estate*





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




60





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




**10.
      NOTES PAYABLE**





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




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





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





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





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




61


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


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





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





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





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





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




62


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


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





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





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





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





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




63


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


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





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





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





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





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





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




64


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


**11.
      ACCRUED LIABILITIES**





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




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





**12.
      EQUITY TRANSACTIONS**





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





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





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





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





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




65


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


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





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





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





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





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





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





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





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




66


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


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





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





**13.
      WARRANTS**





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





**14.
      STOCK REPURCHASE PROGRAM**





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





**15.
      STOCK OPTION PLANS**





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




67


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


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




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





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




68


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


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





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





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




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





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





**16.
      RELATED PARTY TRANSACTIONS**





*Due
      from Related Parties*





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





*IPEX,
      Inc.*





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




69


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


*Digicorp*





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





*Loans*





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





*ASG*





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





*A
      Plus International, Inc.*





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





**17.
      INCOME TAXES**





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





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




70


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


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





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





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





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





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





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





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




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




71


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


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




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





**18.
      COMMITMENTS AND CONTINGENCIES**





*Operating
      Lease*





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





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





*Legal
      Proceedings*





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





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




72


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


*Employment
      Agreements*





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





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





**19.
      SEGMENT REPORTING**





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





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





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




73


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


**21.
      SUBSEQUENT EVENTS**





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





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




74




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





Not
      applicable.





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





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




**Management’s
      Report on Internal Control Over Financial Reporting**





Under
      Section 404 of the Sarbanes-Oxley Act of 2002, management is required to
      assess the effectiveness of the Company’s internal control over financial
      reporting as of the end of each fiscal year and report, based on that
      assessment, whether the Company’s internal control over financial reporting is
      effective.





The
      Company’s management is responsible for establishing and maintaining adequate
      internal control over financial reporting. The Company’s internal control over
      financial reporting is a process designed to provide reasonable assurance of
      the
      reliability of its financial reporting and of the preparation of its financial
      statements for external reporting purposes, in accordance with U.S. generally
      accepted accounting principles.





The
      Company’s internal control over financial reporting includes policies and
      procedures that (1) pertain to the maintenance of records that, in
      reasonable detail, accurately and fairly reflect transactions and
      disposition of assets; (2) provide reasonable assurance that transactions
      are recorded as necessary to permit preparation of financial statements in
      accordance with U.S. generally accepted accounting principles, and that receipts
      and expenditures are being made only in accordance with the authorization of
      its
      management and directors; and (3) provide reasonable assurance regarding
      the prevention or timely detection of unauthorized acquisition, use, or
      disposition of the Company’s assets that could have a material effect on its
      financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of the
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies and procedures included in such controls may
      deteriorate.





The
      Company’s management has assessed the effectiveness of the Company’s internal
      control over financial reporting as of December 31, 2007. In making this
      assessment, the Company used the criteria established by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
      Control—Integrated Framework.” These criteria are in the areas of control
      environment, risk assessment, control activities, information and communication,
      and monitoring. The Company’s assessment included extensive documenting,
      evaluating and testing the design and operating effectiveness of its internal
      controls over financial reporting.





Based
      on
      the Company’s processes and assessment, as described above, management has
      concluded that, as of December 31, 2007, the Company’s internal control
      over financial reporting was effective.




75




The
      Company’s independent registered public accounting firm, Squar, Milner,
      Peterson, Miranda & Williamson, LLP, has not audited and therefore has not
      issued a report on effectiveness of the Company’s internal control over
      financial reporting.





**Item
      9B. Other Information.**





None.


**PART
      III**




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





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





The
      current directors of the company are as follows: Steve Kane (Class I Director
      (Served since 2008) - nominated for re-election to the Board for a three-year
      term expiring in 2010); David M. Augustine (Class I Director (Served since
      2007)
      - nominated for re-election to the Board for a three-year term expiring in
      2010); John P. Francis (Class I Director (Served since 2007) - nominated for
      re-election to the Board for a three-year term expiring in 2010); Herbert
      Langsam (Class II Director - (Served since 2004) - term expiring in 2008);
      Wenchen Lin (Class II Director - (Served since 2007) - term expiring in 2008);
      Arnold E. Spangler (Class III Director (Served since January 7, 2006) - term
      expiring in 2009); and Louis Glazer, M.D., Ph.G (Class III Director (Served
      since 2004) - term expiring in 2009). We believe under the standards for Nasdaq
      listed companies that, other than Dr. Glazer, all of the Company’s directors are
      independent.





**Common
      Stock Directors**





***Steven
      H. Kane***  (1) ***,*** age 55,
      is the Company’s Chairman and was elected by the Board of Directors to serve as
      a Class I Director of the Company on February 7, 2008. Mr. Kane is currently
      the
      President, Chief Executive Officer and Director of Protalex, Inc. (OTCBB: PRTX)
      and has over 30 years experience in the health care industry. From April 1997
      to
      August 2000, Mr. Kane served as Vice President of North American Sales &
Field Operations for Aspect Medical. While at Aspect, he helped guide the
      company to a successful initial public offering in January 2000. Prior to
      Aspect, Mr. Kane was Eastern Area Vice President for Pyxis Corporation, where
      he
      was instrumental in positioning the company for its successful initial public
      offering in 1992. Pyxis later was acquired by Cardinal Health for $1 billion.
      Prior to that Mr. Kane worked in sales management with Eli-Lilly and Becton
      Dickinson





***David
      Augustine*** (2) ***,*** age
      46,
      was elected by the Board of Directors to serves as a Class I Director of the
      Company on January 24, 2007 to fill the vacancy created by the resignation
      of
      Brig. Gen. Lytle Brown, III effective January 24, 2007. Mr. Augustine has almost
      twenty years experience as a successful legal advisor, managing principal and
      business consultant. Mr. Augustine began his career as an attorney in the
      Mergers and Acquisitions department of Skadden, Arps, Slate, Meagher & Flom,
      representing predominantly Fortune 500 companies. Mr. Augustine also started
      up
      the firm’s restructuring and reorganization department in its Wilmington,
      Delaware office. Mr. Augustine has guided numerous companies through successful
      restructurings both as a business principal and as a legal advisor. He also
      has
      substantial experience in the areas of intellectual property development,
      protection, and licensing.





***John
      P. Francis*** **,** age
      42,
      was elected by the Board of Directors to serves as a Class I Director of the
      Company on November 26, 2007 to fill the vacancy created by the resignation
      of
      William B. Horne effective as of that date. Mr. Francis is President of Francis
      Capital Management, LLC, an investment management firm specializing in small
      capitalization equities.   Mr. Francis has over eighteen years of
      experience in investment management, finance and accounting.




76





***Wenchen
      Lin,*** age
      52,
      was elected by the Board of Directors to serves as a Class II Director of the
      Company on March 28, 2007 to fill the vacancy created by the resignation of
      Alice Campbell effective January 26, 2007. Mr. Lin has almost twenty years
      experience as the President and founder of A Plus International, a successful
      manufacturer producing a variety of surgical dressings, film and plastic
      products and servicing the custom procedural tray industry on cotton textile
      products. A Plus has established relationships with key market leaders in the
      industries that A Plus services. Mr. Lin began his career serving as
      Vice-President to large trade and shipping companies, such as Trade Diversified,
      Inc. and Brother Trucking Co. and has vast knowledge and experience in oversees
      factories, trade, transport and distribution. Mr. Lin received his MBA from
      Ohio
      University and his accounting degree from Taiwan Suzhou University.





***Arnold
      Spangler*** (2) ***,*** age 59,
      was elected by the Board of Directors to serve as a Class III Director of the
      Company on January 7, 2006 to fill the vacancy created by the first resignation
      of Milton “Todd” Ault, III effective January 9, 2006. From 1993 through 2005 Mr.
      Spangler was Managing Director of Mancuso & Co., a private merchant banking
      and equity firm which arranges and participates in leveraged buyout
      acquisitions. Mr. Spangler is currently on advisory boards of NYPPE Holdings,
      LLC and Total Equips, Inc., both private companies.





**Series
      A Preferred Stock Directors**





***Louis
      Glazer, M.D., Ph.G.***  (1) ,
      age 77,
      has served as a Class III Director of the Company since October 22, 2004. Dr.
      Glazer also currently serves on the executive council of patient safety at
      Harvard Medical School and Brigham and Women’s Hospital and as a member of AGB
& Company IM’s advisory board and as an independent biotechnology and
      medical consultant. Until 2002, Dr. Glazer served as the chief anesthesiologist
      and medical director for the Vitreo-Retinal Clinic in Memphis, Tennessee. Prior
      to that, Dr. Glazer taught obstetrics anesthesia at the University of Tennessee,
      while practicing anesthesiology at Baptist East Hospital, Methodist Hospital,
      St. Francis Hospital and Baptist Memorial Hospital in Memphis, Tennessee. Dr.
      Glazer was also responsible for establishing anesthesia programs at Baptist
      Memorial Hospital and Methodist Hospital South in Memphis, Tennessee. Dr. Glazer
      received his B.S. in pharmacy from the University of Oklahoma and his M.D.
      from
      the University of Bologna School of Medicine in Italy.





***Herbert
      Langsam***  (1) ,
      age 77,
      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




77


**Executive
      Officers**





The
      executive officers of the Company as of March 31, 2008 are as
      follows:




***Name
                and Age***
            
            ***Title***
            
            ***Served
                as an******Officer
                Since***William
                B. Horne (39)
            
            Chief
                Executive Officer and Chief Financial Officer and Principal Accounting
                Officer
            
            2005William
                Adams (52)
            
            President
                and Chief Executive Officer of SurgiCount Medical, Inc.
            
            2005Rick
                Bertran (46)
            
            President
                of SurgiCount Medical, Inc.
            
            2005




**Executive
      Officers**





***William
      B. Horne,*** age 39,
      Chief Executive and Chief Financial Officer and Principal Accounting Officer.
      Mr. Horne served as a Class I Director of the Company from January 9, 2007
      to
      November 26, 2007 to fill the vacancy created by the resignation of Milton
      “Todd” Ault III effective January 9, 2007. Since July 20, 2005, Mr. Horne has
      been a director of Digicorp (OTCBB: DGCO). From July 20, 2005 until April 20,
      2007, Mr. Horne was also the Chief Financial Officer of Digicorp. From September
      30, 2005 until December 29, 2005, Mr. Horne also served as Digicorp’s Chief
      Executive Officer and Chairman of Digicorp’s Board of Directors. Since January
      2002, Mr. Horne has provided strategic financial consulting services to private
      and public companies. From May 2002 to April 2005, Mr. Horne held the position
      of Chief Financial Officer of Alaska Wireless Communications, a privately held
      advanced cellular communications company. From November 1996 to December 2001,
      Mr. Horne held the position of Chief Financial Officer of The Phoenix Partners,
      a venture capital limited partnership located in Seattle,
      Washington.





***Bill
      Adams,*** age 52,
      President and Chief Executive Officer of SurgiCount Medical, Inc. Mr. Adams
      has
      25 years of experience in the health care industry and the disposable medical
      supply business.  As the President of Health West Marketing since its
      inception in 1983, Mr. Adams pioneered the introduction of custom procedure
      trays into the acute care supply chain.  Additionally, Mr. Adams is one of
      the industry's leaders in taking advantage of global economics through the
      introduction of external manufacturing in China with A Plus
      International.  Mr. Adams has been actively involved in the design and
      development of SurgiCount Medical's Safety-Sponge System for several
      years and was instrumental in solidifying SurgiCount’s national distribution and
      manufacturing agreements.





***Richard
      Bertran,*** age 46,
      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.





**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. John Francis, David Augustine and Arnold Spangler, each of
      whom are considered independent under Rule 10A-3 under the Securities Exchange
      Act of 1934, as amended, and each of whom is financially literate. Mr. Spangler
      serves as Chairman of the Audit Committee.




78





**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, 2007:






Name
                and Relationship
            
            Number
              of
                late reports
            
            Transactions
                not
              timely
                reported
            
            Known
                failures to
              file
                a required formLouis
                Glazer, M.D., Ph.G., Director
            
            
            1
            
            
            2
            
            
            0William
                B. Horne, Officer
            
            
            2
            
            
            6
            
            
            0John
                Francis, Director
            
            
            1
            
            
            1
            
            
            1Arnold
                Spangler, Director
            
            
            2
            
            
            5
            
            
            0Herbert
                Langsam, Director
            
            
            1
            
            
            2
            
            
            0Bill
                Adams, Officer
            
            
            1
            
            
            1
            
            
            0David
                Augustine, Director
            
            
            1
            
            
            3
            
            
            0Wayne
                Lin, Director
            
            
            1
            
            
            1
            
            
            1Steven
                Kane, Director
            
            
            0
            
            
            0
            
            
            0




**Item
      11. Executive Compensation.**





**COMPENSATION
      DISCUSSION AND ANALYSIS**





We
      designed the compensation program for our named executive officers to attract,
      motivate, and retain key executives who drive the Company’s success. We seek to
      employ the best executive talent in our line of business. We want to reward
      our
      executives for business achievements and satisfaction of corporate objectives.
      Additionally, the overall executive compensation program, taken as a whole,
      should align the interests of the executives with the stockholders’ interests.
      We achieve these objectives through a compensation package that:





·
            provides
                competitive total compensation consisting primarily of cash and
                stock,




·
            allows
                our officer’s to participate in the benefit programs that we offer to all
                full-time employees,




·
            provides
                certain officer’s to receive additional fringe
                benefits,




·
            differentiates
                rewards based on the officer’s contributions to company performance,
                and




·
            encourages
                our named executive officers to act as owners with an equity interest
                in
                Patient Safety.





We
      view,
      for compensation purposes, our competitors for executive talent as companies
      in
      the health care industry.




*Determining
      Executive Compensation*




The
      independent members of the Board approve the compensation of our named executive
      officers. The Compensation Committee makes a recommendation to the independent
      directors for annual compensation (including salary, bonus and stock-based
      compensation) of our named executive officers. These recommendations are based
      on:




Chief
      executive officer





·
            The
                chief executive officer’s historical
                earnings,




·
            a
                market competitive assessment of similar roles at other
                companies,




·
            the
                earnings of other named executive officers, and




·
            an
                evaluation of the chief executive officer’s performance for the fiscal
                year.




Named
      executive officers (other than the chief executive officer) .





·
            The
                executive’s historical earnings,




79




·
            a
                market competitive assessment of similar roles at other
                companies,




·
            internal
                comparisons to the compensation of other
                executives,




·
            evaluations
                of performance for the fiscal year,
                and




·
            the
                chief executive officer’s recommendations for each named executive
                officer’s base pay, and bonus
                amounts.




The
      evaluation is based on the success of the named executive officer in achieving
      his performance commitments, which include financial, strategic and company
      culture/leadership goals. The Board approves the named executive officers
      salary, bonus and stock-based compensation in the first quarter of the fiscal
      year after the relevant performance information is available.





**The
      components of our executive compensation program**





Our
      executive compensation program consists of three elements: base pay; cash bonus
      and grants of fair market value of either restricted stock or options to
      purchase shares of our common stock. We use this mix of programs for a variety
      of reasons:





·
            As
                a package, these types of programs are typically offered by the types
                of
                companies from which we would seek executive
                talent.




·
            As
                a package, these particular programs provide both a current and a
                long
                term incentive for the executive officers, thereby aligning the
                executives’ interests with
                shareholders.




·
            These
                programs, as a package, provide the executives with short and long
                term
                rewards; this serves as a retention, as well as a motivational, device
                for
                the executives.





We
      also
      provide our named executive officers with a package of fringe benefits on the
      same basis that is provided to all full-time benefits eligible employees. These
      benefits include such items as health insurance and group term life insurance.
      We provide certain executives with an additional benefit of an automobile
      allowance, which is provided for in their employment contracts.





We
      believe that the package of executive compensation programs that we offer is
      competitive; we are able to attract and retain the executive talent that we
      need
      to successfully run our business. We currently believe that the long term
      incentive component of our executive compensation program, which uses fair
      market value stock options and grants of restricted common stock, provides
      executives with an incentive as well as putting a portion of their compensation
      at risk if our share price declines.





We
      believe that our named executive officers should have formalized employment
      contracts. The existence of a contract gives the Company, and the named
      executive officer structure as to the other’s expectations from the employment
      relationship. We also believe that the level of security that an employment
      contract provides to the executive is an important retention tool; we feel
      that
      many of the companies with whom we compete for executive talent offer such
      agreements and that we would be at a competitive disadvantage if we did not
      have
      them. The salient terms of the employment agreements for the named executive
      officers are discussed in the “Employment Agreements” section.





**Our
      process for setting executive pay**





The
      Compensation Committee’s focus is to determine the compensation of the chief
      executive officer and to review the proposals of the chief executive officer
      regarding the compensation for other named executive officers. In 2007, the
      Compensation Committee made the final decision on all aspects of named executive
      officer pay. In 2008, the Compensation Committee will present recommendations
      to
      the entire Board of Directors for their approval.




80





Our
      executive compensation process begins with the chief executive officer’s
      submission of each executive’s total pay package to the Compensation Committee
      for its determination. We maintain a pay structure with ranges for each type
      of
      compensation (base pay, bonus, equity grant) for the named executive officers.
      We have developed this structure based on our knowledge of our industry.





Our
      process for determining the value of each component of executive pay functioned
      in the following manner for 2007:





Base
      pay: Base
      compensation for all of our named executive officers is provided for in their
      respective employment agreements, and the Company has the ability to make annual
      increases to the base pay level. Looking at information from other reporting
      companies, the chief executive officer makes a recommendation for executive
      base
      pay increases to the Compensation Committee. The Compensation Committee reviews
      the information provided by the chief executive officer and its supporting
      data,
      and makes a determination of annual base pay increases.





The
      Compensation Committee awarded the following base pay increases to the named
      executive officers; the increases were effective on January 1, 2007 for our
      chief executive and chief financial officer and May 1, 2007 for the President
      of
      SurgiCount Medical.





**Named
                Executive Officer**
            
            **Annualized
                2006**
              **Base**
            
            **Annual**
              **Increase**
            
            **Annualized
                2007**
              **Base**
            
            **Percentage**
              **Increase**William
                Horne, Chief Executive and Chief Financial Officer
            
            $
            150,000
            
            $
            100,000
            
            $
            250,000
            
            
            66.7
            %Bill
                Adams, President and Chief Executive Officer of SurgiCount Medical,
                Inc.
            
            $
            300,000
            
            $
            0
            
            $
            300,000
            
            
            0
            %Richard
                Bertran, President of SurgiCount Medical, Inc.
            
            $
            200,000
            
            $
            50,000
            
            $
            250,000
            
            
            25
            %





The
      Chief
      Executive and Chief Financial Officer and the President of SurgiCount each
      received significant raises because further analysis by the Compensation
      Committee indicated that the positions were underpaid. The Compensation
      Committee specifically noted that the additional responsibilities Mr. Horne
      assumed, effective January 2007, in his dual role as both the Company’s Chief
      Executive Officer and Chief Financial Officer warranted additional cash
      compensation. The Compensation Committee elected to increase Mr. Bertran’s base
      compensation as a reward for his individual efforts in promoting the Company
      Safety-Sponge product. Further, the Compensation Committee wanted to establish
      an equitable level of base pay amounts for our three senior
      executives.




Annual
      bonus: Our
      annual bonus program for executives is administered in the following manner.
      Our
      Compensation Committee determines the amount of bonuses, if any, for each of
      our
      named executive officers. To the extent bonuses are made they are on a
      completely discretionary basis at the reasonable and good faith discretion
      of
      the Compensation Committee, based upon the financial performance of the Company.
      During 2007 the Compensation Committee did not award any bonuses.





Equity
      grants: In
      certain circumstances, the Compensation Committee may award equity grants to
      named executive officers. The reasons for these grants include:





·
            an
                incentive to join the Company, based on compensation that is being
                forfeited through the termination of previous
                employment,




·
            to
                encourage retention of critical
                talent,




·
            as
                a strategic investment in someone deemed critical to the Company’s
                leadership, and




81




·
            to
                reward outstanding performance




The
      chief
      executive officer recommends the equity grant, if any, to a named executive
      officer. The Compensation Committee considers the chief executive officer’s
      recommendation and makes a final decision based on the factors listed above.
      Equity grants that were made to named executive officers during 2007 were in
      connection with a grant specifically authorized by our Board of Directors,
      in
      the case of our Chief Executive and Financial Officer, or an employment contract
      executed by the President of SurgiCount Medical. The equity grant during 2007
      to
      our Chief Executive and Chief Financial Officer was in the form of restricted
      stock issued as a means to retain his services, at the direction of our Board
      of
      Directors. The equity grant during 2007 to our President of SurgiCount Medical
      was in the form of non-qualified stock options pursuant to an employment
      contract executed upon joining the Company. All of the options granted in 2007
      were valued at fair market value as of the date of grant (as further explained
      below). The grant to our President of SurgiCount Medical was fully vested at
      the
      date of grant.





In
      connection with the award of equity grants, the Principal Executive Officer
      provides the Compensation Committee with a proposal for equity grants as part
      of
      the employment contract process. The amount of the grant is based on the equity
      grant ranges for the position which the Company maintains. The Compensation
      Committee reviewed the Principal Executive Officer’s proposal and the underlying
      information, and makes its determination as to the grant.





We
      establish the exercise price for our options in the following
      manner:





For
      a new
      hire, the Compensation Committee approves the grant and establishes the price
      based on the Company’s closing price on the day of Compensation committee
      approval; however, if the executive has not yet started employment as of the
      date of Compensation Committee approval, the price is set as the Company’s
      closing price on the executive’s first day of work.




For
      a new
      contract for a current executive, the Compensation Committee approves the grant
      and establishes the price based on the Company’s closing price on the day of
      Compensation Committee approval.





We
      believe that the grant of fair market value stock options, even though there
      is
      now a financial statement impact before the options are exercised, continues
      to
      provide substantial benefits to the Company and the executive. We benefit
      because the options align the executive’s financial interest with the
      shareholders’ interest:





The
      executives benefit because:




·
            They
                can realize additional income if our shares increase in value,
                and




·
            They
                have no personal income tax impact until they exercise the
                options





We
      do not
      maintain any equity ownership guidelines for our named executive officers.
      We
      have adopted a corporate policy which expressly prohibits any named executive
      officer from trading in derivative securities of our Company, short selling
      our
      securities, or purchasing our securities on margin at any time. We do not time
      the granting of our options with any favorable or unfavorable news relating
      to
      our Company. Proximity of any awards to an earnings announcement, market event
      or other event related to us is purely coincidental.




Because
      we feel that each of our named executive officers provides unique services
      to
      us, we do not use a fixed relationship between base pay, short term bonus and
      equity awards. When the Compensation Committee makes the final decisions about
      a
      named executive officers total compensation package for a year, the three
      elements (base pay, bonus and equity award) are considered both individually
      and
      as a complete package. We do not take into account amounts that a named
      executive officer may have realized in a year as a result of short term bonus
      awards or stock option exercises when we establish pay levels and goals for
      the
      current year. Overall, we believe that our total compensation program for
      executives is reasonable while being competitive with market peers.




82





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, 2007 who earned compensation exceeding $100,000 during 2007
      (the ***“named
      executive officers”*** ),
      for
      services as executive officers for the last three fiscal years.


**SUMMARY
                  COMPENSATION TABLE**Name
                  and principal position
              
              Year
              
              Salary
                  ($)
              
              Bonus
                  ($)
              
              Stock
                  Awards ($)(3)
              
              Option
                  Awards ($)(3)
              
              Non-Equity
                  Incentive Plan Compensation ($)
              
              Nonqualified
                  Deferred Compensation Earnings ($)
              
              All
                  Other Compensation
                ($)(4)
              
              Total
                ($)William
                  B. Horne, Chief Executive & Chief Financial Officer(1)
              
              
              2007
                2006
                2005
              
              
              218,750
                150,000
                75,000
              
              
              0
                0
                750
              
              
              26,100
                38,703
                277,536
              
              
              0
                0
                227,732
              
              
              0
                0
                0
              
              
              0
                0
                0
              
              
              0
                255
                368
              
              
              244,850
                188,958
                581,386Bill
                  Adams, President & Chief Executive Officer of SurgiCount(2)
              
              
              2007
                2006
                2005
              
              
              312,500
                206,250
                0
              
              
              0
                0
                0
              
              
              0
                0
                0
              
              
              0
                996,302
                0
              
              
              0
                0
                0
              
              
              0
                0
                0
              
              
              0
                822
                0
              
              
              312,500
                1,203,374
                0Lynne
                  Silverstein, Executive Vice President
              
              
              2007
                2006
                2005
              
              
              105,000
                120,000
                120,000
              
              
              0
                0
                0
              
              
              25,000
                123,000
                158,000
              
              
              0
                108,085
                131,384
              
              
              0
                0
                0
              
              
              0
                0
                0
              
              
              0
                200
                591
              
              
              130,000
                351,285
                409,975Richard
                  Bertran, President of SurgiCount
              
              
              2007
                2006
                2005
              
              
              231,243
                200,000
                92,500
              
              
              0
                0
                750
              
              
              0
                0
                36,000
              
              
              53,308
                0
                343,195
              
              
              0
                0
                0
              
              
              0
                0
                0
              
              
              0
                360
                433
              
              
              284,551
                200,360
                47,878James
                  Schafer, Director of Manufacturing of SurgiCount
              
              
              2007
                2006
                2005
              
              
              67,051
                100,000
                39,807
              
              
              0
                0
                750
              
              
              50,000
                0
                50,000
              
              
              0
                0
                186,324
              
              
              0
                0
                0
              
              
              0
                0
                0
              
              
              0
                342
                361
              
              
              117,051
                100,342
                277,242Louis
                  Glazer, M.D., Ph.G., Former Chief Executive Officer
              
              
              2007
                2006
                2005
              
              
              0
                118,750
                120,000
              
              
              0
                0
                750
              
              
              26,100
                246,000
                316,000
              
              
              0
                216,169
                262,768
              
              
              0
                0
                0
              
              
              0
                0
                0
              
              
              0
                1,060
                2,582
              
              
              26,100
                581,979
                702,100Milton
                  “Todd” Ault III, Former Chief Executive Officer
              
              
              2007
                2006
                2005
              
              
              0
                180,000
                150,000
              
              
              0
                0
                750
              
              
              26,100
                270,000
                316,000
              
              
              0
                237,259
                262,768
              
              
              0
                0
                0
              
              
              0
                0
                0
              
              
              184
                184
                1,248
              
              
              26,100
                687,443
                730,766




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


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


(3)
            Represents
                the dollar amount recognized for financial reporting purposes of
                restricted stock grants and stock options awarded in 2007, 2006 and
                2005,
                respectively, computed in accordance with SFAS
                123(R).


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





83


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, 2007. The Company did not have any outstanding stock appreciation
      rights ( ***“SARs”*** )
      as of
      December 31, 2007.


**GRANTS
                  OF PLAN-BASED AWARDS**
  Estimated
                  Future Payouts Under Non-Equity Incentive Plan Awards
              
              
              Estimated
                  Future Payouts Under Equity Incentive Plan AwardsName
              
              
              Grant
                Date
              
              
              Threshold
                ($)
              
              
              Target
                ($)
              
              
              Maximum
                ($)
              
              
              Threshold
                ($)
              
              
              Target
                ($)
              
              
              Maximum
                ($)
              
              
              All
                  Other Stock Awards: Number of Shares of Stocks or Units(#)
              
              
              All
                  Other Option Awards: Number of Securities Underlying
                  Options(#)
              
              
              Exercise
                  or Base Price of Option Awards
                ($/Sh)
              
              
              Grant
                  Date Fair Value of Stock and Option AwardsWilliam
                  B. Horne
              
              
              —
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              15,000
              
              
              0
              
              
              0
              
              
              26,100Bill
                  Adams
              
              
              —
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0Lynne
                  Silverstein
              
              
              —
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              20,000
              
              
              0
              
              
              0
              
              
              25,000Richard
                  Bertran
              
              
              10/02/2007
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              50,000
              
              
              1.39
              
              
              53,308





**OUTSTANDING
                EQUITY AWARDS AT FISCAL YEAR-END**OPTION
                AWARDS
            
            STOCK
                AWARDSName
            
            Number
                of Securities Underlying Unexercised Options (#)
              Exercisable
            
            Number
                of Securities Underlying Unexercised Options (#)
              Unexercisable
            
            Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options
              (#)
            
            Option
                Exercise Price
              ($)
            
            Option
                Expiration
              Date
            
            Number
                of Shares or Units of Stock That Have Not Vested (#)
            
            Market
                Value of Shares or Units of Stock That Have Not Vested
              ($)
            
            Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested
              (#)
            
            Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested
              (#)William
                B. Horne
            
            
            78,000
            
            
            0
            
            
            0
            
            
            5.267
            
            
            3/30/2015
            
            
            0
            
            
            0
            
            
            0
            
            
            0Bill
                Adams
            
            
            100,000
            
            
            300,000
            
            
            0
            
            
            3.50
            
            
            4/18/2016
            
            
            0
            
            
            0
            
            
            0
            
            
            0Lynne
                Silverstein
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            0
            
            
            0
            
            
            0
            
            
            0Richard
                Bertran
            
            
            133,333
              50,000
            
            
            66,667
              0
            
            
            0
              0
            
            
            5.00
              1.39
            
            
            7/18/2015
              10/02/2017
            
            
            0
            
            
            0
            
            
            0
            
            
            0James
                Schafer
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            0
            
            
            0
            
            
            0
            
            
            0Louis
                Glazer, M.D., Ph.G.,
            
            
            75,000
              60,000
            
            
            0
              0
            
            
            0
              0
            
            
            5.267
              4.10
            
            
            3/30/2015
              1/31/2016
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0
            
            
            0
              0Milton
                “Todd” Ault III
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            —
            
            
            0
            
            
            0
            
            
            0
            
            
            0




84


**OPTION
                  EXERCISES AND STOCK VESTED**OPTION
                  AWARDS
              
              STOCK
                  AWARDSName
              
              Number
                  of
                Shares
                  Aquired
                on
                  Exercise
                (#)
              
              Value
                Realized
                on
                  Exercise
                ($)
              
              Number
                  of
                Shares
                Aquired
                on
                  Vesting
                (#)
              
              Value
                Realized
                on
                  Vesting
                ($)William
                  B. Horne
              
              
              0
              
              
              0
              
              
              18,019
              
              
              31,081Bill
                  Adams
              
              
              0
              
              
              0
              
              
              0
              
              
              0Lynne
                  Silverstein
              
              
              0
              
              
              0
              
              
              20,000
              
              
              25,000Richard
                  Bertran
              
              
              0
              
              
              0
              
              
              0
              
              
              0James
                  Schafer
              
              
              0
              
              
              0
              
              
              0
              
              
              0Louis
                  Glazer, M.D., Ph.G.,
              
              
              0
              
              
              0
              
              
              15,000
              
              
              26,100Milton
                  “Todd” Ault III
              
              
              0
              
              
              0
              
              
              15,000
              
              
              26,100




**Pension
      Benefits**





The
      Company does not offer a pension benefit plan.





**Non-Qualified
      Deferred Compensation**





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





**Compensation
      of Directors**





As
      of
      December 31, 2007, the cash compensation earned by each director of the Company
      varies. Arnold Spanger and David Augustine earned $100,000 and $20,000,
      respectively, whereas the other compensated directors, which include Mr.
      Langsam, Dr. Glazer and Mr. Brown, were eligible to receive a fee of $500 plus
      reimbursement of expenses incurred in attending each board meeting. During
      2007,
      the Company did not compensate Mr. Langsam, Dr. Glazer and Mr. Brown in cash
      and
      all of Mr. Spangler’s and a portion of Mr. Augustine’s cash compensation was
      accrued at December 31, 2007. 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. The
      following table provides certain summary information concerning the compensation
      paid to directors, other than William Horne (our Chief Executive Officer) and
      Louis Glazer, M.D., Ph.G. (our former Chief Executive Officers), during 2006.
      All compensation paid to Messrs .
      Horne
      and Glazer is set forth in the table under “Executive
      Compensation.”




85


**Director
        Compensation**


Name
              
              Fees
                  Earned or Paid in Cash ($)
              
              Stock
                Awards
                  ($)(7)
              
              Option
                Awards
                  ($)(7)
              
              Non-Equity
                Incentive
                  Plan
                Compensation
                  ($)
              
              Change
                  in Pension
                Value
                  and Nonqualified
                Deferred
                  Compensation
                Earnings
                  ($)
              
              All
                  Other
                Compensation
                  ($)
              
              Total
                  ($)Arnold
                  Spangler
              
              
              100,000
              
              
              151,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              151,000Herbert
                  Langsam
              
              
              0
              
              
              26,100
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0David
                  Augustine (1)
              
              
              20,000
              
              
              10,000
              
              
              61,802
              
              
              0
              
              
              0
              
              
              0
              
              
              91,802Wenchen
                  Lin (2)
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0Alice
                  Campbell(3)
              
              
              0
              
              
              26,100
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              26,100Brigadier
                  General (Ret.) Lytle Brown III(4)
              
              
              0
              
              
              26,100
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              26,100John
                  Francis (5)
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0Steven
                  H. Kane (6)
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0





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


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


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


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


(5)  Mr.
      Francis was appointed as a director effective November 26, 2007.


(6)  Mr.
      Kane
      was appointed as a director effective February 7, 2008.


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





**Compensation
      Committee Interlocks and Insider Participation**





The
      Compensation Committee members currently are Messrs. Steven H. Kane, Louis
      Glazer and Herbert Langsam, each of whom is independent. Each member of the
      Compensation Committee is a “non-employee director” for purposes of Rule 16b-3
      under Section 16 of the Exchange Act and an “outside director” for purposes of
      Section 162(m) of the Internal Revenue Code. Mr. Kane serves as the Chairman
      of
      the Compensation Committee. Other than Dr. Glazer, 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.




86





**Employment
      Agreements**





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




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 under the agreement was $200,000. Effective
      May 1, 2007 Mr. Bertran’s base salary was increased to $250,000 per year. In
      addition, Mr. Bertran is entitled to receive: (a) options to purchase 200,000
      shares of the Company’s common stock with a strike price of $5.00 per share,
      which options will vest annually over three years; and (b) 10,000 restricted
      shares of the Company’s common stock as a signing bonus. Mr. Bertran also may
      receive the following stock options upon accomplishing milestones: (a) options
      to purchase 50,000 shares of the Company’s common stock when SurgiCount reaches
      $5 million in sales; and (b) options to purchase 50,000 shares of the Company’s
      common stock when Mr. Bertran accomplishes certain other unspecified milestones
      to be mutually agreed upon among Mr. Bertran, SurgiCount’s Chief Executive
      Officer and Health West. Mr. Bertran is also entitled to participate in all
      of
      SurgiCount’s employee benefit plans in effect from time to time. The employment
      agreement has an initial term of three years and will automatically renew for
      successive one-year periods unless sooner terminated. Mr. Bertran and SurgiCount
      have the right to terminate the employment agreement at any time during the
      employment term for any reason. SurgiCount may also terminate the employment
      agreement at any time for “cause” (as defined in the employment agreement). If
      the employment agreement is voluntarily terminated by Mr. Bertran or if
      SurgiCount terminates the agreement for cause, then all unvested stock options
      and/or unearned milestone bonuses will be forfeited and all obligations of
      the
      parties will end except SurgiCount must continue to reimburse Mr. Bertran for
      reasonable out-of-pocket business expenses related to his employment with
      SurgiCount, Mr. Bertan must continue to maintain the confidentiality of any
      confidential information about SurgiCount and SurgiCount may be required to
      indemnify Mr. Bertran for certain liabilities in connection with his employment.
      If SurgiCount voluntarily terminates the employment agreement without cause,
      then: (a) if the termination date is before 15 months after the effective date
      of the employment agreement, SurgiCount must pay Mr. Bertran severance
      compensation in cash equal to 15 months of base compensation, plus award the
      milestone option grants to the extent the milestones are met within the
      employment term; (b) if the termination date occurs within the final 15 months
      of the initial term, SurgiCount must pay Mr. Bertran severance compensation
      in
      cash through the remaining initial term of the agreement; and (c) all unvested
      stock options will become automatically vested.




87





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




**Compensation
      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 plan.





On
      December 31, 2007, there were 1,650,000 options to purchase shares of common
      stock outstanding under the Amended and Restated Stock Option and Restricted
      Stock Plan, with 990 options, warrants, or shares of common stock available
      for
      future issuance under the Amended and Restated Stock Option and Restricted
      Stock
      Plan.





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





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




*Purpose*





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




88


*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.




89




**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, 2007.





**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)
            
            
            1,650,000
            
            $
            3.49
            
            
            990**Equity
                compensation plans****not
                approved by security****holders**
            
            
            -0-
            
            
            -0-
            
            
            -0-**Total**
            
            
            1,650,000
            
            $
            3.49
            
            
            990




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





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





The
      following tables set forth certain information with respect to beneficial
      ownership (as that term is defined in the rules and regulations of the SEC)
      of
      the Company’s common stock and preferred stock as of April 11, 2008, 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., 43460
      Ridge Park Drive, Suite 140, Temecula, CA 92590.




90




**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****:**Francis
                Capital Management, LLC
              429
                Santa Monica Blvd., Suite 320
              Santa
                Monica, CA 90401
            
            
            2,080,200
                (3
            )
            
            16.1
            %
            
            —
            
            
            —Melanie
                Glazer
              1800
                Century Park East, Ste. 200
              Los
                Angeles, California 90067
            
            
            1,360,203
                (4
            )
            
            11.0
            %
            
            8,150
                (4
            )
            
            74.4
            %DSAM
                Fund LP
              222
                Broadway, 6thFloor
              New
                York, NY 10038
            
            
            1,294,000
                (5
            )
            
            10.3
            %
            
            —
            
            
            —Ault
                Glazer Capital Partners, LLC
              1800
                Century Park East, Ste. 200
              Los
                Angeles, California 90067
            
            
            1,320,893
                (6
            )
            
            9.9
            %
            
            2,600
                (6
            )
            
            23.7
            %A
                Plus International, Inc.
              5138
                Eucalyptus Avenue
              Chino,
                California 91710
            
            
            1,100,000
                (7
            )
            
            8.9
            %
            
            —
            
            
            —Alan
                E. Morelli
              225
                Mantua Road
              Pacific
                Palisades, California 90272
            
            
            1,151,351
                (8
            )
            
            8.7
            %
            
            —
            
            
            —Steven
                Bodnar & Bodnar Capital Management LLC
              680
                Old Academy Road
              Fairfield,
                CT 06824
            
            
            843,750
                (9
            )
            
            6.9
            %
            
            —
            
            
            —**Directors
                and Named Executive Officers****:**John
                P. Francis
            
            
            2,080,200
                (3
            )
            
            16.1
            %
            
            —
            
            
            —Wenchen
                Lin
            
            
            1,100,000
                (7
            )
            
            8.9
            %
            
            —
            
            
            —Bill
                Adams
            
            
            302,017
                (10
            )
            
            2.4
            %
            
            —
            
            
            —Arnold
                Spangler
            
            
            268,250
                (11
            )
            
            2.2
            %
            
            —
            
            
            —William
                B. Horne
            
            
            239,035
                (12
            )
            
            2.0
            %
            
            —
            
            
            —Richard
                Bertran
            
            
            193,889
                (13
            )
            
            1.6
            %
            
            —
            
            
            —Louis
                Glazer, M.D., Ph.G
            
            
            141,600
                (14
            )
            
            1.2
            %
            
            —
            
            
            —Herbert
                Langsam
            
            
            172,903
                (15
            )
            
            1.2
            %
            
            —
            
            
            —David
                Augustine
            
            
            37,500
                (16
            )
            
            *
            
            
            —
            
            
            —All
                directors and named executiveofficers
                as a group (9 persons)
            
            
            4,535,394
            
            
            32.4
            %
            
            —
            
            
            —





*
      Represents less than 1%




91





(1)
            Applicable
                percentage ownership is based on 12,079,602 shares of common stock
                outstanding as of April 11, 2008, together with securities exercisable
                or
                convertible into shares of common stock within 60 days of April 11,
                2008
                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 April 11,
                2008
                are deemed to be beneficially owned by the person holding such securities
                for the purpose of computing the percentage of ownership of such
                person,
                but are not treated as outstanding for the purpose of computing the
                percentage ownership of any other
                person.





(2)
            Applicable
                percentage ownership is based on 10,950 shares of Series A Convertible
                Preferred Stock outstanding. Each share of Series A Convertible Preferred
                Stock is convertible into 22.5 shares of common stock. Except as
                otherwise
                required by law, each holder of Series A Convertible Preferred Stock
                is
                entitled to vote on all matters submitted to our stockholders, voting
                together with the holders of common stock as a single class, with
                each
                shares of Series A Convertible Preferred Stock entitled to one vote
                per
                share.(3)
            Consists
                of: (a) 1,272,000 shares of common stock; and (b) warrants for purchase
                of
                808,200 shares of common stock. John Francis has voting and investment
                control over the securities held by Francis Capital Management,
                LLC.(4)
            Consists
                of: (a) 1,086,162 shares of common stock; (b) warrants for purchase
                of
                90,666 shares of common stock; and (c) 183,375 shares of common stock
                issuable upon conversion of 8,150 shares of Series A Convertible
                Preferred Stock.(5)
            Consists
                of: (a) 820,000 shares of common stock; and (b) warrants for purchase
                of
                474,000 shares of common stock.(6)
            Ault
                Glazer Capital Partners, LLC (***“the
                Fund”***)
                is an investment fund. The securities beneficially owned by the Fund
                include: (a) 76,870 shares of common stock; (b) a Convertible Secured
                Promissory Notein
                the principal amount of $2,530,558 that isconvertible
                into 1,012,223 shares of the Company’s common stock at a conversion price
                of $2.50; (c) warrants for purchase of 173,300 shares of common stock;
                and
                (d) 58,500 shares of common stock issuable upon conversion of
                2,600 shares of Series A Convertible Preferred Stock. The managing
                member of the Fund is Milton “Todd” Ault, III, who may be deemed to
                beneficially own the securities held by the Fund due to his relationship
                with the Fund.(7)
            A
                Plus International, Inc. owns 800,000 shares of common stock and
                warrants to purchase 300,000 shares of common stock.
                Mr. Lin has the power to vote and direct the disposition of all
                securities owned by A Plus International, Inc.(8)
            Consists
                of warrants to purchase shares of common stock.(9)
            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.(10)
            Consists
                of: (a) 82,017 shares of common stock; (b) 200,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $3.50
                per share that expire on April 21, 2016; and (c) warrants for purchase
                of
                20,000 shares of common stock.(11)
            Consists
                of: (a) 210,500 shares of common stock; (b) 15,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $4.30
                per share that expire on January 25, 2016; and (c) warrants for purchase
                of 42,750 shares of common stock.(12)
            Consists
                of: (a) 141,035 shares of common stock; (b) 78,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $5.27
                per shares that expire March 30, 2015; and (c) warrants for purchase
                of
                20,000 shares of common stock.(13)
            Consists
                of: (a) 10,555 shares of common stock; (b) 133,334 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $5.00
                per share that expire on July 18, 2015; and (c) 50,000 shares of
                common
                stock issuable upon exercise of stock options with an exercise price
                of
                $1.39 per share that expire on October 2, 2017.(14)
            Consists
                of: (a) 6,600 shares of common stock; (b) 60,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $4.10
                per share that expire on January 31, 2016; and (d) 75,000 shares
                of common
                stock issuable upon exercise of stock options with an exercise price
                of
                $5.27 per share that expire on March 30, 2015.(15)
            Consists
                of: (a) 93,403 shares of common stock; (b) 15,000 shares of common
                stock
                issuable upon exercise of stock options with an exercise price of
                $4.30
                per share that expire on January 25, 2016; (c) 4,500 shares of common
                stock issuable upon exercise of stock options with an exercise price
                of
                $5.27 per share that expire on March 30, 2015; and (d) warrants for
                purchase of 60,000 shares of common
                stock.




92




(16)
            Consists
                of: (a) 6,250 shares of common stock; and (b) 31,250 shares of common
                stock issuable upon exercise of stock options with an exercise price
                of
                $1.75 per share that expire on January 24,
                2017.




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





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




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





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





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





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





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




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




93





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





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





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





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





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




94




**Sale
      of Stock to Director**





During
      March 2007, the Company sold 240,000 shares of common stock and warrants to
      purchase 120,000 shares of common stock to certain current directors and
      officers of the Company, at a price of $1.25 per share, resulting in gross
      proceeds of $300,000. The warrants are exercisable for a period of five years,
      have an exercise price equal to $2.00, and 50% of the warrants are callable
      upon
      the occurrence of any one of a number of specified events when, after any such
      specified occurrence, the average closing price of the Company’s common stock
      during any period of five consecutive trading days exceeds $4.00 per share.
      We
      used the net proceeds from the private placement transaction primarily for
      general corporate purposes.





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





*Audit
      Fees*  *.* The
      aggregate fees billed for professional services rendered by Squar, Milner, Peterson, Miranda & Williamson, LLP
      (successor in
      interest to Peterson & Company, LLP) and Rothstein, Kass & Company, P.C.
      for the fiscal years ended December 31, 2007 and 2006 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 $169,000
      and
      $207,500, respectively. The amounts paid or attributable to Squar, Milner,
      Peterson, Miranda & Williamson, LLP for the fiscal years ended December 31,
      2007 and 2006 was approximately $169,000 and $12,500, respectively, the amounts
      paid or attributable to Rothstein, Kass & Company, P.C. were
      approximately nil and $195,000 for the fiscal years ended December 31, 2007
      and 2006, 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 did not incur any audit-related fees for the fiscal years ended December
      31, 2007 and 2006, 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 $9,000 and nil for the fiscal
      years ended December 31, 2007 and 2006, 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, 2007 and 2006.





**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.




**PART
      IV**




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





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





Report
      of
      Squar, Milner, Peterson, Miranda & Williamson, LLP


Report
      of
      Rothstein, Kass & Company, P.C


Consolidated
      Balance Sheets as of December 31, 2007 and 2006


Consolidated
      Statements of Operations and Comprehensive loss for the years ended December
      31,
      2007, 2006 and 2005


Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2006 and
      2005


Consolidated
      Statements of Stockholders' Equity for the years ended December 31, 2007, 2006
      and 2005


Notes
      to
      Financial Statements




95


**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)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
            
            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)4.4
            
            Form
                of callable Warrant issued to James Colen (Incorporated by reference
                to
                the Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on April 26, 2005)4.5
            
            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)4.6
            
            Promissory
                Note dated February 8, 2006 issued by Automotive Services Group,
                LLC to
                Ault Glazer Bodnar Acquisition Fund, LLC (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on February 14, 2006)4.7
            
            Revolving
                Line of Credit Agreement dated and effective as of March 7, 2006
                by and
                between Ault Glazer Bodnar Acquisition Fund LLC and Patient Safety
                Technologies, Inc. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                March 8, 2006)4.8
            
            Promissory
                Note in the principal amount of $500,000 issued May 1, 2006 by the
                Patient
                Safety Technologies, Inc. to the Herbert Langsam Irrevocable Trust
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 14,
                2006)4.9
            
            $400,000
                principal amount Convertible Promissory Note issued by Patient Safety
                Technologies, Inc. to Charles J. Kalina III on November 3,
                20064.10
            
            Warrant
                to purchase 85,000 shares of common stock issued by Patient Safety
                Technologies, Inc. to Charles J. Kalina III on July 12, 2006 (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on July 14, 2006)4.11
            
            Warrant
                to purchase 100,000 shares of common stock issued by Patient Safety
                Technologies, Inc. to Charles J. Kalina III on November 3,
                200610.1
            
            Amended
                and Restated Stock Option and Restricted Stock Plan (Incorporated
                by
                reference to Annex A to the Company’s Revised Definitive Proxy Statement
                on Schedule 14A, filed with the Securities and Exchange Commission
                on
                October 18, 2005)10.2
            
            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)




96







**Exhibit**
              **Number**
            
            **Description**10.3
            
            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)10.4
            
            Employment
                Agreement entered into as of April 21, 2006 between SurgiCount Medical,
                Inc., Patient Safety Technologies, Inc. and William M. Adams (Incorporated
                by reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on April 27, 2006)10.5
            
            Engagement
                Letter dated February 10, 2006 between Analog Ventures, LLC and Patient
                Safety Technologies, Inc. (Incorporated by reference to the Company’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2006,
                filed
                with the Securities and Exchange Commission on May 19,
                2006)10.6
            
            Security
                Agreement dated May 1, 2006, between the Company and the Herbert
                Langsam
                Revocable Trust (Incorporated by reference to the Company’s current report
                on Form 8-K filed with the Securities and Exchange Commission on
                May 5,
                2006)10.7
            
            Secured
                Convertible Note and Warrant Purchase Agreement dated June 6, 2006
                between
                the Company and Alan Morelli (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on June 9, 2006)10.8
            
            Registration
                Rights Agreement dated June 6, 2006 by and between Patient Safety
                Technologies, Inc. and Alan E. Morelli (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on June 9, 2006)10.9
            
            Subscription
                Agreement dated August 30, 2006 between Patient Safety Technologies,
                Inc.
                and Nobu Ventures Inc. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                September 6, 2006)10.10
            
            Secured
                Convertible Note and Warrant Purchase Agreement dated September 8,
                2006
                between the Company and Steven J. Caspi (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 1, 2007)10.11
            
            Pledge
                Agreement and Addendum to Pledge Agreement dated as of September
                8, 2006
                between the Company and Steven J. Caspi (Incorporated by reference
                to the
                Company’s current report on Form 8-K filed with the Securities and
                Exchange Commission on March 1, 2007)10.12
            
            Supply
                Agreement dated November 14, 2006 between SurgiCount Medical, Inc.
                and
                Cardinal Health 200, Inc. (Incorporated by reference to the Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on November 20, 2006)10.13
            
            Exclusive
                License and Supply Agreement dated January 26, 2007, by and among
                SurgiCount Medical, Inc. and A Plus International, Inc. (Incorporated
                by
                reference to the Company’s current report on Form 8-K filed with the
                Securities and Exchange Commission on February 2, 2007)10.14
            
            Subscription
                Agreement dated January 26, 2007 between Patient Safety Technologies,
                Inc.
                and A Plus International, Inc. (Incorporated by reference to the
                Company’s
                current report on Form 8-K filed with the Securities and Exchange
                Commission on February 2, 2007)10.15
            
            Subscription
                Agreement dated January 29, 2007 between Patient Safety Technologies,
                Inc.
                and Nite Capital, LP. (Incorporated by reference to the Company’s current
                report on Form 8-K filed with the Securities and Exchange Commission
                on
                February 2, 2007)10.16
            
            Subscription
                Agreement dated January 29, 2007 between Patient Safety Technologies,
                Inc.
                and David Wilstein and Susan Wilstein, as Trustees of the Century
                Trust
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on February 2,
                2007)





97




**Exhibit**
              **Number**
            
            **Description**10.17
            
            Form
                of Subscription Agreement entered into between March 7, 2007 to April
                5,
                2007 between Patient Safety Technologies, Inc. and several accredited
                investors (Incorporated by reference to the Company’s annual report on
                Form 10-K for the year ended December 31, 2006, filed with the Securities
                and Exchange Commission on May 16, 2007)10.18
            
            Secured
                Convertible Note issued August 10, 2007 with an effective date of
                June 1,
                2007 between the Company and Ault Glazer Capital Partners, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 16,
                2007)10.19
            
            Guaranty
                of Payment by Surgicount Medical, Inc. and Patient Safety Technologies,
                Inc., in favor of Ault Glazer Capital Partners, LLC in connection
                with the
                $2,530,558.40 Promissory Note issued August 10, 2007 with an effective
                date of June 1, 2007 by the Company to Ault Glazer Capital Partners,
                LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 16,
                2007)10.20
            
            Form
                of Subscription Agreement entered into between March 7, 2007 to April
                5,
                2007 between Patient Safety Technologies, Inc. and several accredited
                investors (Incorporated by reference to the Company’s annual report on
                Form 10-K for the year ended December 31, 2006, filed with the Securities
                and Exchange Commission on May 16, 2007)10.21
            
            Secured
                Convertible Note issued August 10, 2007 with an effective date of
                June 1,
                2007 between the Company and Ault Glazer Capital Partners, LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 16,
                2007)10.22
            
            Guaranty
                of Payment by Surgicount Medical, Inc. and Patient Safety Technologies,
                Inc., in favor of Ault Glazer Capital Partners, LLC in connection
                with the
                $2,530,558.40 Promissory Note issued August 10, 2007 with an effective
                date of June 1, 2007 by the Company to Ault Glazer Capital Partners,
                LLC
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on August 16,
                2007)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 Peterson & Company, LLP to the SEC dated December 14, 2006
                (Incorporated by reference to the Company’s current report on Form 8-K
                filed with the Securities and Exchange Commission on December 15,
                2006)21.1*
            
            Subsidiaries
                of the Company23.1*
            
            Consent
                of Squar, Milner, Peterson, Miranda & Williamson,
                LLP23.2*
            
            Consent
                of Rothstein, Kass & Company, P.C.31.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(a)
                or
                Rule 15d-14(a)32.1*
            
            Certification
                of Chief Executive and Financial Officer required by Rule 13a-14(b)
                or
                Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the
                United
                States Code







*
      Filed
      herewith.




98




**SIGNATURES**





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


PATIENT
                SAFETY TECHNOLOGIES, INC.Date:
                April 15, 2008
            By:
            /s/
                William B. HorneWilliam
                B. HorneChief
                Executive and Chief Financial Officer and
              Principal
                Accounting Officer





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




**Signature**
            
            **Title**
            
            **Date**/s/
                Steven H. Kane
            
            Chairman
                of the Board
            
            April
                15, 2008Steven
                H. Kane/s/
                Arnold Spangler
            
            Director
            
            April
                15, 2008Arnold
                Spangler/s/
                John Francis
            
            Director
            
            April
                15, 2008John
                Francis/s/
                David Augustine
            
            Director
            
            April
                15, 2008David
                Augustine/s/
                Louis Glazer
            
            Director
            
            April
                15, 2008Louis
                Glazer, M.D., Ph.G./s/
                Herbert Langsam
            
            Director
            
            April
                15, 2008Herbert
                LangsamDirector
            
            April
                15, 2008Wayne
                Lin





99