In May 2010, the Company and an officer’s suit against BD in the U.S. District Court for the Eastern District of Texas, Marshall Division alleging infringementviolations of another recently issued patent (7,351,224).antitrust acts, false advertising, product disparagement, tortious interference, and unfair competition was reopened.  The Company and an officer filed a Second Amended Complaint on July 23, 2010 setting forth additional detail regarding the allegations of BD’s illegal conduct.  BD counterclaimed for non-infringementfiled a motion to dismiss and invalidity of the asserted patent.  The Court consolidated this case with the above-stated case filedbriefing is in June 2007.  On November 9, 2009, the jury returned a verdict finding that the patents asserted by the Company were valid and infringed by BD and awarded $5,000,000 in damages.  No final judgmentprogress.  A scheduling conference has been entered in this case.  The Companyset for December 8, 2010 and it is seeking injunctive relief.possible that a trial date will be set at that time.

In September 2007, BD and MDC Investment Holdings, Inc. (“MDC”) sued the Company in the United States District Court for the Eastern District of Texas, Texarkana Division, initially alleging that the Company is infringing two U.S. patents of MDC (6,179,812 and 7,090,656) that are licensed to BD. BD and MDC seek injunctive relief and unspecified damages.  The Company counterclaimed for declarations of non-infringement, invalidity, and unenforceability of the asserted patents.  The plaintiffs subsequently dropped allegations with regard to patent no. 7,090,656 and the Company subsequently dropped its counterclaims for unenforceability of the asserted patents.  The Court conducted a claims construction hearing on September 25, 2008 and issued its claims construction order on November 14, 2008.  No trial date has been set.

6.SUBSEQUENT EVENTS

On April 23, 2010, the Company paid $2,122,445 to Lewisville State Bank, a division of 1st International Bank (“1st International”), to pay off a loan in the original principal amount of $2,500,000 which matured in late March 2010.  The Company may seek other financing to replace this loan.

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monopolistic business practices continue despite a prior settlement in 2004 for anticompetitive practices and a patent infringement verdict in 2010.  A suit against BD is currently pending alleging violations of state and federal antitrust acts and false advertising.

We continue to pursue various strategies to have better access to the hospital market, as well as other markets, including attempting to gain access to the market through our sales efforts, our innovative technology, introduction of new products, and, when necessary, litigation.  We are also marketing more products internationally.

We sued Occupational and Medical Innovations Limited (“OMI”) in April 2008 and separately sued BD in June 2007 for claims of patent infringement (see Item 3. Legal Proceedings of the Form 10-K), and in December 2009March 2010 and November 2009,May 2010, respectively, the products of such companies were found to infringe our patents.  These verdicts could increasejudgments may have increased the demand for our product.  OMI was immediately enjoined from further sales of its products, but in the case of BD syringes, the Court’s injunction was stayed pending appeal, so that product remains in the market at this time.However, there is no assurance when or if such increase will occur.BD voluntarily removed its 1cc syringes from the market, which may have positively affected our sales.

In the event we continue to have only limited market access, and the cash provided by the litigation settlements and generated from operations becomes insufficient, and royalties from BTMD are not forthcoming, we would take additional cost cutting measures to reduce cash requirements.  Such measures could result in the reduction of units being produced, the reduction of workforce, the reduction of salaries of officers and other nonhourly employees, and the deferral of royalty payments.  We took such actions at the end of the second quarter of 2009.

At the end of the second quarter of 2009, we announced that in the interest of the long-term survival of the Company we would reorganize some of the Company’s functions and implement staff reductions, all in order to minimize our cash expenditures and conserve our resources.  Although certain salary reductions remain in place, we granted one-time payments to our employees to offset such salary reductions in the third quarter of 2010.  We also granted one-time payments to our independent Directors in the third quarter of 2010.  Our workforce was reduced by 16% on July 1, 2009.  However, due to the expected increase in production from sales to DHHS,the Department of Health and Human Services, we increased the workforce at the Little Elm facility beginning in the latter part of the third quarter of 2009.  The effect of Mr. Shaw’s waiver of $1,000,000 in royalties was fully realized in 2009.  Salaries for all personnel above a certain salary level were cut by 10% in 2009 (subject to contract rights).  As a result of the cost cutting measures, compensation costs for the nine months ended September 30, 2010 included in Operating expenses were reduced by $270,000$930,000 and 401(k)401(k) matching expense declined $26,000.$77,000.  Other costs related to the reduction in force declined $71,000steps taken last year to reduce costs include reductions of $126,000 for consulting, $57,000$193,000 for travel and entertainment, and $48,000$71,000 for marketing expense.  We have begun additional molding in Little Elm.  These measures will remain in place as long as Management deems them necessary.expense for the nine months ended September 30, 2010.

We are focusingbringing additional molding operations to Little Elm as a cost saving measure.  We continue to focus on methods of upgrading our manufacturing capability and efficiency in order to reduce costs.

Pursuant to a settlement agreement among us, Abbott Laboratories (“Abbott”), and Hospira, Inc. (“Hospira”) effective July 12, 2010 (the “Effective Date”), Hospira delivered $6 million to us in the third quarter of 2010.  Also pursuant to this settlement agreement, Abbott waived its rights to any Series IV Class B preferred stock dividends.  The marketing fee of $1,419,760 and payment of an Abbott invoice of $144,000 due to the Company were also waived.  Additionally, Hospira was granted an exclusive one-year option to negotiate a licensing agreement for certain uses of our Patient Safe® syringe.  In exchange for the option, Hospira shall pay us $2 million per quarter for four quarters, beginning three months from the Effective Date and every three months thereafter, for a total of $8 million.  In the event a licensing agreement is entered into, any remaining portion of the option fee shall, when paid, be credited against royalties payable by Hospira to us.  In the third quarter of 2010, we granted bonuses to certain officers and employees in recognition of work leading to the Abbott settlement.

In the second quarter of 2010, we reached an agreement with our counsel, Locke Lord Bissell & Liddell, regarding future litigation expenditures that caps certain of our litigation costs in exchange for a contingent fee interest.  We believe this agreement serves both the short-term and long-term interests of the Company and will reduce the legal fee component of our current capitalization provides the resources necessary to implement some of these changesGeneral and improveadministrative costs and will impact our manufacturing capacity and efficiency, thereby reducing our unit cost.cash flow in a positive manner.

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Internal Sources of Liquidity

Margins and Market Access

To achieve break evenbreak-even quarters consistently, we need minimal access to hospital markets which has been difficult to obtain due to the monopolistic marketplace which was the subject of our initial lawsuit and now also included in our second antitrust lawsuit against BD.  We will continue to attempt to gain access to the market through our sales efforts, innovative technology, the introduction of new products, and, when necessary, litigation.

We are focusingcontinue to focus on methods of upgrading our manufacturing capability and efficiency in order to reduce costs.  We believe our current capitalization provides the resources necessary to implement some of these changes and improve our manufacturing capacity and efficiency, thereby reducing our unit cost.

In the third quarter of 2009, we were awarded a contract by the DHHS to supply a portion of the safety engineered syringes to be used in the U.S. efforts to vaccinate the U.S. population against the Swine Flu.  The impact on us was material.  Sales to the DHHS comprised 24.4% of our revenues for the twelve months ended December 31, 2009.  This program, which was estimated to run from August 2009 through March 2010, ended in December 2009.  We do not know if there will be a similar program in 2010.  We recorded sales to DHHS in 2010 (7.1% of Sales, net for the first quarter) that were attributable to orders placed in 2009.

Fluctuations in the cost and availability of raw materials and inventory and our ability to maintain favorable supplier arrangements and relationships could result in the need to manufacture all (as opposed to 32.9%33.4%) of our products in the U.S.  This could temporarily increase unit costs as we ramp up domestic production.

The mix of domestic and international sales affects the average sales price of our products.  Generally, the higher the ratio of domestic sales to international sales, the higher the average sales price will be.  Typically international sales are shipped directly from China to the customer.  Purchases of product manufactured in China, if available, usually decrease the average cost of manufacture for all units.  Domestic costs, such as indirect labor and overhead, remain relatively constant.  The number of units produced by the Company versus manufactured in China can have a significant effect on the carrying costs of inventory as well as Cost of sales.  We will continue to evaluate the appropriate mix of products manufactured domestically and those manufactured in China to achieve economic benefits as well as to maintain our domestic manufacturing capability.  Currently, approximately 32.9%of our products are produced domestically.

Fluctuations in the cost of oil (since our products are petroleum based), transportation, and the volume of units purchased from Double Dove may have an impact on the unit costs of our product.  Increases in such costs may not be recoverable through price increases of our products.  Reductions in oil prices may not quickly affect petroleum product prices.

Seasonality

Historically, unit sales have increased in the latter part of the year due, in part, to the demand for syringes during the flu season.  The Swine Flu may have a longer worldwide immunization duration than the seasonal flu.

Licensing AgreementAgreements

WePursuant to a settlement agreement among us, Abbott, and Hospira effective July 12, 2010 (the “Effective Date”), Hospira was granted an exclusive one-year option to negotiate a licensing agreement to produce and market our Patient Safe® syringe for certain uses.  In exchange for the option, Hospira shall pay us $2 million per quarter for four quarters, beginning three months from the Effective Date and every three months thereafter, for a total of $8 million.  In the event a licensing agreement is entered into, a new agreement (effective asany remaining portion of July 1, 2009)the option fee shall, when paid, be credited against royalties payable by Hospira to the Company.

We are working with BTMD along similar terms as our priorto renew its license agreement.  This agreement expires on July 1, 2010 which may automatically extend under certain conditions. Such

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External Sources of Liquidity

We have obtained several loans from our inception, which have, together with the proceeds from the sales of equities and litigation efforts, enabled us to pursue development and production of our products.  Given the current economic conditions, our ability to obtain additional funds through loans is uncertain.  Furthermore, the shareholders previously authorized an additional 5,000,000 shares of a Class C Preferred Stock that could, if necessary, be designated and used to raise funds through the sale of equity.  Due to the current market price of our Common Stock, it is unlikely we would choose to raise funds by the sale of equity.

We obtained a loan from Lewisville State Bank, a division of 1st International, Bank (“1st International”), for $2,500,000, secured by the land and existing buildings, which provided funding for the construction of the 47,250 square foot warehouse placed in service in 2005.  This loan matured in late March 2010 and we paid $2,122,445 to pay off the loan on April 23, 2010.  We may seek other financing to replace this loan.

On August 29, 2008, we obtained a $4,210,000 interim construction loan from 1st International.  The purpose of the loan was to expand the warehouse, including additional office space, and construct a new Controlled Environment.  The construction project was completed  and the loan was renewed on December 10, 2009 with a 20 year amortization and 10 year maturity.  The interest rate is 5.968%.

Pursuant to a settlement agreement among us, Abbott, and Hospira, Hospira delivered $6 million to us in the third quarter of 2010.  Also pursuant to this settlement agreement, Abbott waived its rights to any Series IV Class B preferred stock dividends.  The marketing fee of $1,419,760 and payment of an Abbott invoice of $144,000 due to the Company were also waived.

CAPITAL RESOURCES

Material Commitments for Capital Expenditures

None.

Trends in Capital Resources

Interest expense will increase due to the reduction of capitalized interest at the present time.  It may also be affected by additional loans or rising interest rates.  However, interest expense may be lower if we do not obtain a loan to replace the money expended to pay off the 1st International note, which was paid in the second quarter of 2010.  Interest income may continue to be negatively affected by lower interest rates and our prior movement of cash to U.S. Treasury bills and other U.S. government backed securities.  Although we believe that we have granted credit to credit-worthy firms, current economic conditions may affect the timing and/or collectability of some accounts.

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disclosure. Based upon this evaluation, the CEO and CFO concluded that, as of March 31,September 30, 2010, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There have been no changes during the firstthird quarter of 2010 or subsequent to March 31,September 30, 2010 in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.Legal Proceedings.

On August 12, 2005, we filedPlease refer to Note 6 to the financial statements for a lawsuit against Abbott Laboratories (“Abbott”) in the U.S. District Court in the Eastern Districtcomplete description of Texas, Texarkana Division.  We are alleging fraud and breach of contract in connection with the National Marketing and Distribution Agreement dated as of May 4, 2000, which was terminated on October 15, 2003.  We are seeking damages which we estimate to be in millions of dollars of lost profits, out of pocket expenses, and other damages.  In addition, we are seeking punitive damages, pre- and post-judgment interest, and attorneys’ fees.  Following Abbott’s unsuccessful attempt to get the case dismissed and ordered to arbitration, Abbott filed an answer and counterclaim on July 15, 2008, alleging several breaches of contract, breach of implied warranty of merchantability, and breach of express warranty, seeking in excess of $6,000,000 in compensatory damages as well as seeking attorneys’ fees.  We deny the validity of Abbott’s counterclaims.  Discovery has already taken place and is substantially completed.  Trial is currently set for July 2010.all legal proceedings.

In June 2007, we sued BD in the U.S. District Court for the Eastern District of Texas, Marshall Division, alleging infringement of three patents (5,578,011; 5,632,733; and 6,090,077) and violations by BD of the federal and state antitrust laws, and of the Lanham Act.  We subsequently dropped the 5,578,011 patent allegations from the lawsuit.  In January 2008, the Court severed the patent claims from the other claims pending resolution of the patent dispute.  In April 2008, we and Thomas J. Shaw sued BD in the U.S. District Court for the Eastern District of Texas, Marshall Division, alleging infringement of another recently issued patent (7,351,224).  BD counterclaimed for non-infringement and invalidity of the asserted patent.  The Court consolidated this case with the above-stated case filed in June 2007. On November 9, 2009, the jury returned a verdict finding that the patents asserted by us were

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Series V Class B Convertible Preferred Stock

As of the threenine months ended March 31,September 30, 2010, the amount of dividends in arrears was $99,000$297,000 and the total arrearage was $3,792,000.$3,991,000.

Item 5.    Other Information.

The 2010 annual meeting shall be held on September 24, 2010, at 10:00 a.m. Central time at Little Elm City Hall; 100 West Eldorado Parkway; Little Elm, Texas 75068.

Item 6.Exhibits.

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