UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission file number.: 000-05663

LIBERATOR MEDICAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

NEVADA (State or other jurisdiction of incorporation or organization)		87-0267292 (I.R.S. Employer Identification No.)

2979 SE Gran Park Way, Stuart, Florida 34997
(Address of principal executive offices) (Zip Code)

(772) 287-2414
(Registrant’s telephone number, including area code)

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 preceding 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 þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company þ

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

Yes o     No þ

APPLICABLE TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of February 10, 2010
Common Stock, $.001		33,933,666

 

 

TABLE OF CONTENTS

				Page
PART I — FINANCIAL INFORMATION					3
Item 1.		Condensed Consolidated Financial Statements			3
		Balance Sheets as of December 31, 2009 (unaudited) and September 30, 2009			3
		Statements of Operations for the three months ended December 31, 2009 and 2008 (unaudited)			4
		Statement of Changes in Stockholders’ Equity for the three months ended December 31, 2009 (unaudited)			5
		Statements of Cash Flows for the three months ended December 31, 2009 and 2008 (unaudited)			6
		Notes to Unaudited Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			21
Item 4T.		Controls and Procedures			21
PART II — OTHER INFORMATION					22
Item 1.		Legal Proceedings			22
Item 1A.		Risk Factors			22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3.		Defaults Upon Senior Securities			22
Item 4.		Other Information			22
Item 5.		Exhibits			22
SIGNATURES					23
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)

		December 31,				September 30,
		2009				2009
		(unaudited)
Assets
Current Assets
Cash		$	2,881			$	3,798
Restricted cash			1,053				500
Accounts receivable, net of allowances of $2,717 and $2,327, respectively			4,664				3,850
Inventory, net of allowance for obsolete inventory of $110 and $110, respectively			933				902
Deferred advertising, current portion			2,678				2,016
Debt issuance costs, current portion			242				347
Other			246				136
Total Current Assets			12,697				11,549
Property and Equipment
Property and Equipment, net of accumulated depreciation of $1,116 and $1,021, respectively			1,726				1,041
Other Assets
Deferred advertising, net of current portion			2,305				1,739
Debt issuance costs, net of current portion			—				7
Deposits			258				123
Total Other Assets			2,563				1,869
Total Assets		$	16,986			$	14,459
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable		$	2,834			$	2,089
Accrued liabilities			560				716
Credit line facility			750				—
Stockholder loan			1,315				1,515
Convertible notes payable, net of unamortized discount of $247 and $292, respectively			6,286				3,893
Capital lease obligations, current portion			77				80
Deferred rent liability, current portion			38				60
Total Current Liabilities			11,860				8,353
Long-Term Liabilities
Convertible notes payable, net of unamortized discount of $0 and $90, respectively			—				2,447
Capital lease obligations, net of current portion			53				70
Deferred rent liability, net of current portion			185				165
Deferred tax liability			503				—
Total Long-Term Liabilities			741				2,682
Total Liabilities			12,601				11,035
Stockholders’ Equity
Common stock, $.001 par value, 200,000 shares authorized; 33,298 and 32,462 shares issued, respectively; 33,209 and 32,377 shares outstanding at December 31, 2009 and September 30, 2009, respectively			33				32
Additional paid-in capital			11,820				11,705
Accumulated deficit			(7,418	)			(8,272	)
			4,435				3,465
Less: Treasury stock, at cost; 89 and 85 shares at December 31, 2009 and September 30, 2009, respectively			(50	)			(41	)
Total Stockholders’ Equity			4,385				3,424
Total Liabilities and Stockholders’ Equity		$	16,986			$	14,459

See accompanying notes to unaudited condensed consolidated financial statements.

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
For the three months ended December 31, 2009 and 2008
(Unaudited)
(in thousands, except per share amounts)

		2009				2008
Sales		$	9,158			$	5,342
Cost of Sales			3,248				1,841
Gross Profit			5,910				3,501
Operating Expenses
Payroll, taxes and benefits			2,169				1,065
Advertising			806				298
Bad debts			655				679
Depreciation			95				66
General and administrative			1,025				882
Total Operating Expenses			4,750				2,990
Income from Operations			1,160				511
Other Income (Expense)
Interest expense			(243	)			(273	)
Interest income			3				8
Total Other Income (Expense)			(240	)			(265	)
Income before Income Taxes			920				246
Provision for Income Taxes			66				—
Net Income		$	854			$	246
Basic earnings per share:
Weighted average shares outstanding			32,848				32,049
Earnings per share		$	0.03			$	0.01
Diluted earnings per share:
Weighted average shares outstanding			51,350				35,970
Earnings per share		$	0.02			$	0.01

See accompanying notes to unaudited condensed consolidated financial statements.

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity
For the three months ended December 31, 2009
(Unaudited)
(in thousands)

																						Total
		Common				Common				Paid in				Accumulated				Treasury				Stockholders’
		Shares				Stock				Capital				Deficit				Stock				Equity (Deficit)
Balance at September 30, 2009			32,377			$	32			$	11,705			$	(8,272	)		$	(41	)		$	3,424
Options issued to employees											125												125
Common stock issued for interest on convertible debt			19				—				45												45
Common stock issued upon conversion of debt			300				—				150												150
Common stock issued for exercise of warrants			355				1				162												163
Common stock issued for employee stock purchase plan			162				—				73												73
Purchase common treasury stock			(4	)															(9	)			(9	)
Deferred income taxes related to convertible notes payable											(440	)											(440	)
Net income															854								854
Balance at December 31, 2009			33,209			$	33			$	11,820			$	(7,418	)		$	(50	)		$	4,385

See accompanying notes to unaudited condensed consolidated financial statements.

Liberator Medical Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2009 and 2008
(Unaudited)
(in thousands)

		2009				2008
Cash flow from operating activities:
Net Income		$	854			$	246
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			905				357
Equity based compensation			133				136
Provision for doubtful accounts and sales returns			763				679
Non-cash interest related to convertible notes payable			180				162
Deferred income taxes			63				—
Amortization of non-cash debt issuance costs			9				10
Changes in operating assets and liabilities:
Accounts receivable			(1,576	)			(1,190	)
Deferred advertising			(2,037	)			(680	)
Inventory			(31	)			(275	)
Other assets			(150	)			80
Accounts payable			744				928
Accrued expenses			(179	)			6
Deferred rent			(2	)			(12	)
Net Cash Flow Provided by (Used in) Operating Activities			(324	)			447
Cash flow from investing activities:
Purchase of property and equipment			(780	)			(29	)
Purchase of certificates of deposit			(553	)			—
Net Cash Flow Used in Investing Activities			(1,333	)			(29	)
Cash flow from financing activities:
Proceeds from issuance of convertible notes			—				2,500
Costs associated with issuance of convertible notes			—				(310	)
Proceeds from the exercise of warrants			163				—
Proceeds from employee stock purchase plan			56				—
Proceeds from credit line facility			750				—
Purchase of treasury stock			(9	)			(3	)
Payments of debt and capital lease obligations			(220	)			(16	)
Net Cash Flow Provided by Financing Activities			740				2,171
Net increase (decrease) in cash			(917	)			2,589
Cash at beginning of period			3,798				1,173
Cash at end of period		$	2,881			$	3,762
Supplemental disclosure of cash flow information:
Cash paid for interest		$	105			$	93
Cash paid for income taxes		$	12			$	—
Supplemental schedule of non-cash investing and financing activities:
Capital expenditures funded by capital lease borrowings		$	—			$	17
Common stock issued for interest expense		$	45			$	—
Common stock issued for conversion of debt		$	150			$	—

See accompanying notes to unaudited condensed consolidated financial statements.

Liberator Medical Holdings, Inc. and Subsidiaries
Notes To The Unaudited Condensed Consolidated Financial Statements
December 31, 2009

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Liberator Medical Holdings, Inc. (the “Company”) and the notes thereto have been prepared in accordance with instructions for Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. However, in the opinion of the Company, such information includes all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position and results of operations for the interim periods presented.

The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and the notes thereto that are included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009 that was filed with the SEC on December 17, 2009. The results of operations for the three months ended December 31, 2009 are not necessarily indicative of the results to be expected for the full year.

The unaudited condensed consolidated financial statements include the accounts of the Company, Liberator Medical Supply, Inc., Liberator Health and Education, Inc., and Liberator Health and Wellness, Inc., its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.

Certain prior period amounts in the unaudited condensed consolidated financial statements have been reclassified to conform to the current period’s presentation.

Note 2 — Summary of Significant Accounting Policies

The significant accounting policies followed by the Company for interim reporting are consistent with those included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009.

Recent Accounting Pronouncements

In September 2009, Accounting Standards Codification (“ASC”) became the source of authoritative U.S. GAAP recognized by the Financial Accounting Standards Board (“FASB”) for nongovernmental entities, except for certain FASB Statements not yet incorporated into ASC. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative U.S. GAAP for registrants. The discussion below includes the applicable ASC reference.

ASC Topic 815-10 Derivatives and Hedging was adopted by the Company effective January 2, 2009. The guidance under Topic 815-10 changes the manner of presentation and related disclosures of the fair values of derivative instruments and their gains and losses. The Company does not currently hold derivative instruments and was not impacted by the adoption of this pronouncement.

The Company adopted ASC Topic 825-10 Financial Instruments, which requires quarterly disclosure of information about the fair value of financial instruments within the scope of Topic 825-10. The Company adopted this pronouncement effective April 1, 2009 with no material impact on its consolidated financial statements.

The carrying value of financial instruments including cash, receivables, accounts payable, accrued expenses and debt, approximates their fair value at December 31, 2009 and September 30, 2009 due to the relatively short-term nature of these instruments. The carrying value of long-term debt approximates its fair value as it bears variable interest rate which reflects the current market yield level for comparable loans.

In April 2009, the Company adopted ASC Topic 820-10-65 Fair Value Measurements and Disclosures. The standard provides additional guidance for estimating fair value in accordance with Topic 820-10-65 when the volume and level of activity for the asset or liability have significantly decreased and includes guidance on identifying circumstances that indicate if a transaction is not orderly. The Company adopted this pronouncement effective April 1, 2009 with no material impact on its consolidated financial statements.

The Company adopted, ASC Topic 855-10 Subsequent Events effective April 1, 2009. This pronouncement changes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company has evaluated subsequent events through the time it filed its interim report on Form 10-Q on February 11, 2010.

In July 2009, the FASB issued SFAS No. 168, The Hierarchy of Generally Accepted Accounting Principles. SFAS 168 codified all previously issued accounting pronouncements, eliminating the prior hierarchy of accounting literature, in a single source for authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168, now ASC Topic 105-10 Generally Accepted Accounting Principles, is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this pronouncement did not have a material effect on the consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, Measuring Liabilities at Fair Value, which clarifies, among other things, that when a quoted price in an active market for the identical liability is not available, an entity must measure fair value using one or more specified techniques. The Company adopted the pronouncement effective July 1, 2009 with no material impact on its consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, which revises the existing multiple-element revenue arrangements guidance and changes the determination of when the individual deliverables included in a multiple-element revenue arrangement may be treated as separate units of accounting, modifies the manner in which the transaction consideration is allocated across the separately identified deliverables and expands the disclosures required for multiple-element revenue arrangements. The pronouncement is effective for financial statements issued after December 31, 2010. The Company does not expect the pronouncement to have a material effect on its consolidated financial statements.

Note 3 — Property and Equipment

A summary of property and equipment at December 31, 2009 and September 30, 2009 is as follows (in thousands):

		Estimated				December 31,				September 30,
		Life				2009				2009
Leased equipment		5 years				$	582			$	582
Transportation equipment		3 years					95				95
Warehouse equipment		5 years					64				56
Office furniture		5 years					339				150
Computer equipment		3 years					150				87
Telephone equipment		5 years					33				33
Rental equipment		7 years					18				18
Web Site		3 years					6				6
Server Software		3 years					158				130
Training guides		3 years					3				3
Leasehold improvements		5 years					901				889
Signage		3 years					13				13
Fixed assets under construction							480				—
Total property and equipment							2,842				2,062
Less: accumulated depreciation							(1,116	)			(1,021	)
Property and equipment, net						$	1,726			$	1,041

The amounts charged to operations for depreciation for the three months ended December 31, 2009 and 2008 were $95,000 and $66,000, respectively.

Note 4 — Deposits

Deposits at December 31, 2009 and September 30, 2009 consist of the following (in thousands):

		December 31,				September 30,
		2009				2009
Deposits on leased equipment		$	14			$	9
Building rent deposits			64				67
Utility deposits			9				9
Deposits on software development			25				25
Deposits for building expansion			66				3
Deposits for professional fees			80				10
Total deposits		$	258			$	123

Note 5 — Stockholder Loan

The stockholder loan at December 31, 2009 and September 30, 2009 in the amounts of $1,315,000 and $1,515,000, respectively, consist of various 8% and 11% notes payable to the President and principal stockholder of the Company, Mark Libratore. The notes payable are non-collateralized and due on demand. However, the notes are subordinated to the senior, unsecured, convertible notes payable discussed below in Note 7. During the three months ended December 31, 2009, $200,000 was paid to Mr. Libratore. As of December 31, 2009, an additional $150,000 has been authorized by the senior note holders, but not paid to Mr. Libratore. Interest expense related to the stockholder loan for the three months ended December 31, 2009 and 2008 were $31,000, and $38,000, respectively.

Note 6 — Credit Line Facility

On September 4, 2009, the Company entered into a one-year Business Loan Agreement, Promissory Note and Assignment of Deposit (collectively, the “Credit Line Facility”) with a lender. Pursuant to the Credit Line Facility, the lender has agreed to advance the Company a maximum of Five Hundred Thousand Dollars ($500,000) secured by the Company’s $500,000 certificate of deposit held by the lender. Interest is payable on any advance under the Credit Line Facility at a rate of 1.000 percentage point under the corporate loan base rate index published by the Wall Street Journal, with a minimum interest rate of 4.750% per annum.

On November 2, 2009, the Company entered into a revised Credit Line Facility with the same lender discussed above. Under the revised loan agreement, the lender has agreed to advance the Company a maximum of One Million Dollars ($1,000,000) secured by the Company’s existing $500,000 certificate of deposit held by the lender plus an additional $550,000 certificate of deposit to be held by the lender. The revised Credit Line Facility expires on September 8, 2010. All other terms of the September 4, 2009 Credit Line Facility remain unchanged.

As of December 31, 2009, the Company had an outstanding balance of $750,000 under the Credit Line Facility.

Note 7 — Convertible Notes Payable

April 2008 Convertible Notes

On April 11, 2008, the Company closed a private placement consisting of convertible notes and warrants for $804,000, of which $598,000 was cash proceeds and $206,000 was prior year debt exchanged for the convertible notes. The notes are convertible into shares of our common stock at an initial conversion price of $0.50 per share, subject to adjustment, and mature one year after issuance. The notes are senior unsecured obligations of our Company and accrue interest at an annual rate of twelve percent (12%) per annum, payable at maturity. The warrants have a term of five years and are exercisable from the date of their issuance until their expiration at a price of $1.00 per share. In addition, we issued a warrant to the placement agent exercisable for up to 51,000 shares of our common stock on terms substantially similar to the warrant issued in connection with the note described above.

As of December 31, 2009, $260,000 of the notes has been converted into 520,000 shares of the Company’s common stock and $93,000 of the notes has been redeemed for cash. During fiscal year 2009, the maturity dates for the remaining $451,000 of notes were extended for one year from the original date of maturity. The maturity dates and amounts for the outstanding notes as of December 31, 2009 are as follows (in thousands):

		Amount Due
February 2010		$	263
March 2010			50
April 2010			138
Total April 2008 Convertible Notes Due		$	451

Interest expense related to the April 2008 convertible notes was $16,000 and $23,000 for the three months ended December 31, 2009 and 2008, respectively.

May 2008 Convertible Note

On May 22, 2008, the Company closed a private placement consisting of a convertible note and a warrant for gross proceeds of $3,500,000. The note is convertible into shares of our common stock at an initial conversion price of $0.80 per share, subject to adjustment, and matures on May 22, 2010. The note is a senior unsecured obligation of ours and accrues interest at the rate of 3% per annum, paid semi-annually on each November 15 and May 15. The note is unconditionally guaranteed by Liberator Medical Supply and Liberator Health and Education Services, Inc. The conversion price of the note will be reduced if, among other things, we issue shares of common stock or securities exercisable, exchangeable or convertible for or into shares of common stock (“common stock equivalents”) at a price per share less than both the conversion price then in effect and $0.75, subject to certain exclusions. The warrants have a term of 5 years and are exercisable for up to 4,375,000 shares of our common stock at an exercise price of $1.00 per share, subject to adjustment. The exercise price of the warrants will be reduced if, among other things, we issue shares of our common stock or common stock equivalents at a price per share less than both the exercise price then in effect and the closing sale price of our common stock for any of the 10 consecutive trading days immediately preceding such issuance, subject to certain exclusions. In addition, we issued a warrant to the placement agent exercisable for up to 350,000 shares of our common stock on terms substantially similar to the warrant issued in connection with the note described above.

Interest expense related to the May 2008 convertible note was $26,000 and $26,000 for the three months ended December 31, 2009 and 2008, respectively.

October 2008 Convertible Note

On October 17, 2008, the Company closed a private placement consisting of a convertible note and a warrant for gross proceeds of $2,500,000. The note is convertible into shares of our common stock at an initial conversion price of $0.75 per share, subject to adjustment, and matures on October 17, 2010. The note is a senior unsecured obligation of ours and accrues interest at the rate of 3% per annum, paid semi-annually on each October 15 and April 15. The note is unconditionally guaranteed by Liberator Medical Supply and Liberator Health and Education Services, Inc. The conversion price of the note will be reduced if, among other things, we issue shares of common stock or securities exercisable, exchangeable or convertible for or into shares of common stock (“common stock equivalents”) at a price per share less than both the conversion price then in effect and $0.75, subject to certain exclusions. The warrants have a term of 3 years and are exercisable for up to 1,166,667 shares of our common stock at an exercise price $1.25 per share, subject to adjustment. The exercise price of the warrants will be reduced if, among other things, we issue shares of our common stock or common stock equivalents at a price per share less than both the exercise price then in effect and the closing sale price of our common stock for any of the 10 consecutive trading days immediately preceding such issuance, subject to certain exclusions. In addition, we issued a warrant to the placement agent exercisable for up to 266,667 shares of our common stock on terms substantially similar to the warrants issued in connection with the note described above.

Interest expense related to the October 2008 convertible note was $26,000 and $15,000 for the three months ended December 31, 2009 and 2008, respectively.

In May 2009, the Company entered into Waiver Agreements with the note holder of the May 2008 and October 2008 convertible notes discussed above. As part of the Waiver Agreements, the note holder agreed to accept 171,945 shares of the Company’s common stock, with a fair market value of $105,000, in lieu of the Company’s obligation to pay cash in the amount of $86,000 for interest payments that were due April 15, 2009 and May 15, 2009 under the original terms of the notes. As a result of this transaction, the Company incurred an additional $19,000 of interest expense that would not have been incurred if the Company had paid the interest due in cash. The rights and obligations of the note holder and the Company with respect to any future interest payments and the other terms of the notes are in all other respects unchanged.

In October 2009, the Company entered into a Waiver Agreement with the note holder of the October 2008 convertible note discussed above. As part of the Waiver Agreement, the note holder agreed to accept 18,101 shares of the Company’s common stock, with a fair market value of $45,000, in lieu of the Company’s obligation to pay cash in the amount of $38,000 for an interest payments that was due October 15, 2009 under the original terms of the note. As a result of this transaction, the Company incurred an additional $7,000 of interest expense that would not have been incurred if the Company had paid the interest due in cash. The rights and obligations of the note holder and the Company with respect to any future interest payments and the other terms of the note are in all other respects unchanged.

Short-term convertible notes payable consist of the following as of December 31, 2009 (in thousands):

										Oct’08
		April’08 Notes				May’08 Note				Note				Totals
Notes Payable, face amount		$	452			$	3,500			$	2,500			$	6,452
Discounts on Notes:
Valuation of Warrants			(126	)			(610	)			(86	)			(822	)
Intrinsic Value of Conversion Rights			—				(303	)			(86	)			(389	)
Accumulated Amortization			126				735				103				964
Total Discounts			—				(178	)			(69	)			(247	)
Accrued Interest			45				17				19				81
Convertible Notes Payable, net		$	497			$	3,339			$	2,450			$	6,286

Short-term convertible notes payable consist of the following as of September 30, 2009 (in thousands):

		April’08 Notes				May’08 Note				Totals
Notes Payable, face amount		$	601			$	3,500			$	4,101
Discounts on Notes:
Valuation of Warrants			(126	)			(610	)			(736	)
Intrinsic Value of Conversion Rights			—				(303	)			(303	)
Accumulated Amortization			126				621				747
Total Discounts			—				(292	)			(292	)
Accrued Interest			40				44				84
Convertible Notes Payable, net		$	641			$	3,252			$	3,893

Long-term Convertible notes payable consist of the following at September 30, 2009 (in thousands):

		Oct’08 Note
Notes Payable, face amount		$	2,500
Discounts on Notes:
Valuation of Warrants			(86	)
Intrinsic Value of Conversion Rights			(86	)
Accumulated Amortization			82
Total Discounts			(90	)
Accrued Interest			37
Convertible Notes Payable, net		$	2,447

Note 8 — Capital Lease Obligations

Capital lease obligations include eleven capitalized leases with interest rates ranging from 8.4% to 28.4%. The combined monthly payments of principal and interest are $9,000. The amount of equipment and furniture capitalized under the capital leases was $289,000. Accumulated depreciation recorded for the equipment and furniture under capital leases as of December 31, 2009 is $152,000. The payment terms of the capital leases expire between August 2010 and May 2012.

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2009 (in thousands):

		Amount
Year ending September 30:
2010		$	75
2011			62
2012			13
Total minimum lease payments			150
Less: Interest on capitalized lease obligations			(20	)
Present value of capitalized lease obligations			130
Less: Current portion			(77	)
Capitalized lease obligations, net of current portion		$	53

Interest expense on capitalized leases was $6,000 and $7,000 for three months ended December 31, 2009 and 2008, respectively.

Note 9 — Stockholders’ Equity

Warrants

The Company issued warrants to the stockholders of LMS to purchase 2,818,092 shares of the Company’s common stock in conjunction with the merger in 2007. As of December 31, 2009, 200,000 of these warrants have expired and 133,750 of these warrants have been exercised. The weighted-average exercise price for the remaining 2,484,342 warrants as of December 31, 2009 is $0.98 per share. The expiration dates of the outstanding warrants are as follows:

Shares		Expiration Date
7,188		April 2010
31,250		May 2010
2,070,904		June 2010
337,500		July 2010
12,500		August 2010
25,000		November 2010

From July 2007 to January 2008, in connection with sales of the Company’s common stock, the Company issued warrants to purchase an additional 686,667 shares of the Company’s common stock at a weighted-average exercise price of $1.40 per share. The weighted-average exercise price for the remaining 667,917 warrants as of December 31, 2009 is $1.41 per share. The expiration dates of the outstanding warrants are as follows:

Shares		Expiration Date
6,250		July 2010
234,375		August 2010
75,625		September 2010
169,167		October 2010
145,000		November 2010
31,250		December 2010
6,250		January 2011

In November 2007, the Company issued warrants to purchase 125,000 shares of the Company’s common stock at an exercise price of $2.00 per share as compensation for consulting services. These warrants are still outstanding as of December 31, 2009 and expire in November 2012. The fair value of these warrants of $24,000 was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:			4.11	%
Expected term:		5		years
Expected dividend yield:			0.00	%
Expected volatility:			27.97	%

In connection with the April 2008 Convertible Notes discussed above in Note 7, the Company issued warrants to purchase 829,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the note holders and 51,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the placement agent. As of December 31, 2009, 20,000 of these warrants have been exercised. These remaining 860,000 warrants will expire as follows:

Shares		Expiration Date
263,000		February 2013
100,000		March 2013
497,000		April 2013

The fair value of these warrants of $126,000 and $7,000, respectively, was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:		Range of 2.39% to 2.93%
Expected term:		5 years
Expected dividend yield:			0.00	%
Expected volatility:			27.97	%

In connection with the convertible note payable issued in May 2008 and discussed above in Note 7, the Company issued warrants to purchase 4,375,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the note holder and 350,000 shares of the Company’s common stock at an exercise price of $1.00 per share to the placement agent. In October 2009, the placement agent exercised 350,000 warrants via a cashless exercise, in which the Company issued 192,873 shares of the Company’s common stock. The 4,375,000 warrants held by the note holder are still outstanding as of December 31, 2009 and expire in May 2013.

The fair value of these warrants of $610,000 and $49,000, respectively, was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:			3.24	%
Expected term:		5		years
Expected dividend yield:			0.00	%
Expected volatility:			27.97	%

In connection with the long-term convertible notes payable issued in October 2008 and discussed above in Note 7, the Company issued warrants to purchase 1,166,667 shares of the Company’s common stock at an exercise price of $1.25 per share to the note holders and 266,667 shares of the Company’s common stock at an exercise price of $1.25 per share to the placement agent. These warrants are still outstanding as of December 31, 2009, and expire in October 2011. The fair value of these warrants of $86,264 and $19,717, respectively, was determined using the Black-Scholes option pricing model with the assumptions listed below:

Risk-free interest rate:			1.90	%
Expected term:		3		years
Expected dividend yield:			0.00	%
Expected volatility:			35.19	%

A summary of warrants issued, exercised and expired during the three months ended December 31, 2009, is as follows:

						Weighted
						Avg.
						Exercise
Warrants:		Shares				Price
Balance at September 30, 2009			10,458,093			$	1.07
Issued			—				—
Exercised			(512,500	)			1.00
Expired			—				—
Balance at December 31, 2009			9,945,593			$	1.07

Options

In connection with conversion of $1,589,000 of debt to equity and under the terms of the Private Placement and Merger Agreement, Mr. Libratore, the Company’s founder, principal shareholder and President, received and exercised 620,000 options in March 2007 and beginning on June 1, 2007, 356,455 options monthly until a total number of 4,541,009 options are received. The exercise price of the options is $0.0001. As of December 31, 2009, a total of 3,921,009 options were outstanding.

Employee & Director Stock Options

On September 14, 2007 the Board of Directors adopted the Company’s 2007 Stock Plan with an aggregate of 1,000,000 shares of the Company’s unissued common stock. The Plan was approved by the shareholders at the Company’s annual meeting in September 2008. The 1,000,000 shares authorized under the 2007 Stock Plan are reserved for issuance to officers, directors, employees, prospective employees and consultants as incentive stock options, non-qualified stock options, restricted stock awards, other equity awards and performance based stock incentives. The option price, number of shares and grant date are determined at the discretion of the Company’s board of directors or the committee overseeing the 2007 Stock Plan.

On July 13, 2009, the Board of Directors of the Company approved an amendment to the 2007 Stock Plan to increase the number shares authorized under the plan from 1,000,000 to 2,000,000 shares. The amendment was approved at the Company’s annual shareholders meeting on September 4, 2009.

On September 14, 2007 the Company adopted the provisions of ASC Topic 718, Compensation — Stock Compensation,” which requires the Company to recognize expense related to the fair value of stock-based compensation awards. The Company elected the modified prospective transition method as permitted by Topic 718, under which stock-based compensation for the years ended September 30, 2009 and 2008 is based on grant date fair value estimated in accordance with the provisions of Topic 718 and compensation expense for all stock-based compensation awards granted subsequent to January 1, 2006, as well as the unvested portion of previously granted awards that remained outstanding as of January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of Topic 718.

On October 30, 2008, the Board of Directors of the Company approved a grant of 480,000 stock options under the 2007 Stock Plan to employees with an exercise price of $0.60 per share. The options vest 25% on October 1, 2009, 25% on April 1, 2010, 25% on October 1, 2010, and 25% on April 1, 2011.

On October 29, 2009, Joseph D. Farish, Jr. was appointed to the Board of Directors of the Company. As part of the compensation for his services as a director, Mr. Farish was granted an option, vesting over two years, to purchase 50,000 shares of common stock at $2.35 per share.

On December 3, 2009, Robert Cuillo was appointed to the Board of Directors of the Company. As part of the compensation for his services as a director, Mr. Cuillo was granted an option, vesting over two years, to purchase 50,000 shares of common stock at $2.18 per share.

The fair values of share-based payments are estimated on the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the three months ended December 31, 2009 and 2008:

		2009				2008
Risk-free interest rate:			1.38	%			1.82	%
Expected term:			3	years			3	years
Expected dividend yield:			0.00	%			0.00	%
Expected volatility:			66.35	%			36.05	%

For the three months ended December 31, 2009 and 2008 the Company recorded $55,000 and $44,000, respectively, of stock-based compensation expense which has been classified as Operating expenses, sub-classification of Payroll, taxes and benefits. As of December 31, 2009, there is $381,000 in total unrecognized compensation expense related to non-vested employee stock options granted under the 2007 Stock Plan, which is expected to be recognized over 1.9 years.

A summary of the stock options outstanding under the 2007 Stock Plan as of December 31, 2009, and activity for the three months then ended is as follows:

						Weighted
						Avg.				Aggregate
						Exercise				Intrinsic
2007 Stock Plan:		Shares				Price				Value
Options outstanding at September 30, 2009			1,580,000			$	0.81
Granted			100,000				2.27
Exercised			—				—
Expired or forfeited			—				—
Options outstanding at December 31, 2009			1,680,000			$	0.90			$	2,144,100
Options exercisable at December 31, 2009			600,000			$	0.73			$	862,500

2009 Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan (the “ESPP”) became effective June 10, 2009, the effective date of the registration statement filed on Form S-8 with the SEC. The ESPP provides a means by which employees of the Company are given an opportunity to purchase common stock of the Company through payroll deductions. The maximum number of shares to be offered under the ESPP is 500,000 shares of the Company’s common stock, subject to changes authorized by the Board of Directors of the Company. Shares are offered through consecutive offering periods with durations of approximately six (6) months, commencing on the first trading day on or after June 1^st and November 30^th of each year and terminating on the last trading day before the commencement of the next offering period. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code. The ESPP allows employees to designate up to 15% of their cash compensation to purchase shares of the Company’s common stock at 85% of the lesser of the fair market value at the beginning of the offering period or the exercise date, which is the last trading day of the offering period. Employees who own stock possessing 5% or more of the total combined voting power or value of all classes of the Company’s common stock are not eligible to participate in the ESPP.

The first offering period of the ESPP commenced on June 10, 2009 and ended on November 30, 2009. The second offering period commenced on December 1, 2009 and will end on May 31, 2009. As of December 31, 2009 161,781 shares of the Company’s common stock have been purchased through the ESPP. For the three months ended December 31, 2009, the Company received $56,000 through payroll deductions under the ESPP.

The Company uses the Black-Scholes option pricing model to estimate the fair value of the shares expected to be issued under the ESPP at the grant date, the beginning date of the offering period, and recognizes compensation expense ratably over the offering period. If an employee elects to increase their payroll withholdings during the offering period, the increase is treated as a modification to the original option granted under the ESPP. As a result of the modification, the incremental fair value, if any, associated with the modified award is recognized as compensation expense at the date of the modification. Compensation expense is recognized only for shares that vest under the ESPP. For the three months ended December 31, 2009, the Company recognized $70,000 of compensation expense related to the ESPP.

Note 10 — Diluted Earnings per Common Share

The following is a reconciliation of the numerator and denominator used in the computation of basic and diluted earnings per share for the three months ended December 30, 2009 and 2008 (in thousands, except per share amounts):

		For the Quarters Ended
		December 31,
		2009				2008
Numerator:
Net income — basic		$	854			$	377
Effect of dilutive securities:
Convertible debt			69				—
Net income — diluted		$	923			$	377
Denominator:
Weighted average shares outstanding — basic			32,848				32,049
Effect of dilutive securities:
Stock options			9,750				3,921
Convertible debt			8,752				—
Weighted average shares outstanding — diluted			51,350				35,970
Earnings per share — basic		$	0.03			$	0.01
Earnings per share — diluted		$	0.02			$	0.01

The following tables summarize the number of weighted shares outstanding for each of the periods presented, but not included in the calculation of diluted income per share because the impact would have been anti-dilutive and/or the conversion price of the securities was greater than the average market price of our common stock for the three months ended December 31, 2009 and 2008 (in thousands):

		2009				2008
Stock options			100				975
Warrants			—				10,668
Convertible Debt			—				8,650
Totals			100				20,293

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is established when management considers it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company files consolidated federal and state income tax returns.

The Company had a net income tax provision for the quarter ended December 31, 2009 of approximately $66,000. Although the Company had net operating loss carryforwards which completely offset it regular taxable income, the

Company incurred alternative minimum tax on its net alternative minimum taxable income of $3,000. In addition, the Company incurred deferred tax expense of $63,000. For the quarter ended December 31, 2009, the Company’s net deferred tax liabilities exceeded its net deferred tax assets and the Company incurred the corresponding deferred tax expense.

Note 12 — Commitments

The Company leases property and telephone equipment under operating leases that expire at various times through June 2014. Future minimal rental commitments under non-cancelable operating leases with terms in excess of one year as of December 31, 2009 are as follows (in thousands):

		Amount
Year ending September 30:
2010		$	432
2011			661
2012			608
2013			161
2014			121
		$	1,983

Rent expense for the three months ended December 31, 2009 and 2008 was $164,000 and $120,000, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this quarterly report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as “intends,” “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those set forth below under “Certain Risk Factors.” The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Form 10-Q and the audited financial statements of the Company, included in our Report on Form 10-K for the year ended September 30, 2009, filed with the Securities and Exchange Commission and management’s discussion and analysis contained therein. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

Liberator Medical Supply, Inc. (“LMS”), a wholly-owned subsidiary of the Company, is a federally licensed, direct-to-consumer, provider of Medicare Part B Benefits focused on providing medical supplies in a retail environment, and via the Internet in the United States. LMS distributes a full range of medical products which address the healthcare needs of our customers.

We market our products directly to consumers primarily through targeted media and direct response television advertising. Our customer service representatives are specifically trained to communicate with Medicare-eligible beneficiaries. Our operating platforms enable us to collect and process required documents from physicians and customers, bill and collect amounts due from Medicare and/or other government agencies and/or third party payors and/or customers.

Results of Operations

The following table summarizes the results of operations for the three months ended December 31, 2009 and 2008, including percentage of sales (dollars in thousands):

		2009								2008
		Amount				%				Amount				%
Sales		$	9,158				100.0			$	5,342				100.0
Cost of Sales			3,248				35.5				1,841				34.5
Gross Profit			5,910				64.5				3,501				65.5
Operating Expenses			4,750				51.9				2,990				56.0
Income from Operations			1,160				12.7				511				9.6
Other Income (Expense)			(240	)			(2.6	)			(265	)			(5.0	)
Income Before Income Taxes			920				10.0				246				4.6
Income Taxes			66				0.7				—				—
Net Income		$	854				9.3			$	246				4.6

Revenues:

Sales for the three months ended December 31, 2009 increased by $3,816,000, or 71.4%, to $9,158,000, compared with sales of $5,342,000 for the three months ended December 31, 2008. The increase was due to a substantial direct-response advertising campaign to obtain new mail order customers. Our direct-response advertising costs for the three months ended December 31, 2009 were $2,037,000 compared to $713,000 for the three months ended December 31, 2008.

Gross Profit:

Gross profit for the three months ended December 31, 2009 increased by $2,409,000, or 68.8%, to $5,910,000, compared with gross profit of $3,501,000 for the three months ended December 31, 2008. The increase was attributed to our increased sales volume for the three months ended December 31, 2009 compared to the three months ended December 31, 2008. As a percentage of sales, gross profit decreased by 1.0% to 64.5% of sales for

the three months ended December 31, 2009, compared to 65.5% of sales for the three months ended December 31, 2008. The 1.0% decrease in profit margins is primarily the result of product mix.

Operating Expenses:

The following table provides a breakdown of our operating expenses for the three months ended December 31, 2009 and 2008, including percentage of sales (dollars in thousands):

		2009								2008
		Amount				%				Amount				%
Operating Expenses:
Payroll, taxes and benefits		$	2,169				23.7			$	1,065				20.0
Advertising			806				8.8				298				5.6
Bad debts			655				7.2				679				12.7
Depreciation			95				1.0				66				1.2
General and administration			1,025				11.2				882				16.5
Total Operating Expenses		$	4,750				51.9			$	2,990				56.0

Operating expenses for the three months ended December 31, 2009 were $4,750,000, or 51.9% of revenue, compared with $2,990,000, or 56.0% of revenue for the three months ended December 31, 2008. The increase in operating expenses is primarily attributed to increased spending levels for additional employees, advertising costs, rent and other administration costs to support our sales growth.

Income from Operations:

Income from operations for the three months ended December 31, 2009 increased $649,000 to $1,160,000, compared with $511,000 for the three months ended December 31, 2008. As a percentage of sales, operating income improved by 3.1% to 12.7% of sales for the three months ended December 31, 2009 compared to 9.6% of sales for the three months ended December 31, 2008. The increase in operating income and margins for the three months ended December 31, 2009 is attributed to our increased sales volumes at lower levels of incremental operating expenses, as a percentage of sales.

Other Income (Expense):

Other income (expense) is predominantly interest expense associated with our convertible debt, shareholder loans, and credit line facility. Interest expense decreased by $30,000 to $243,000 for the three months ended December 31, 2009 compared with $273,000 for the three months ended December 31, 2008. The decrease is primarily attributed to a reduction in non-cash interest expense associated with the amortization of discounts on our outstanding convertible notes payable.

Liquidity and Capital Resources

The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended December 31, 2009 and 2008 (dollars in thousands):

		For the Quarters Ended
		December 31,
		2009				2008
Cash Flows:
Net cash provided by (used in) operating activities		$	(324	)		$	447
Net cash used in investing activities			(1,333	)			(29	)
Net cash provided by financing activities			740				2,171
Net increase (decrease) in cash			(917	)			2,589
Cash at beginning of period			3,798				1,173
Cash at end of period		$	2,881			$	3,762

The Company had cash of $2,881,000 at December 31, 2009, compared to cash of $3,798,000 at September 30, 2009, a decrease of $917,000. The decrease in cash for the three months ended December 31, 2009 is primarily due to our accelerated direct-response advertising campaign and the build out of our new 24,000 square foot facility during the quarter, partially offset by borrowings from our credit line facility.

In order to maintain our accelerated sales growth through our direct-response advertising efforts, we may be required to raise additional cash through the sale of our securities, whether on a debt or equity basis. As of December 31, 2009, we had 2.8 million of outstanding warrants at an average exercise price of $1.00 that expire during fiscal year 2010. We have already received telephone inquiries from several of the warrant holders over the last few months and expect a majority of these warrant holders to exercise these “in-the-money” warrants before expiration. There can be no assurance, of course, as to the amount or timing of the proceeds we may receive from the sale of our securities. However, we believe that existing cash and cash equivalents, together with cash generated from the collection of accounts receivable and the sale of products will be sufficient to meet our cash requirements during the next twelve months, but at reduced levels of sales growth if we are unable to raise additional capital.

Operating Activities

Net cash used in operating activities decreased to $324,000 during the three months ended December 31, 2009 as compared to net cash provided by operating activities of $447,000 during the three months ended December 31, 2008. The decrease is primarily a result of our increased direct-response advertising spend, partially offset by an increase in net income.

Investing Activities

During the three months ended December 31, 2009, we purchased $780,000 of property and equipment primarily related to the build out of our new 24,000 square foot facility, which we moved into in January 2010. In addition, we purchased a $550,000 certificate of deposit as additional security for a $1,000,000 credit line facility discussed above in Note 6 of the unaudited condensed consolidated financial statements. The certificate matures in September 2010 and bears interest at a rate of 1.242%.

Financing Activities

During the three months ended December 31, 2009, cash provided by financing activities was $740,000, which included borrowings of $750,000 from our credit line facility used to finance the build out of our new facility discussed above, $163,000 of proceeds from the exercise of warrants, and $56,000 of proceeds from our employee stock purchase plan, partially offset by payments of $220,000 to pay down a portion of our outstanding debt and capital lease obligations.

During the three months ended December 31, 2008, cash provided by financing activities was $2,171,000, which was the result of a $2,500,000 convertible debt offering in October 2008, partially offset by $310,000 of debt issuance costs associated with the debt offering.

Outlook

The Company has experienced tremendous growth over the past two and a half years. We have built an infrastructure and business model that is capable of generating a substantially higher sales volume at reduced levels of incremental cost. In an effort to continue our growth, we have accelerated our advertising efforts to attract new customers and expanded our operations to service our new and existing customers. The outlook for demand for our products and services is favorable, as there should be an increase in newly-diagnosed patients requiring the medical supplies that we provide. We expect our revenues to continue to increase over the next nine months due to our advertising and marketing programs. The Company does not anticipate any major changes in Medicare reimbursement in 2010, nor in any other reimbursement programs available from other third-party payors.

Our current assets of $12,697,000 exceed our current liabilities of $11,860,000 by $837,000.

Our plan for the next twelve months includes the following:

	•		Continue our advertising and marketing efforts;
	•		Increase our customer base;
	•		Continue to service our current customer base and increase the retention rate;
	•		Continue to invest in the expansion of our infrastructure; and
	•		Increase our accounts receivable collection efforts.

In order to implement our current business model, we have completed the following:

	•		Identified and presented to many large funding sources, soliciting terms for long-term capital in the form of debt, equity or a combination of both;
	•		Retained an investor relations firm to further enhance our exposure and opportunities for long-term capital requirements;
	•		Identified products and related target customers through extensive market research;
	•		Established efficient and cost effective methods to reach qualified customers;
	•		Established an infrastructure of management and knowledgeable staff to support substantial growth in sales with a minimal amount of additional staff members, maximizing our revenue per employee;
	•		Completed the build out of an additional 24,000 square foot facility to house our expanding workforce and support our continued growth;
	•		Created a HIPPA compliant IT infrastructure and staff to accommodate additional growth in sales;
	•		Established a marketing plan that can be monitored for effectiveness and is flexible enough to adjust to changing market conditions; and
	•		Tested our advertising methods and established methods of testing additional advertising methods to meet with changing market conditions.

We will continue to operate as a federally licensed, direct-to-consumer, Part B Benefits Provider, primarily focused on supplying medical supplies to the chronically ill patients

Contractual Obligations

A summary of our contractual obligations for convertible debt obligations, capital lease obligations, minimum lease payments under non-cancelable operating leases, and minimum purchase commitments as of December 31, 2009 is presented in the following table (dollars in thousands):

		Payments due by period
		Totals				FY 2010				FY 2011				FY 2012				FY 2013				FY 2014
Convertible debt obligations (1)		$	6,642			$	4,101			$	2,541			$	—			$	—			$	—
Operating leases			1,983				432				661				608				161				121
Capital lease obligations			150				75				62				13				—				—
Purchase commitment (2)			514				84				120				120				120				70
Total contractual obligations		$	9,289			$	4,692			$	3,384			$	741			$	281				191

Off-Balance Sheet Arrangements

As of December 31, 2009, we had no off-balance sheet arrangements.

Critical Accounting Policies

See “Summary of Significant Accounting Policies” in the Notes to the unaudited condensed consoloidated financial statements and our current annual report on Form 10-K for the year ended September 30, 2009, for discussion of significant accounting policies, recent accounting pronouncements and their effect, if any, on the Company.

Effect of Inflation

We do not believe that inflation has had a material effect on our business, results of operations or financial condition during the past two years.

Item 3. Qualitative and Quantitative Disclosure about Market Risk

We have not entered into any hedging agreements or swap agreements. Our principal market risk is the risk related to our customers and Medicare.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company has carried out an evaluation under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. The evaluation examined the Company’s disclosure controls and procedures as of December 31, 2009, the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended. Based on that evaluation, such officers have concluded that, as of December 31, 2009, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time period specified in the rules and forms of the Securities and Exchange Commission, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Change in Internal Controls

During the three months ended December 31, 2009 there were no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect such internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     None.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. Please refer to the “Risks Factors” section in our Annual Report for a discussion of risks to which our business, financial condition, results of operations and cash flows are subject.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Under a stock repurchase program approved by our Board of Directors in December 2008, we are authorized to repurchase up to $500,000 of our Common Stock through December 2009. The authorization enables the Company to purchase shares through open market transactions at management’s discretion. We intend to retain any common shares which we repurchase as treasury shares or use them in connection with our employee stock option program. Our shares repurchased for the three months ended December 31, 2009 were as follows:

										Total Number of				Approximate Dollar
		Total								Shares Purchased as				Value of Shares that
		Number of				Average				Part of Publicly				May Yet Be
		Shares				Price Paid				Announced Plans or				Purchased Under the
		Purchased				per Share				Programs(2)				Plans or Programs(2)
October 1—31, 2009(1)			—			$	—
November 1—30, 2009(1)			4,000			$	2.26
December 1—31, 2009(1)			—			$	—
Total			4,000			$	2.26				89,600			$	0

Item 3. Defaults Upon Senior Securities

     None.

Item 4. Other Information

     None.

Item 5. Exhibits

Exhibit 31.1 — Section 302 Certificate of Chief Executive Officer
Exhibit 31.2 — Section 302 Certificate of Chief Financial Officer
Exhibit 32.1 — Section 906 Certificate of Chief Executive Officer
Exhibit 32.2 — Section 906 Certificate of Chief Financial Officer

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized.

/s/ Mark A. Libratore   Mark A. Libratore		President		February 11, 2010
/s/ Robert J. Davis   Robert J. Davis		Chief Financial Officer		February 11, 2010